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China: the trade shows must go on

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Good morning from Singapore, where there is at long last at least a glimmer of hope that regional travel in the east Asia region might be possible in the not too distant future, even without a vaccine for Covid-19 yet available.

The reason for this optimism is the recent announcement by authorities in Singapore and Hong Kong that they will soon allow each other’s residents to travel relatively freely between the region’s two leading financial centres. So long as people test negative for coronavirus, they will be able to travel quarantine-free between the south-east Asian city-state and the Chinese special administrative region.

Now imagine that other Chinese cities — say Beijing, Shanghai, Guangzhou and Shenzhen — could be integrated into this scheme. There is a rough template for it already. China has long allowed international travellers to stay visa-free in certain cities for a number of days between transit flights, provided they do not leave city limits. This has made it easy for someone travelling from London to Hong Kong to fly via Beijing and conduct a few days of business in the Chinese capital without ever having to apply for a formal visa.

If Singapore, Hong Kong and some of China’s largest cities could all agree to allow quarantine-free travel, it could be the start of a long-awaited return to normal in the Asia-Pacific region — and help revive events such as the Canton Fair, which is the main subject of today’s post.

Policy watch looks at steps taken by the EU markets regulator to quell some investor concerns about post-Brexit trading while our chart of the day highlights how China has become the dominant force for bilateral lending in sub-Saharan Africa.

Don’t forget to click here if you’d like to receive Trade Secrets every Monday to Thursday. And we want to hear from you. Send any thoughts to trade.secrets@ft.com or email me at tom.mitchell@ft.com.

China trade

A virtual Canton Fair

On March 12 China’s premier, Li Keqiang, issued a surprising statement. The country’s largest and longest-running trade fair, held annually in the southern city of Guangzhou since 1957, would hold its spring session as normal.

It seems inconceivable now, given the speed with which the coronavirus pandemic has spread across the world, but at the time holding the Canton Fair did seem like it might be possible. By early March, China had successfully contained the virus, especially in cities and provinces far away from its centre in central Hubei province, and it was not yet clear that major outbreaks would emerge in other parts of the world.

In these circumstances, holding the Canton Fair as scheduled would be an important symbol that the world’s second-largest economy was still open for business. After all, the fair was famous for not missing a session since its establishment in 1957 — surviving traumatic events such as the Great Leap Forward famine of 1959-61 that killed tens of millions of people, the decade-long turmoil of the Cultural Revolution and the Tiananmen Square protests and ensuing massacre in the spring of 1989. Chinese officials did not want to see the fair’s streak broken.

In the end, however, this year the government had to bow to reality. As outbreaks gathered pace in late March in Europe, the US and across the developing world, China closed its borders to foreign travellers — including foreign residents with valid permits to live and work in China.

The Canton Fair’s spring session was postponed from April to June and moved online only. Its autumn session, also convened virtually, concluded on October 24. Guangzhou’s hotels, restaurants and bars had to do without hundreds of thousands of visitors.

So in terms of keeping the fair’s long streak alive, do two online sessions count — or is this cheating?

Mr Li’s government says it was a triumph. Both he and President Xi Jinping “attended” the spring session’s online opening ceremony and “visited” online booths. Some 26,000 exhibitors displayed their wares on the fair’s website to registered buyers from 217 countries and regions.

“The virtual Canton Fair blazed a new path of international development,” its organisers argue. They contend this is just the beginning of a brave new future for the event: “A Canton Fair that never ends will be built with integrated online and offline functions to make new contributions for Chinese and foreign companies to develop broader markets.”

For Guangzhou in particular, the significance of the fair extends far beyond its inaugural session in 1957 and what it said about the city’s relative openness even during the darkest periods of Maoist China.

For Guangzhou, the significance of the fair extends far beyond its inaugural session in 1957
For Guangzhou, the significance of the fair extends far beyond its inaugural session in 1957 © Alamy

China’s largely Beijing-based rulers have waxed and waned in their enthusiasm for foreign trade over the centuries. But no matter whether such commerce was actively encouraged or barely tolerated, Guangzhou has long prided itself on being one of country’s leading trade centres.

