Saturday, July 25, 2020

Weekend reading links

1. US Attorney General William Barr has a speech which highlights how systematic abuse by Chinese authorities and business greed of American companies contributed to China's economic rise. He points to the abusive economic practices of the Chinese Communist Party,
To tilt the playing field to its advantage, China’s communist government has perfected a wide array of predatory and often unlawful tactics: currency manipulation, tariffs, quotas, state-led strategic investment and acquisitions, theft and forced transfer of intellectual property, state subsidies, dumping, cyberattacks, and espionage. About 80% of all federal economic espionage prosecutions have alleged conduct that would benefit the Chinese state, and about 60% of all trade secret theft cases have had a nexus to China.
He draws attention to the consistent Chinese playbook across industries,
To achieve dominance in pharmaceuticals, China’s rulers went to the same playbook they used to gut other American industries. In 2008, the PRC designated pharmaceutical production as a “high-value-added-industry” and boosted Chinese companies with subsidies and export tax rebates. Meanwhile, the PRC has systematically preyed on American companies. American firms face well-known obstacles in China’s health market, including drug approval delays, unfair pricing limitations, IP theft, and counterfeiting. Chinese nationals working as employees at pharma companies have been caught stealing trade secrets both in America and in China. And the CCP has long engaged in cyber-espionage and hacking of U.S. academic medical centers and healthcare companies... By imposing a quota on American films, the CCP pressures Hollywood studios to form joint ventures with Chinese companies, who then gain access to U.S. technology and know-how.
And how American companies compromised on US national interests,
China’s communist leaders lured American business with the promise of market access, and then, having profited from American investment and know-how, turned increasingly hostile. The PRC used tariffs and quotas to pressure American companies to give up their technology and form joint ventures with Chinese companies. Regulators then discriminated against American firms, using tactics like holding up permits. Yet few companies, even Fortune 500 giants, have been willing to bring a formal trade complaint for fear of angering Beijing.
The speech links to this Newsweek article by Bill Powell from last year which describes how American companies help build up China's economic prowess. The article outlines how US corporate interests lobbied hard to make policy that channelled US investments to China and integrated the country into the world economy. In particular, the permanent normalisation of trade relations with China in 2000, opened the floodgates for US companies to build China-centric supply chains. This was followed up in 2001 with the US supported entry of China into the WTO.

Barr's speech was part of an escalation of public accusations of Chinese spying and theft of US intellectual property by a string of top US officials. One estimate of US intellectual property theft by China puts it in the range between $225 bn and $600 bn a year. It has culminated in the US directive for immediate closure of the Chinese consulate in Houston which has been accused of being the centre of Chinese corporate theft in the US. China predictably responded with ordering the closure of Chengdu consulate, which looks after Tibet. There have also been arrests of Chinese students and professionals in the US who have close links with the Peoples Liberation Army.

The present US administration has on several occasions spoken about the need for an alliance of democratic countries to fight the Chinese aggression. C Rajamohan argues in favour of India joining a US led coalition of democracies to forge partnerships in combating China. 

2. When all the expertise talking on Covid 19 is done with, it is most likely to emerge that the most effective strategy to combat the disease is the simple use of masks. Sample this remarkable factoid,
Researchers say the benefits of widespread mask use were recently seen in a Missouri hair salon, where two stylists directly served 139 clients in May before testing positive for Covid-19. According to a recent report published by the CDC, both wore either a double-layered cotton or surgical mask, and nearly all clients who were interviewed reported wearing masks the entire time. After contact tracing and two weeks of follow-up, no Covid-19 symptoms were identified among the 139 clients or their secondary contacts, the report found. Of the 67 who were willing to be tested, all were negative for Covid-19.
3. On the challenges faced by the solar sector in India. Interesting developments in India's power sector. During Covid 19, as the power demand declined, discoms were contractually obliged to keep purchasing power from renewable generators, as part of the must-run status in the contracts. The result,
Electricity procurement from coal-fired power in India’s energy mix fell from 75% in early March to 63% in May, while the contribution of clean energy sources—solar, wind and hydroelectric power—rose from 16% to a never-before-seen 28%, according to data from the national load despatch centre.
The article also points out that the sectoral boom is being kept alive by foreign investors, and their pool has been expanding in recent months. 

