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A new cold war: Trump, Xi and the escalating US-China confrontation

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“From Stettin in the Baltic to Trieste in the Adriatic, an ‘iron curtain’ has descended across the continent.” Winston Churchill’s speech in Fulton, Missouri, in March 1946 is remembered as a key moment in the outbreak of the cold war.

If future historians are ever looking for a speech that marked the beginning of a second cold war — this time between America and China — they may point to an address by Mike Pence delivered at Washington’s Hudson Institute in October 2018. “China wants nothing less than to push the United States of America from the western Pacific . . . But they will fail,” the vice-president declared. “We will not be intimidated and we will not stand down.” Pointing to China’s political system, Mr Pence argued: “A country that oppresses its own people rarely stops there.”

For students of the first cold war between the US and the USSR, some of this sounded eerily and worryingly familiar. Once again, the US is facing off against a rival superpower. Once again, a military rivalry is taking shape — although this time, the main theatre is the western Pacific rather than central Europe. And once again, the conflict is being framed as one between the free world and a dictatorship. To add to the sense of symmetry, the People’s Republic of China, like the Soviet Union, is run by a Communist party.

Even in the past few months, the deterioration in relations between the US and China has rapidly gathered pace, against the backdrop of a feverish election campaign in the US. Military tensions in the Pacific are rising. Taiwanese officials say the September exercises by the Chinese military within its air defence buffer zone were the most significant threat to its security since Beijing launched missiles into the seas around the island in 1996. The US has a commitment to help the country defend itself.

Map showing recent military exercises near Taiwan

The US has moved aggressively to block Chinese technology firms, such as TikTok and Huawei — from expanding their international operations, or buying US-made computer chips. China and America are even indulging in tit-for-tat expulsions of journalists.

And coronavirus, which originated in China, has devastated the global economy and led to more than 200,000 deaths in America. President Donald Trump, who is currently in hospital after testing positive for the virus, has made it clear that he holds the government of China directly responsible for the pandemic.

In another confrontational speech that will probably be remembered by historians, secretary of state Mike Pompeo warned in July that five decades of engagement with China had been a failure.

New cold war

In a series of articles this week, the FT explores how the US-China rivalry is beginning to resemble a new cold war, with the technology world splitting into two blocs and countries being asked to choose sides.

Tuesday: Can supply chains in China be shifted elsewhere?

Wednesday: The battle for tech supremacy

Thursday: How America turned hawkish on China

“If we don’t act now, ultimately, the [Chinese Communist party] will erode our freedoms and subvert the rules-based order that our free societies have worked so hard to build,” he said, speaking at the Californian library of Richard Nixon, the president who reopened ties with Beijing during the cold war. “The old paradigm of blind engagement with China simply won’t get it done. We must not continue it. We must not return to it.”

New uncertainty

For Joseph Nye, a professor at Harvard University and former senior Pentagon official, US-China relations are now “at their lowest point in 50 years”.

There is even a fear that, as in the cold war, the world could increasingly divide into two blocs — one that looks to Washington and one that looks to Beijing. That may sound implausible in a world of globalised supply chains. But, especially in the tech sector, there are signs that this is already starting to happen.

As the Huawei case illustrates, the US is now clearly leaning on its allies to cut tech ties with China — and, in some cases, such as in Britain and, to an extent, Germany, the pressure is working. China, however, is also building its own global network of influence through trade and its Belt and Road Initiative — which could involve loans and investment of up to $1tn in infrastructure development outside China.

Henry Kissinger, the former US secretary of state who helped bring about the rapprochement between the US and China in the 1970s, said last year that Beijing and Washington were now in the “foothills of a cold war”.

If China’s growing technological prowess has captured US attention this year, its defence capabilities are also driving the growing anxiety. China’s rapid military build-up has altered the balance of power between Beijing and Washington. The Chinese navy now has more ships than the US navy — and they can all be concentrated in the western Pacific. China has also developed a formidable range of missile and satellite weaponry that could threaten American aircraft carriers and disrupt the US military’s communications.

In a recent article, Michèle Flournoy, who is tipped as a possible US defence secretary if Joe Biden wins the presidential election, worried that “dangerous new uncertainty about the US ability to check various Chinese moves . . . could invite risk-taking by Chinese leaders”, adding: “They could conclude that they should move on Taiwan sooner rather than later.”