The city is dotted with ancient mosques which stand as monuments to Guangzhou’s trading links to the Arab world, which date back at least 1,300 years. And not far from the Canton Fair’s cavernous exhibition halls on the banks of the Pearl river is Shamian Island, where western traders were allowed to establish trading posts in the late 18th century.

With such a proud heritage at stake, letting the fair formally lapse was not an option for the Chinese government — not even during a once-in-a-century pandemic. Having saved face with this year’s two online sessions, Beijing’s hope now is that the fair can resume business as usual in the spring of 2021. If it can, it will be an important sign that life is continuing to return to normal — at least in this part of the world.

The Canton Fair’s official name is the China Import and Export Fair, but it is a misleading one. The event has always been about exports, with a focus on matchmaking domestic manufacturers with foreign buyers. Over time this emphasis became problematic for the Chinese government, especially as US President Donald Trump railed against China’s trade surpluses and sought to slow down its export sector.

So two years ago, at a time of heightened trade tensions with the US, President Xi Jinping’s administration launched the annual China International Import Expo, held every autumn in Shanghai. The idea was to show the world that it need not fear China’s export prowess, for it also has a huge and growing demand for imports.

The CIIE’s third annual session will open next week. But unlike the Canton Fair, it is attempting to pull it off in the real rather than virtual world, with a 20 per cent year-on-year increase in floor space to meet demand from exhibitors. Attendees will be subject to a sophisticated array of health checks and monitoring as organisers hope to keep the event Covid-19 free.

Charted waters

China has emerged as the biggest bilateral lender to Africa over the past two decades, transferring nearly $150bn to governments and state-owned companies. But as FT reporters on the continent note, the pandemic has revealed the fragmented nature of Chinese lending as well as Beijing’s reluctance to fully align with global debt relief plans. China’s share of bilateral debt owed by the world’s poorest countries to members of the G20 has risen from 45 per cent in 2015 to 63 per cent last year, according to the World Bank.

Bar chart of Repayments on bilateral debt due this year ($bn) showing China is the dominant bilateral lender in sub-Saharan Africa

Policy watch

EU investors will still be able to trade dual-listed companies such as IAG, the parent of British Airways
EU investors will still be able to trade dual-listed companies such as IAG, the parent of British Airways © Andy Rain/EPA-EFE/Shutterstock

The EU markets regulator has taken steps to partly assuage investor concerns about trading after Brexit by indicating EU investors will be able to trade sterling-quoted shares of European companies listed in London, Phil Stafford and Jim Brunsden write.

The Paris-based European Securities and Markets Authority on Monday made the policy change because of concerns among businesses and some EU governments that the bloc’s regulations could fragment the share market and cut European companies out of deep pools of capital in London.

Esma said that trading of EU shares on a UK exchange in pounds will be exempt from an EU rule, known as the share trading obligation, which determines which venues investors can use to trade. That means EU investors will still be able to trade dual-listed companies like AstraZeneca, Relx, Tui, British Airways parent IAG and G4S in London as those companies are listed in sterling.

However, many Irish companies, like Ryanair, Kingspan and Bank of Ireland will remain vulnerable as they trade in euros. One industry lobbyist in Brussels said it was “the narrowest of accommodations”, adding that it “does not solve what Ireland needs”.

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    Beijing and Wall Street have deepened their ties despite geopolitical rivalry, defying the trade war with growing investments.
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  • In broad terms, there is not much doubt that China, after mishandling the initial outbreak, has done a good job of containing the disease. But the inability to accept criticism suggests that pro-Beijing triumphalism is premature.
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  • South Korea’s economy rebounded in the third quarter as demand for exports grew following the relaxation of lockdowns in the region, although US-China tensions still pose a threat.
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Emerging Markets

Australia’s treasurer warns global stimulus threatens financial stability

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Australia has warned that unprecedented global stimulus efforts during the coronavirus pandemic are creating financial stability risks that will only intensify when interest rates inevitably rise.