4. Yuvraj Malik has a good primer on Huawei and on the issues with keeping Huawei out of India. This on the company's large India footprint,
There are 560,000 mobile towers in India, according to the Department of Telecommunications (DoT), and two-thirds of these, according to experts tracking the space, run on Huawei equipment. Huawei has also been a massive supplier for more than a decade, to Airtel and Vodafone-Idea, which will lose their competitive advantage if the Chinese firm is barred, experts say... It has about 6,000 employees in the country, about 4,000 of them serving at its R&D facility in Bengaluru. The Bengaluru centre, opened in 2015, is Huawei's largest overseas research hub, people close to the company say. It also houses a business unit called Global Service Centre, which supports carrier network operations (support work) for Huawei’s customers in over 30 countries. India GSC is also the largest in the world for Huawei.
Any bank on Huawei in India will be a significant benefit to Reliance and cost Bharti and Vodafone. In the interests of the telecom sector in the country, it is therefore incumbent on the government, on strategic considerations, to support these companies transition out of Huawei. One way would be to discount their losses (or cost-differetial) due to shifting away from Huawei in the forthcoming 5G spectrum auctions. Howsoever messy a quantification of the cost differential, it is important that some such decision be taken to compensate the telecoms providers due to a decision which is surely a force majeure over which they had no control.

5. Latest, from January 2020, on cost and time overruns of public infrastructure projects worth over Rs 150 Cr each or more in India. The total cost overrun was Rs 4.02 trillion.
Of the 1,692 such projects, 401 projects reported cost overruns and 552 projects time escalation. "Total original cost of implementation of the 1,692 projects was Rs 20,75,212.70 crore and their anticipated completion cost is likely to be Rs 24,78,016.45 crore, which reflects overall cost overruns of Rs 4,02,803.75 crore (19.41 per cent of original cost)," the ministry's latest report for January 2020 said. The expenditure incurred on these projects till January 2020 is Rs 10,97,604.64 crore, which is 44.29 per cent of the anticipated cost of the projects... Out of 552 delayed projects, 168 have overall delay in the range of 1 to 12 months, 125 with delay in the range of 13 to 24 months, 145 projects reflect delay in the range of 25 to 60 months and 114 projects show delay of 61 months and above. The average time overrun in these 552 delayed projects is 39.71 months. The brief reasons for time overruns as reported by various project implementing agencies are delay in land acquisition, delay in obtaining forest/environment clearances and lack of infrastructure support and linkages. Besides, there are other reasons like delay in tie-up of project financing, delay in finalisation of detailed engineering, change in scope, delay in tendering, ordering and equipment supply, law and order problems, geological surprises, pre-commissioning teething troubles and contractual issues, among others, the report said.
6. Tamal Bandhyopadhyay raises concerns about a discussion paper by the RBI on banking sector governance. In light of the recent scandals and misgovernance in private sector banks, the paper appears to be an effort to fashion a new governance system for them. It proposes making the CEO virtually a titular head, with all powers being vested in sub-committees of Boards.
Going by the paper, a bank must have three lines of defence for risk management — the business line (including a robust finance and accounting function); a risk-management function and a compliance function independent from the first line of defence; and an internal audit and vigilance function, independent from the first and second lines of defence. No one can challenge the proposition but the devil is in the detail. How will it be executed? The chief risk officer, the head of internal audit, the chief compliance officer and the internal vigilance head will report directly to the respective board committees. The company secretary will report to the chairman and the head of human resources will report to the nomination and remuneration committee. Such committees will be responsible for the selection of the executives, approval of their budgets, performance appraisals and compensation. The CEO will neither be able to guide the senior team in operational matters nor decide on their appointment, compensation or removal. Yet, the CEO is responsible for the profit and loss of the bank!
On public sector bank governance, Debashis Basu points to the pervasive culture of suppressing information and dressing up of accounts. The article highlights the example of management of the non-performing assets and recovery rates from written off assets. An RTI application revealed that in the FY13-FY20 period, the SBI wrote off Rs 1.23 trillion but managed to recover just 7% or Rs 8969 Cr. However, the annual reports of the SBI appear to point to a number which may be much higher.

