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Exit from single market closes a chapter UK did so much to write

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When Big Ben strikes 11pm on New Year’s Eve, the UK will leave Europe’s single market. It will be a moment of national catharsis — and like in Greek tragedies — a moment when the protagonist’s own triumphs of the past catch up with him.

For the roots of Britain’s rupture with Europe grow from its greatest European victory: the success in imparting to Europe a British and especially Tory economic ideology of eliminating bureaucratic barriers to trade. The single market was to a large extent created by British Conservatives.

“Just think for a moment what a prospect that is,” Margaret Thatcher told an audience of British business leaders at Lancaster House in 1988 when she was prime minister. “A single market without barriers — visible or invisible — giving you direct and unhindered access to the purchasing power of over 300 million of the world’s wealthiest and most prosperous people. Bigger than Japan. Bigger than the United States. On your doorstep. And with the Channel Tunnel to give you direct access to it.”

Thatcher was the political force behind a genuinely unified European market for goods, services, labour and capital; Arthur Cockfield, the Brussels commissioner she appointed in 1985, was its intellectual architect and bureaucratic engineer.

How UK newspapers reported Britain’s entry into the common market in 1973 © Frank Barratt/Hulton/Getty Images

The motivation was plain enough. When Britain belatedly joined what was then known as the European Economic Community in 1973, economic integration mainly took the form of a customs union, known as the bloc’s “common market” in which tariffs between members were eliminated. Those who saw economic benefits for Britain were vindicated, with membership quickly bringing to an end Britain’s long underperformance as economic growth caught up with European peers.

The common market remained, however, riddled with barriers as differing national regulations made cross-border trade costly.

And as soon as he arrived in Brussels in 1985, Cockfield set out to remove them. His white paper on “Completing the internal market”, one of the most consequential documents in EU history, set out a compromise between “harmonised” pan-European rules and “mutual recognition” of national ones. Much as the British might once have wanted a simple system of mutual recognition, Cockfield realised that politically, this would never fly without a foundation of minimum common standards. Where necessary, therefore, common rules relating to the single market would be adopted — by qualified majority of member states rather than unanimous consent, to avoid political deadlock — with national leeway to shape the detailed implementation where possible.

Cockfield was remarkably successful. The 1986 Single European Act allowed single market legislation by qualified majority. Hundreds of legislative measures were then passed at speed, and by the start of 1993 the single market was a reality, and most border controls disappeared. 

The UK began to sour on its own creation, however, even before it came into being.

An anti-euro protester campaigns against the UK adopting the currency in 2003 © Scott Barbour/Getty Images

One irritant was present from the start. For continental leaders, the elimination of capital controls meant only monetary unification could prevent currency instability that would distort trade or jeopardise cross-border investments. As the slogan had it: “One market, one money”. This link was never accepted in Britain. In the long-term this deepened a divergence of interests between the UK and the euro members, which would show up starkly after the global financial crisis and David Cameron’s ill-fated attempt to negotiate new terms for Britain’s EU membership.

But other consequences of the single market were ones the UK had not just accepted, but desired. Yet it soon had second thoughts about them.

Shortly after Lancaster House, Thatcher gave what would become known as the Bruges speech, a foundational text for British Eurosceptics. The European Commission’s ambition for a “social Europe” had woken her up to the danger, as she saw it, that she had “successfully rolled back the frontiers of the state in Britain, only to see them reimposed at a European level with a European superstate exercising a new dominance from Brussels”.

She had woken up to the danger, as she saw it, that she had “successfully rolled back the frontiers of the state in Britain, only to see them reimposed at a European level with a European superstate exercising a new dominance from Brussels”. If that had come to pass it would have been an effect of the very method Thatcher and Cockfield had championed: common rulemaking by (qualified) majority decision. The prime minister who pushed for common rules to remove trade barriers struggled to accept that a majority of others may have different ideas about what the best common rules for free trade ought to be. In parallel, the Labour party warmed to a European integration it had previously spurned. 

Boris Johnson had long supported the single market but was concerned about the role of the European Court of Justice © Carl Court/Getty Images

A further implication of the single market project was the growing role of the European Court of Justice. Where there are common rules, there must logically be a common arbiter of whether the rules have been obeyed. But this increasingly rankled the most vocal British Eurosceptics as offensive to sovereignty. Even for prime minister Boris Johnson, long a supporter of the single market, the ECJ’s final word in interpreting much of the law that regulated the UK economy seems to have been genuinely intolerable.

Then there is the most toxic part of the 2016 referendum campaign. Part of a betrayal myth about the UK’s 1973 accession is that people signed up only to free trade, not to a freedom of movement later imposed by stealth. But the ability to work anywhere in the bloc was part of the EU’s founding credo, as was well understood in the original UK membership debates.