Since President Xi Jinping came to power in 2012, China has become more assertive overseas and more authoritarian at home

Ms Flournoy’s recommendation is that America should strengthen its military capacity, so as to restore deterrence. The fact that a prominent Democrat is taking this position points to an important aspect of the new US-China rivalry: it will not disappear if Mr Trump loses the White House in the presidential election.

There is no doubt that the current US president uses much more confrontational language with China (and indeed most countries) than any of his predecessors. Mr Trump’s single-minded focus on the US trade deficit with China and his protectionist policies are also distinctive. But Mr Trump may have helped to bring about a permanent shift in orthodox opinion in Washington. Daniel Yergin, an economic historian, notes that “while Democrats and Republicans hardly agree on anything today in Washington, one thing they do agree on is that China is a global competitor and that the two countries are in a technology race”.

A Biden approach to China would place more emphasis on American alliances than the Trump administration, and would probably make less use of tariffs. The Democrats would also look to work with China on climate change. But a Biden administration would not alter the basic premise of the Trump policy — which is that China is now an adversary.

Map showing how the topography of Taiwan makes Chinese invasion difficult

In Beijing, this move towards a “cold war mentality” is decried — and is often attributed solely to America’s supposed refusal to accept a multipolar world. It probably is the case that there is a bipartisan determination in Washington to retain America’s status as “number one”. But the Chinese view skates over the extent to which Beijing itself has contributed to the emergence of a second cold war.

Since President Xi Jinping came to power in 2012, China has become more assertive overseas and more authoritarian at home. Beijing’s construction of military bases across the South China Sea has been perceived in Washington as a direct challenge to American power in the Pacific. Constitutional changes that would allow Mr Xi to rule for life, the crackdown in Hong Kong and the mass imprisonment of the Uighur minority have all driven home the message that China is becoming more dictatorial — dashing any remaining hopes in Washington that economic modernisation in China would lead to political liberalisation.

Winston Churchill delivering his speech ‘The sinews of peace’ at Fulton, Missouri, in March 1946 is remembered as a key moment in the outbreak of the cold war © Popperfoto via Getty

An increasingly wealthy, illiberal and aggressive China is much easier to see as a dangerous rival that needs to be confronted. In public the Chinese leadership continues to decry the “zero-sum thinking” of the Americans. In private, however, the Xi leadership seems to regard the US as a dangerous rival, intent on overthrowing Communist party rule. As long ago as 2014, Wang Jisi, a well-connected Beijing academic, wrote that China’s leadership was preoccupied by “alleged US schemes to subvert the Chinese government”.

If continuing rivalry between the US and China is inevitable, how do the two sides match up?

It is generally acknowledged that the military gap between Washington and Beijing has narrowed considerably. But the US has a network of allies that China cannot replicate. There is no “Beijing Pact” to rival the Warsaw Pact that once bolstered the Soviet Union. On the contrary, other key powers in the Indo-Pacific region are treaty allies of the US, including Japan, South Korea and Australia. And India, while it is not a formal ally of the US, is likely to tilt towards Washington following the recent deadly confrontations between Indian and Chinese troops on the two nations’ disputed border.

US president Donald Trump, left, has made it clear that he holds the government of China directly responsible for the coronavirus pandemic © Andy Wong/AP

However, if America stood aside in the event of a Chinese assault on Taiwan, then the US alliance system might not survive the shock. Conversely, if the rivalry between Beijing and Washington never escalates into military confrontation, then China has other assets it can deploy. It is the largest trading partner for more than 100 nations; compared with 57 nations for America.

China is also a plausible rival to the US in a tech race. It is clear that some Chinese tech firms are vulnerable to cut-offs of key American components — in particular computer chips and semiconductors. On the other hand, China is ahead in certain technologies, such as mobile payments, and it is a formidable competitor in other areas such as artificial intelligence and medicine.

A scientific rivalry between America and China is certainly reminiscent of the US-Soviet rivalry, which was driven by a space race.