Canberra has also defended tough new foreign investment rules that have led to a collapse in Chinese investment, arguing the number of proposed deals motivated by strategic, rather than purely commercial gain, was increasing.

Josh Frydenberg, Australia’s treasurer, said the Pacific nation was in a strong economic position as its net debt to gross domestic product was about half that of other advanced economies, even as it begins unwinding fiscal stimulus.

“There is no doubt elevated debt levels will create challenges for many countries. While global interest rates are low those debt levels can be serviceable — but there will be a time when the monetary policy settings change,” he told the Financial Times.

Frydenberg’s comments on the risks posed by global stimulus followed a similar warning delivered last week by Peter Costello, a close political ally and former Australia treasurer.

Australia will be among the first advanced economies to taper off Covid-19 fiscal stimulus with the closure of its A$90bn (US$70bn) JobKeeper wage subsidy scheme this month.

Canberra has argued that the recovery is already under way, citing a fall in unemployment to 6.4 per cent in January and a 3.3 per cent economic expansion in the three months to September last year.

Frydenberg, who counts Margaret Thatcher and Ronald Reagan among his role models, said the government’s A$250bn stimulus was required to stabilise the economy during the pandemic. But he said JobKeeper, which supported 3.6m workers at its peak, was no longer needed as the recovery could be supported by tax cuts, which were announced last year.

Asked if he thought the economic policies of Thatcher and Reagan were still relevant, he said: “[Reagan and Thatcher] achieved a lot when they were in office and they were committed to lower taxes. They were committed to cutting regulation and that’s certainly what I’ve been committed to as well.”

But trade unions and businesses that are still suffering as a result of border closures and restrictions, particularly in the tourism and entertainment sectors, have warned that the scheme’s closure will dent the economy.

“JobKeeper should be extended for those businesses that are still affected by coronavirus. [Through] no fault of their own, they are suffering that downturn,” said Sally McManus, secretary of the Australian Council of Trade Unions, last week. “And we say that because that will save jobs.”

Josh Frydenberg, Australia’s treasurer, is a rising star in the country’s conservative government and is tipped as a future prime minister © AP

Frydenberg, who was the architect of foreign investment rules aimed at countering rising Chinese influence, said he made no apologies for putting “national interest” at the heart of Australia’s investment policies.

Chinese investment fell 61 per cent last year to A$1bn, down from A$2.6bn in 2019 and a peak in 2016 of A$16.5bn, data showed. Frydenberg was instrumental in blocking two potential deals: China Mengniu’s A$600m bid for Japan-owned Lion Dairy and China State Construction Engineering Corp’s A$300m bid for Probuild, a South Africa-owned construction company.

“We absolutely reserve the right to make decisions around foreign investment based on national interest and having put in place an explicit national security test allows us to do that,” he said.

“Increasingly we’ve seen foreign investment proposals that have been motivated not by purely commercial gains but more strategic ones. When those foreign investment proposals potentially compromise the national interest, then we reserve the right to say no.”

Frydenberg said Australia was not alone in tightening its rules, noting that other countries shared Canberra’s views on national sovereignty and foreign investment.

“Obviously we have had some challenges with China,” he said when asked about Beijing’s imposition of trade sanctions on a range of Australia’s exports following Canberra’s call last year for an inquiry into the origins of Covid-19 in Wuhan.

Frydenberg insisted that Australian ministers were prepared to sit down with their Chinese counterparts to discuss the bilateral relationship but only on a “no conditions attached” basis.

“It is a mutually beneficial trading relationship — we supply the bulk of their iron ore and that iron ore has helped underpin their economic growth,” he said.

Frydenberg is a rising star in Australia’s conservative government and is tipped as a future prime minister.