The single market nevertheless made the aspiration of free movement for workers a reality by sweeping away bureaucratic and legal barriers to moving. Then in 2004 countries from eastern Europe joined the EU, championed by the UK, which was also one of few countries to waive a transition period before east Europeans gained full free movement rights. Millions of workers took the opportunity to come. The transformation of Britain’s labour market and demography gave Eurosceptics their most potent issue to campaign on.

It was, in all these ways, a case of willing the end but not the means. British Conservatives managed to liberalise trade across Europe, then discovered what they really wanted was a strict conception of sovereignty. Mr Johnson’s Christmas Eve trade deal gives them that — but at the price of restoring all the trade frictions Thatcher and Cockfield had managed to remove. This might settle the issue if Britain’s self-appointed “natural party of government” has now made up its mind. But with Brexit associated as much with a free-trading global Britain as with a sovereign one, no one can know whether the deal will resolve these tensions permanently.



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Analysis

Investors rethink China strategy after regulatory shocks

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After four days of heavy selling in Chinese stocks, regulators in Beijing decided it was time to offer some reassurance to Wall Street. But some investors have still been left figuring out whether to double down or flee.

In a hastily arranged call on Wednesday evening, Chinese regulators told a dozen or so executives from global investors, heavy-hitting banks and Chinese financial groups not to fret about the shock overhaul of the country’s $100bn private tutoring industry. Investors should not worry about intervention to curtail profitmaking in other companies, they said. Rather, China remained committed to allowing companies to access capital markets. 

The message did not stick. Tech stocks in the country have wrapped up their worst month since the financial crisis of 2008. “Clearly there will be more [regulatory intervention] to come,” said one person briefed on the call. “That much was obvious to everyone.” 

Now, foreign investors in China have been left nursing huge losses, and anxious over where, after education, regulators might turn their attention next. They must decide whether the drop in stocks is an opportunity to double down on a fast-growing economy or a sign that unpredictable political risk outweighs potentially lucrative returns.

“The political risk factors of investing in China have grown exponentially in the past 18 months,” said Dominic Armstrong, chief executive of Horatius Capital, which runs a geopolitical investment fund. “People learned the hard way in Russia and they’re learning the hard way in China.” 

Line chart of Stock index performance year to date (%) showing China's tech crackdown hits foreign listings harder

Tough lesson

Following a leaked memo just over a week ago suggesting Beijing was planning to clamp down on education companies, the market sell-off was sharp.

It was led by a drop in education stocks that, according to one Gavekal analyst, made for “some of the most traumatic viewing since the charts of Lehman’s bonds”. TAL Education, Gaotu Techedu and New Oriental Education, which are listed in New York, all fell close to 60 per cent in the first hour of trading on July 23.

Further jitters came on Tuesday when Tencent, one of China’s biggest tech groups, announced its flagship WeChat social network had suspended user registrations as it upgraded security technology “to align with all relevant laws and regulations”. 

Nerves have pummelled Chinese tech groups listed in New York, taking the Nasdaq Golden Dragon China index down more than 20 per cent in July — the worst month since the global financial crisis. 

In Hong Kong, the Hang Seng Tech index fell almost 15 per cent, dragging the broader Hang Seng benchmark almost 9 per cent lower as Chinese internet giants Tencent and Alibaba fell 18 and 14 per cent, respectively. 

Big institutional investors have driven the selling, according to strategists at JPMorgan Chase. Meanwhile Ark Invest star manager Cathie Wood has also been slashing her China holdings. The $22.4bn Ark Innovation exchange-traded fund, which held an 8 per cent allocation to China shares in February, has now almost completely exited Chinese stocks, according to the company’s website.

But some have stepped in for a potential bargain. “We have been net buyers,” said a fund manager at a $15bn Asia-based asset manager. “It is unheard of to see these types of moves . . . You’ve got to buy them, unless you think the entire world is going to crash and burn.”

The new rules will ban companies that teach school curriculum subjects from accepting foreign investment © Costfoto/Barcroft Media via Getty

National objectives

The crackdown on education marks part of the Chinese Communist party’s attempts to address falling birth rates by removing some of the perceived financial obstacles to having children. The rules will ban companies that teach school curriculum subjects from making profits, raising capital or listing on stock exchanges worldwide, and from accepting foreign investment.

This sector is dominated by three large US-listed groups — TAL Education, New Oriental Education and Gaotu Techedu — which have enjoyed soaring valuations in recent years and drawn billions of dollars of backing from some of the world’s top investment firms such as BlackRock and Baillie Gifford.

Private rivals like Yuanfudao and Zuoyebang, which have held multibillion-dollar funding rounds in recent years, are backed by groups including Tencent, Sequoia, SoftBank’s Vision Fund and Jack Ma’s Yunfeng Capital.