Vice-president Mike Pence said at Washington’s Hudson Institute in October 2018: ‘China wants nothing less than to push the United States of America from the western Pacific . . . But they will fail’ © Jacquelyn Martin/AP

Integrated rivals

But while the parallels between the current US-China rivalry and the start of the cold war are striking, there are also some important differences. The most obvious is that the economies of the US and China are deeply integrated with each other. Trade between China and the US amounts to more than half a trillion dollars a year. China owns more than $1tn of US debt. Important American companies rely on making and selling their products in China. Manufacture of the Apple iPhone is built around a supply chain based in southern China. There are more Kentucky Fried Chicken restaurants in the PRC than in the US.

This economic intertwining has also created a degree of social convergence. China may be run by a Communist party, but its major cities are throbbing with commercial life, private enterprise and western brands, and could never be mistaken for the grey uniformity of Soviet Russia. “Chinese society is more similar to American society than Soviet society ever was,” Yale University historian Odd Arne Westad noted in Foreign Affairs magazine.

There are also strong scientific and educational ties between China and the US. Mr Xi’s daughter was educated at Harvard. Stalin’s daughter was not sent to Yale.

China is also a plausible competitor to the US in a tech race, reminiscent of the US-Soviet rivalry driven by a space race © Aleksandar plaveski/EPA-EFE

Given the levels of economic and social integration between the US and China, some scholars argue that the cold war may not be the best historical analogy — although some of the other potential comparisons are no less alarming. Margaret Macmillan, who has written a history of the origins of the first world war, thinks the “more important parallel is the UK and Germany before 1914”. This was a classic great power rivalry between an established and a rising power. At the time, some argued that the extent of economic integration between Germany and Britain made war both irrational and unlikely. But that did not prevent the two nations sliding into hostilities.

Mr Westad, an expert both on China and the cold war, points out that, unlike the Soviet people in 1946, the Chinese have enjoyed 40 years of peace and prosperity. Therefore, “in a crisis, the Chinese are more likely to resemble the Germans in 1914 than the Russians after the second world war — excitable, rather than exhausted,” he says.

A yearning to test and demonstrate national strength is certainly visible in nationalist circles in China. Hu Xijin, editor of the Global Times newspaper, tweeted in July that China “is fully capable of destroying all of Taiwan’s military installations within a few hours, before seizing the island shortly after. Chinese army & people have such self-confidence.”

The Chinese navy now has more ships than the US navy, and they can all be concentrated in the western Pacific © Reuters

Another historical analogy, less discussed in the west but often heard in Tokyo, is the clash between Imperial Japan and the US that reached an endpoint in the second world war. As a senior Japanese diplomat sees it: “The Chinese are making the same mistake we made, which is to challenge American hegemony in the Pacific.” But at the time of Pearl Harbor, the Japanese economy was just 10 per cent the size of America’s. China, by contrast, now has an economy that is two-thirds the size of America’s — and larger when measured by purchasing power.

There is one further aspect in which the comparison between modern China and the Japan of the 1930s is suggestive. Imperial Japan argued that it was liberating Asia from western imperialism (countries invaded by the Japanese, such as China and Korea, did not see it that way). There is a similar hint of a “clash of civilisations” in some Chinese nationalist discourse — in which the rise of China is portrayed as ending centuries of domination of the global order by white, western nations.

The Anglo-German rivalry and the US-Japanese confrontation culminated in war. But they broke out in an age before nuclear weapons. By contrast, the threat of nuclear annihilation defined the cold war. Perhaps as a result, US and Soviet forces never clashed directly during the cold war, although they often battled through proxies. Yan Xuetong, a prominent scholar at Tsinghua University in Beijing, has argued that fear of nuclear conflict makes it unlikely that China and America will ever go to war — which would make the current US-Chinese confrontation more like the cold war, than the run-up to the two world wars.

Michèle Flournoy, tipped as a possible US defence secretary if Trump loses the election, said the US should strengthen its military capacity to restore deterrence . . .  © Mark Wilson/Getty

. . . suggesting the new US-China rivalry will not disappear if Democrat Joe Biden enters the White House  © Kevin Dietsch/Bloomberg

Strength of systems

But perhaps the most intriguing comparison is about how the cold war ended, rather than how it began. The contest was not settled on the battlefield or in space. In the end, it was determined by the resilience and success of the two societies — the US and the USSR.