Last week, he shot to global attention following several days of negotiation with Facebook’s Mark Zuckerberg over the social media company’s decision to block news on its platforms in Australia in response to a law forcing it to pay news publishers.

On Friday, Facebook “refriended Australia” and returned news to its Australian platform following amendments that may make it easier for the company to avoid the toughest elements of the law.

“Trying to negotiate with these guys is a bit like playing chess against a chess master,” said Frydenberg, who joked that he spoke to Zuckerberg more than his own wife last week.

“The reality is they are massive companies with huge balance sheets and global reach. If this was easy other countries would have done it [made Big Tech pay for news] long ago.” 



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Ecuador’s exporters caught between US and China after debt deal

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Exporters in Ecuador are worried that their all-important trade with China will suffer as a result of a controversial agreement the US says is aimed at shutting China out of the South American country’s 5G telecoms network.

The agreement, signed by the US International Development Finance Corporation (DFC) and the Ecuadorean government just days before Donald Trump left office in January, envisages the US buying oil and infrastructure assets in Ecuador on the understanding Quito uses the proceeds to pay off its debt to China.

It also obliges Ecuador to sign up to what the Trump administration called the “Clean Network” — a state department initiative designed to ensure that nations exclude Chinese telecoms services and equipment providers as they build out their high-speed 5G mobile networks.

Adam Boehler, the recently departed chief executive of DFC, has described the deal as a “novel model” to eject China from the Latin American nation.

But it has caused unease in Ecuador, which has become increasingly reliant on exports to China.

“The announcement has generated a lot of inquiries and a lot of doubts,” said Gustavo Cáceres, head of the Ecuadorean-China Chamber of Commerce (CCECH). “We hope our authorities handle this in the best way possible so as not to give the impression that we’re turning our backs on China.”

One of the smallest countries in South America, Ecuador has traditionally exported primarily to the US and Europe, but China is fast catching up. Its share of Ecuador’s exports jumped from 3.9 per cent in 2015 to 15.8 per cent. In the same period, the US’s share fell from 39.4 per cent to 23.7 per cent.

The Chinese buy oil, shrimp, bananas, cut flowers, cacao and timber from Ecuador. Last year, despite the coronavirus pandemic, Ecuador’s exports to China grew more than 10 per cent and, for the first time, the country boasted a trade surplus with Beijing.

The shrimp industry has become particularly important. Since 2016, Ecuador’s shrimp exports worldwide have jumped 86 per cent. The nation of just 17.4m people is now the largest exporter of shrimp in the world, having overtaken India last year, when it exported 676,000 metric tonnes of the crustaceans in trade worth $3.6bn. After oil, shrimp were the country’s most lucrative export commodity.

Over half of that went to China, which, with its expanding middle class, is acquiring a taste for seafood once seen as a luxury.

“China will remain our main market,” forecast José Antonio Camposano, president of Ecuador’s National Chamber of Aquaculture (CNA), which oversees the industry. “We need a smart approach to China. A market of 1.4bn people with the acquisitive power that the Chinese have? I’m a businessman, how can I say no to that?”

The CNA was sufficiently worried by Ecuador’s agreement with the US that it sent a three-page letter to Ecuador’s president Lenin Moreno reminding him of China’s buying power.

While the letter did not mention the DFC deal directly, it urged Moreno — who in his four years in power has shifted Ecuador’s axis away from Beijing and towards Washington, reviving relations with the IMF and renegotiating the country’s debt to bondholders — “to reinforce with senior Chinese leaders the point that the excellent relationship between Ecuador and China remains intact”.

Freshly caught shrimp being packed into containers in Ecuador in 2011
Ecuador’s shrimp industry has fed a growing appetite among China’s expanding middle class © Bloomberg

China’s ambassador to Ecuador, Chen Guoyou, said he was unconcerned by the DFC deal and described media reports that it excluded Chinese companies from Ecuador’s telecoms network as “over-interpretation and gratuitous assumption”.