7. Instead of focusing on mergers and privatisation, TT Rammohan makes the case for recapitalisation of public sector banks in light of the likely Covid 19 impact of rise in NPAs. He also calls for measures to alleviate the decision paralysis concerns.

8. A final tally of Reliance investors
Andy Mukherjee has a very good article looking forward into Reliance's ambitions.

9. An argument for bringing the insurance sector under either SEBI or RBI. The point being IRDAI has been sorely deficient in its regulatory role and does not possess the expertise to do so.
... it worthwhile to consider bringing the insurance sector under either the market regulator Securities and Exchange Board of India or the Reserve Bank of India, with an Irdai playing a limited role as a self-regulatory organisation to manage insurance policy issues, agnostic of the financial health of the companies. There is a precedent, too. After trying for decades, the government has removed the National Housing Bank (NHB) from its role as the regulator of the housing finance companies. The government has correctly argued that the NHB has too few resources, financial or human, to dictate to lenders... No major economies have an independent insurance regulator. USA runs a hybrid with the National Association of Insurance Commissioners created by the state insurance departments. But the key call is taken by the Federal Reserve. China has a common regulator for banking and insurance, while the UK has the Prudential Regulatory Authority within the Bank of England. They are none the worse for it.
10. In another blow in the direction of protectionism, Democratic frontrunner Joe Biden puts forth an ambitious Buy American agenda,
On Thursday, Mr. Biden specifically proposed a $300 billion increase in government spending on research and development of technologies like electric vehicles and 5G cellular networks, as well as an additional $400 billion in federal procurement spending on products that are manufactured in the United States. Mr. Biden described it as a level of investment “not seen since the Great Depression and World War II” and emphasized that a top priority was to expand prosperity to all corners of the country, both racial and geographic.
11. Apple, Microsoft, Amazon, Alphabet, and Facebook form nearly a quarter of the market capitalisation of S&P 500, up from 15% in early 2019.

12. The Competition Commission of India (CCI) approves the Adani Ports' acquisition of 75% of Krishnapatnam Port from the CVR Group. Adani now has ten domestic ports in six maritime states - Mundra, Dahej, Kandla and Hazira in Gujarat, Dhamra in Odisha, Mormugao in Goa, Visakhapatnam in Andhra Pradesh, Kattupalli and Ennore in Tamil Nadu. They have the capacity to handle a combined 395 mt of cargo, accounting for 24% of the country's total port  capacity. It is also developing a container transshipment facility at Vizhinjam. 

13. Very good data series piece in Livemint which captures the problems with India's GDP calculations. This graphic comparing the periods from 2005-11 and 2012-18 says it all.
So does this about wage indicators
This first part of the data series has a good graphic on the relative performance of India over the last two decades, and it's very impressive.
14. A reality check on the performance of the Indian equity markets,
In the last five years, returns have been around 6 per cent (in rupee terms). From 2010, the Sensex returns have seen compound annual growth (CAGR) of around 6 per cent in rupee terms. In dollar terms, CAGR returns have been abysmal 1.5 per cent over a decade. While we keep getting excited, long-term returns from Indian equities have been below fixed deposit (FD) returns for several years now.
15. Finally, a well argued case for Presidential system for India by Shashi Tharoor. Needless to say, this is a very complex issue with no clear answers. Advocates will always be excessively optimistic and critics always excessively pessimistic.

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