Ultimately, the Soviet system simply collapsed under the weight of its own internal problems. (Ironically, this was the fate that Communists had long predicted for the capitalist system). The USSR’s fate vindicated the strategy first sketched out by the American diplomat George Kennan, who in 1946 had advocated the patient containment of Soviet power while awaiting the system’s ultimate demise. Kennan also argued that the vitality of America’s own system would be crucial in any contest with the USSR.

It is this last comparison which should disquiet the Americans and their allies most. The current presidential election threatens to provoke a crisis in the American democratic system of a sort that has not been seen since the 19th century. Even if the US achieves the peaceful transition of power that Mr Trump has failed to guarantee, the Trump era has revealed social and economic divisions that have turned America inwards and damaged the country’s international prestige.

A yearning to test and demonstrate national strength is certainly visible in nationalist circles in China © Thomas Peter/Reuters

The spectacle of the Trump-Biden contest has strengthened the sense in China that the US is in decline. Eric Li, a trustee of the China Institute at Shanghai’s Fudan University, inverts the cold war analogy — by casting the US as the USSR, in the grip of an “existential brawl between two near octogenarians”, referring to Mr Trump and Mr Biden. “Remember [former Soviet rulers] Brezhnev, Andropov and Chernenko?” By contrast, according to Mr Li, “China today is the opposite of what the USSR was decades ago. It is practical, ascendant and globally connected.”

For all the confidence of pro-government intellectuals in China, like Mr Li, there is no doubt that Mr Xi’s China also has significant internal problems. As Mr Westad notes, it is “a de facto empire that tries to behave as if it were a nation-state” and the strains are showing from Hong Kong to Tibet to Xinjiang. But the PRC has also demonstrated an economic prowess that the USSR never possessed.

If the US and China are indeed embarking on a new cold war to determine which country will dominate the 21st century, the vitality of their domestic systems may ultimately determine who prevails.





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Analysis

DUP’s new leader strives to stabilise N Ireland’s biggest party

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Sir Jeffrey Donaldson, new leader of Northern Ireland’s Democratic Unionist party, is striving to heal DUP wounds that pose a very potent threat to its status as the region’s most powerful political force.

The 58-year-old is expected to ease internal divisions by sharing the DUP’s prized ministerial positions in Northern Ireland’s government between his supporters and those of Edwin Poots, his predecessor as party leader, who was ousted last week after just 21 days in the job.

Donaldson, named DUP leader on Tuesday, is also aiming to unite the party around the cause of aggressively pressing the UK government to overhaul contentious post-Brexit trading rules between Great Britain and Northern Ireland.

These arrangements were strongly criticised but ultimately tolerated by Poots and by Arlene Foster, Northern Ireland’s former first minister. Her removal as DUP leader in April heralded what has been the most tumultuous period in the party’s 50-year history. 

The urgency of forging consensus within the DUP stems from a big decision facing Donaldson: whether to endorse a first minister appointed by Poots against the party’s will, propose a replacement, or collapse Northern Ireland’s government in protest at post-Brexit trading rules.

A collapse would have far-reaching consequences beyond the DUP: the power-sharing government at Stormont established under the 1998 Good Friday Agreement drew a line under the sectarian violence in Northern Ireland that claimed more than 3,600 lives.

Shuttering the Stormont assembly could destabilise the region in the early stages of the summer marching season, which often inflames tensions between Northern Ireland’s Catholic nationalist community and Protestant unionists.

“We need Stormont established for people to see that politics is working and it’s not always in a perpetual crisis,” said Peter Sheridan, chief executive of Co-operation Ireland, a peace-building organisation. “Wherever you have a political vacuum there is always the danger of violence.”

Whatever happens in the next few weeks, Donaldson, a senior DUP MP at Westminster, knows that at the very least he is counting down to Stormont assembly elections scheduled for May. He intends to stand in them, and then become first minister, he told the Financial Times.

But the elections will be a public test that the DUP is ill-equipped to face in its current state of disarray. One recent opinion poll put its support among voters as low as 16 per cent, compared to more than 35 per cent in the early days of Foster’s leadership.