“China respects the sovereign and independent decision of the Ecuadorean government to develop pragmatic, balanced and diverse partnerships with other countries,” he told the Financial Times in an email.

Responding to his comments, one of the former Trump administration officials who negotiated the deal said it had been made explicitly clear in the text that the agreement was contingent on the country participating in the “Clean Network” — which would prevent it from including Huawei or any other Chinese company in its telecoms network.

The future of the deal, and indeed Ecuador’s future relations with China and the US, will depend in part on the outcome of the country’s presidential election on April 11. It pits leftwing economist Andrés Arauz against Guillermo Lasso, a conservative former banker. 

Arauz has the backing of Rafael Correa who took Ecuador out of the US’s orbit and pushed it towards China while serving as president from 2007 until 2017. He broke off relations with Washington’s financial institutions and signed a series of loans-for-oil deals with the Chinese. If Arauz wins the election he is likely to seek support from Beijing and might rip up the DFC agreement, particularly now Trump is no longer in office.

In contrast, Lasso told the FT previously the deal was “a pleasant surprise” and “good news” for Ecuador.

“It’s clear that the US is our principal ally and in my government I would look for an even closer alliance with the US,” he said.



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Brazil virus variant found to evade natural immunity

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The P.1 Covid-19 variant that originated in Brazil and has spread to more than 25 countries is around twice as transmissible as some other strains and is more likely to evade the natural immunity people usually develop from prior infection, according to a new international study.

The research, conducted by a UK-Brazilian team of researchers from institutions including Oxford university, Imperial College London, the University of São Paulo, found that the P.1 variant was between 1.4 and 2.2 times more transmissible than other variants circulating in Brazil. 

It was also “able to evade 25-61 per cent of protective immunity elicited by previous infection” with any earlier variant, the researchers found, in a sign that current vaccines could also be less effective against it.

International concern about the P.1 variant has escalated recently, with more than 25 countries detecting the variant, including Belgium, Sweden and the UK, which has identified six cases.

The scientists are expected to release a paper describing the research on Tuesday. Dr Nuno Faria, the lead author, did not immediately respond to a request for comment. The study has not yet been peer reviewed.

The researchers have dated the emergence of the P.1 variant to November 6, 2020, around one month before cases began to surge for a second time in the Brazilian city of Manaus. They found that the proportion of cases classified as P.1 in Manaus increased from zero to 87 per cent in the space of 7 weeks. 

The paper concluded: “Our results further show that natural immunity waning alone is unlikely to explain the observed dynamics in Manaus, with support for P.1 possessing altered epidemiological characteristics.”

“Studies to evaluate real-world vaccine efficacy in response to P.1 are urgently needed,” it added.

The researchers also found that infections were 10 to 80 per cent more likely to result in death in Manaus after the emergence of P.1. However, the authors cautioned that it was not possible to determine whether this meant the variant was more lethal or whether it was a result of increased strain on the city’s healthcare system, or a combination of both. 

The P.1 variant has over 17 mutations, which alter its genetic sequence from the virus originally identified in Wuhan, including 3 key changes to the spike protein that it uses to enter human cells.

Researchers in Brazil have been using genetic sequencing technology developed by Oxford Nanopore in the UK to identify and track the variant. The technology was first used in Brazil during the Zika outbreak in 2015.

Dr Leila Luheshi, director of applied and clinical markets at Oxford Nanopore, told the Financial Times that while the B.1.1.7 variant in the UK has similar properties of high transmissibility to P.1 — it is thought to be around 1.5 times as transmissible as variants that preceded it — there was no evidence to date that it evaded past natural immunity in the same way. Studies so far have also shown that current vaccines retain their efficacy against B.1.1.7.

Luheshi said that the concern with P.1 is that “because it has these mutations around the spike . . . the hypothesis is that the vaccine will be less effective.” But she added that there is not yet definitive evidence to support this theory. 



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