“The DUP machine . . . is completely unfit for an election compared to how primed they usually are,” said Sophie Whiting, co-author of an award-winning book about the DUP. 

DUP founder Ian Paisley addresses a meeting in Belfast in 1972 © Bride Lane Library/Popperfoto/Getty Images

Established as a hardline breakaway from the Ulster Unionist party, the DUP was for decades synonymous with its founder, the late Rev Ian Paisley. He set up his own Free Presbyterian church and was famed for quotes like “save Ulster from sodomy” in his effort to prevent the decriminalisation of homosexuality in the late 1970s.

Diarmaid Ferriter, an Irish historian, said some of what has played out in the DUP since Paisley stepped down as leader in 2008 was typical of the “infighting after a very dominant authoritarian figure departs the stage”.

Neither of the DUP’s subsequent two leaders — Peter Robinson or Foster — had the charisma of Paisley, and internal party divisions became more pronounced.

But the fallout from the UK’s departure from the EU has also played a central role in the DUP ructions. The pro-Brexit party briefly enjoyed major influence at Westminster when it propped up Theresa May’s minority UK government, and the DUP rejected her withdrawal agreement with the EU.

But when Boris Johnson replaced May as UK prime minister, the DUP accused him of betrayal after he finalised a Brexit deal that created a customs and regulatory border between Great Britain and Northern Ireland. Treating their region differently to the rest of the UK was anathema to Northern Ireland’s unionists.

“It’s very hard for [the DUP] to explain what happened,” said Alex Kane, a longtime Northern Ireland commentator.

Unionist protesters demonstrate against the Northern Ireland protocol of the Brexit agreement in Portadown © Clodagh Kilcoyne/Reuters

The DUP has also been coming under threat from the winds of change in the region. Young people, and their parents and grandparents, have begun to embrace gay rights, abortion and other issues that clashed with the DUP’s deep conservatism.

Dissatisfaction with Foster inside the DUP included a perceived softening of her stance on social issues after she failed to vote against legislation banning gay conversion therapy.

But the biggest issue for Foster was the DUP’s handling of the Northern Ireland protocol — the part of Johnson’s Brexit deal that introduced the border in the Irish Sea.

Tim Cairns, a former DUP adviser, said the criticism of Foster “wasn’t that she was too soft on the protocol, it was that she was too soft in the action she was taking to get rid of the protocol”.

Poots succeeded Foster with promises to do better on the DUP’s most important issues, and to embrace a more inclusive leadership style.

He failed at both, notably by agreeing to continue the power-sharing government involving the DUP and the nationalist Sinn Féin party on terms overwhelmingly opposed by his colleagues at Stormont and Westminster.

Poots infuriated DUP politicians by striking an agreement under which Westminster will pass legislation to protect and promote the status of the Irish language — a top priority for Sinn Féin.

Abortion rights protest at Stormont © Charles McQuillan/Getty Images

Donaldson on Monday launched his bid to lead the DUP with a warning that the government at Stormont could collapse if the UK did not take “decisive action” on the Northern Ireland protocol.

A UK government official said Donaldson was seen as a “more pragmatic” figure than Poots, adding that the new DUP leader’s experience at Westminster meant he had “relationships with people” that could ease negotiations on the protocol.

Still, securing changes to the protocol will be difficult, not least because any revisions must be agreed with the EU. The British official rejected the suggestion that the UK government would have to give the DUP a sweetener on the protocol to ensure Northern Ireland’s stability.

Kane said he believed Donaldson would do everything possible to avoid a collapse of the region’s government. “He isn’t giving up Westminster and coming back to Northern Ireland just to allow the assembly to come down,” added Kane. “He wants to be first minister.”

As for the future of the DUP, while the party has been scarred by recent events, Donaldson arguably inherits a better situation than his predecessor.

In particular, Poots resolved the contentious Irish language legislation, relieving Donaldson of an issue that was always going to be problematic for some inside the DUP.

Furthermore, Donaldson is privately more progressive on social issues than he is in public, and a strategic long-term thinker, according to people who know him.

Cairns said: “There are certainly problems within the party, [but] if anybody is going to sort that out I think Jeffrey is probably best placed to do that.”



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Conservatives’ ideological splits exposed by big spending rail projects

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Boris Johnson has been urged by Conservative MPs representing the ‘red wall’ of former Labour heartland seats not to cut back major rail infrastructure projects as the UK prime minister comes under pressure from chancellor Rishi Sunak to rein in ambitious plans for public spending.

The National Infrastructure Commission, which advises the government, recently said plans to extend the High Speed 2 rail project to Leeds should be scrapped to save £32bn from its expected budget of over £100bn. Earlier this week the FT revealed that costs on HS2 have risen by £1.7bn in the past year — partly because of the pandemic — although this was covered by the project’s contingency budget.

Meanwhile the Treasury has not yet given the sign-off to the Northern Powerhouse rail project, which is supposed to link the north’s big cities from Liverpool, Hull and Newcastle via Manchester, Sheffield and Leeds, and which could cost a further £39bn.

The uncertainty over the multibillion pound transport schemes underline the tensions between Johnson and Sunak in recent weeks over a number of spending projects, with the Treasury eager to dampen Downing Street’s appetite for spending. Number 10 has clashed with other Whitehall ministries over social care reform and a new “royal yacht”.

Johnson is seen by his party as the most pro-spending Conservative leader since Harold Macmillan’s time in Downing Street from 1957 to 1963. Since Margaret Thatcher took over the party in 1975, it has shunned stimulating demand through spending, opting instead for tax cuts.

One senior Treasury insider said that Sunak’s view was “there are choices that have to be made” and it was important to stabilise the public finances as the UK emerged from the worst of the coronavirus pandemic. The chancellor announced two tax changes in his March budget — freezes in the personal income tax threshold and a rise in corporation tax.

“What he did at the Budget was to put us back on to a more stable trajectory, get debt falling and get our public finances on to a stable footing. He made it very clear that the two tax changes are things he wanted to do to achieve that. But he’s not necessarily keen on raising any more taxes on people, particularly personal taxation,” the official said.

HS2 is designed to run from London to Manchester via Birmingham and Crewe. But the “eastern leg of HS2 2b” — extending from the West Midlands to Leeds — has been criticised by many Tory MPs in its traditional southern strongholds, who believe it should be scrapped.

Tories elected for the first time in the 2019 election have privately warned that it would be a mistake to cancel it. “Our first time voters are watching and waiting for the government to prove they’re delivering on the promises we made them in 2019,” one newly elected MP said.

Other Tories insist the Northern Powerhouse Rail, sometimes referred to as HS3, is even more important. “It’s absolutely crucial that ‘Northern Powerhouse Rail’ is built. I wasn’t a big fan of HS2 but this is exactly what we have to build to deliver on the trust that was put on us,” another MP said.

Following a report carried by the Huffington Post on Tuesday that said the Treasury and Downing Street were at odds over when to publish the long-awaited integrated rail plan (IRP), which will set out the details of Britain’s future rail system including the new Leeds-Manchester route, a Downing Street spokesman said the government was “still committed” to the new rail line.

“We are getting on top of our priorities and investing in northern transport,” he said. “The integrated rail plan will set out how major rail projects including HS2 phase 2b and Northern Powerhouse Rail will work together to deliver reliable rail services that passengers deserve.”

One Treasury figure said that Downing Street, the Treasury and the Department for Transport all broadly accepted the need to push ahead with the project — but the details were still up in the air.

“There needs to be a package of investment and needs to be agreement on what that looks like. Work is ongoing,” the person said. “But this is more an issue of bandwidth than any serious differences, it has been a while since the relevant cabinet ministers all met.”

Any disagreements on funding the new railway line are not about scale but are instead likely to be about the timeline and how soon spades can go in the ground. 

Many newly elected Tory MPs favour more spending, to make up for decades of under investment in their areas. One MP representing a northern constituency said that most of the newly elected Tories backed “sensible measures that allow us to deliver on our manifesto commitments”.

“Very few people are going around saying we have to do everything, colleagues know that we need to have clear blue water with Labour. We’re in a dangerous position if it looks like we’re going to outspend them,” they said.

Paul Goodman, editor of the ConservativeHome website and a former Tory MP, said the current parliamentary party has a similar tension to the one at the top of government. “Their hearts are with Johnson but their heads are with Sunak,” he said.

“Most Tories are in parliament because they are Conservatives and that’s true of the red wall intake too. They believe in a smaller state and lower taxes. But these beliefs run up against their constituencies demanding more and more spending.”



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First unleveraged single-stock ETPs aim to woo retail investors

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Interested in ETFs?

Visit our ETF Hub for investor news and education, market updates and analysis and easy-to-use tools to help you select the right ETFs.

Leverage Shares is attempting to tap the boom in retail investing with the launch of the world’s first unleveraged physically backed single-stock exchange traded products. The ETPs provide investors in UK and elsewhere in Europe the rare opportunity to buy fractional shares.

Investors might be forgiven for thinking they are another version of the company’s leveraged or inverse ETPs that amplify gains and losses, reset every day and are generally viewed as unsuitable for retail investors.

However, the products promise no geared returns. Instead, they invest directly in the underlying company and, with their launch at $5 per share, their additional sterling and euro share classes, and their offer of big-name companies such as Tesla, they are being aimed straight at the European retail market.

Oktay Kavrak, product strategist at Leverage Shares, said it was unsurprising that the new products were not well understood at present. “Since we’ve only been making leveraged ETPs until now, I’d say this is expected,” he said.

But they have caught the attention of some industry participants.

Matt Brennan, head of passive portfolios at AJ Bell, one of the UK’s largest investment platforms, said that while no decision had yet been taken to add the products to the platform, AJ Bell was “actively monitoring them”.

“In general I am not usually a fan of ETPs, as they do add extra complexity, but to be fair to these products, they do seem to solve a few different problems,” Brennan said.

The products, which it started to roll out in May, effectively made it possible for UK and some other European investors to buy fractional shares in large overseas companies such as Tesla, Google and Amazon for about $5. That compares to about $600 for a single share in Tesla, $2,500 for Alphabet and nearly $3,500 for Amazon.

Leverage Shares’ latest launches last week added large Chinese companies such as Nio and JD.com to the family of unlevered single stock ETPs, which are listed on the London Stock Exchange, Euronext Amsterdam and Euronext Paris.

Kavrak said the ETPs were already available on the Interactive Brokers and Swissquote platforms and that Leverage Shares was in negotiation with other platforms including AJ Bell and Hargreaves Lansdown.

“I can understand the rationale for an unlevered approach to accessing single stocks that acts as a proxy fractional share — though clearly investors will need to pay an ongoing charge for the privilege — something they don’t need to do when owning the standard equity share,” said James McManus, chief investment officer at Nutmeg, a UK investment platform that offers low-cost investment portfolios.

“Clearly this is also an imperfect solution to an existing problem and points to the fact that many platforms have not solved the issue of fractional shares — unlike their US counterparts,” McManus added.

So-called fractional shares allow retail investors to own a part of a share, which can be useful if the share is expensive or if large share price movements result in the need for portfolio rebalancing. Nutmeg has developed a fractional share facility that it uses for its portfolio offerings.

Brennan pointed out that as well as enabling fractional shares the currency share classes eradicated the need for currency conversion charges, which could be high on some platforms.

Investing in the US companies via the Dublin-listed ETPs would also relieve investors of the need to fill in documentation to avoid penal tax rates, Brennan said, although he warned that potential investors should also remember that the European-listed ETPs often trade when the markets on which their underlying stocks are listed are closed.

He also pointed to the potential burden of costs that the ETPs would bring. These included the annual management fee of 0.15 per cent, but also the likelihood of wider bid-ask spreads than a more diversified ETF. He added that the ETPs might not track the underlying stock very efficiently if cash was not fully invested and dividends were not reinvested.

However, Todd Rosenbluth, head of ETF and mutual fund research at CFRA said the products looked interesting and were relatively inexpensive for what they offered.

“I think a 0.15 per cent fee for the stock trackers is modest, given the access these provide, and we would expect trading costs will likely improve as more investors discover them. Most new exchange traded products incur limited volume initially,” he said.

He said they should not be confused with Leverage Shares’ other offerings. “There are leveraged versions, but the ones we’re talking about are as risky as owning Tesla or Amazon outright.”

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