The government intervention came shortly after anti-monopoly and data security measures against some of China’s largest tech companies. Last November the $37bn blockbuster initial public offering of Chinese payments group Ant was torpedoed by Beijing regulators, and its controlling shareholder — Alibaba founder Ma — disappeared from public view for several months.

In the past few months Beijing has also been expanding its influence in to the domestic online sector. In April it fined ecommerce group Alibaba $2.8bn for abusing its market dominance, and opened an antitrust investigation into Meituan, the takeaway delivery and lifestyle services platform. 

And earlier in July, Chinese regulators announced an investigation into possible data security breaches at Didi Chuxing, less than a month after the ride-hailing app raised more than $4bn in a New York listing. Its shares have dropped two-fifths since then.

Line chart of Performance of American depository receipts showing Once high-flying Chinese education stocks tumble back  to Earth

Baillie Gifford, the Edinburgh-based fund manager with £352bn in assets under management, is the second-largest shareholder in US-listed TAL and has made big bets on China’s tech sector.

“It’s not saying we like the geopolitics or the national politics or anything like that,” Baillie Gifford fund manager James Anderson told the Financial Times in June, referring to its decision to add exposure to China in recent years.

But potential gains are too compelling to ignore, he added, pointing to “the excitement we see around businesses, the ambition levels among Chinese entrepreneurs, and the relationships we can build with the individual companies”. 

Baillie Gifford declined to comment this week on the latest developments in China.

The new restrictions for private tutoring companies prohibit them from accepting foreign capital through “variable interest entity” structures — the model that many big Chinese tech firms have used to list abroad for two decades. The VIE structure, which allows global investors to get around controls on foreign ownership in some Chinese industries, has never been legally recognised in China, despite underpinning about $2tn of investments in companies like Alibaba and Pinduoduo on US markets. 

In response to Beijing’s restrictions on China-based companies raising capital offshore, on Friday the US Securities and Exchange Commission announced that China-based companies will have to disclose more about their structure and contacts with the Chinese government before listing in the US. 

“I worry that average investors may not realise that they hold stock in a shell company rather than a China-based operating company,” SEC chair Gary Gensler said in a statement.

Beijing has opened an antitrust investigation into Meituan, the takeaway delivery and lifestyle services platform © Yan Cong/Bloomberg

Widening crackdown?

The education crackdown sparked fears the VIE ban could be extended to other sectors.

Revoking the rights of Chinese companies to use VIEs is seen as China’s nuclear option. On Wednesday, Beijing regulators sought to reassure investors that it would not target VIEs more widely. But one Wall Street executive briefed on this week’s call with regulators said “it was more about what they didn’t say, there were questions about the VIE structure they didn’t address”.

The consequences of restricting VIEs in sectors outside of education would be so severe that some are confident Beijing would not eradicate them completely.

“The government will allow the VIE structure to survive, but one thing is clear: if a company wants to use the VIE structure to circumvent certain regulations then that is not going to work,” said Min Chen, head of China at $8bn emerging markets specialist Somerset Capital Management.

Rather than selling out of China altogether, some investors say they are focusing on trying to select stocks that are in line with the government’s strategic priorities. 

“Companies such as taxi-hailing groups or community group buying businesses, where their model is to use their competitive pricing advantage to squeeze out smaller players are likely to find themselves vulnerable to more regulation,” said Chen. “There is also the potential for winners in this environment, such as domestic leaders in the tech space and semiconductor producers . . . as well as companies that are exposed to mass consumption.” 

Alice Wang, a London-based fund manager at €2.7bn Quaero Capital, agreed that investors will need to switch to betting on sectors that are “important to China’s long-term economic future . . . areas like renewables and industrial automation companies that drive the ‘Made in China’ narrative.”

David Older, head of equities at €41bn asset manager Carmignac, echoed these sentiments and said he likes sectors such as semiconductors, software, renewable energy, healthcare and electric vehicles. He is overweight China and has been adding to his positions this week: “It’s a great buying signal when you see strategists saying that China is uninvestable.”

Trying to align yourself with the government’s strategic objectives “is the only way you can sleep at night”, said Horatius Capital’s Armstrong.

Chinese government intervention is about addressing its “demographic time bomb,” he said. “This is a Chinese problem and there will be a Chinese solution. You can come along and be a passenger if you want, but the ride is not going to be smooth.”

International asset managers rush to tap ‘huge’ China wealth opportunity

Some of the world’s biggest investors are pushing into China with wealth management joint ventures to create investment products for the country’s vast and growing pools of savers. A report from Boston Consulting Group and China Everbright Bank showed that China’s wider wealth market was worth Rmb121.6tn ($18.9tn) in 2020, up 10 per cent from a year earlier. 

While China’s wealth management sector is still dominated by banks, early overseas movers include Europe’s Amundi and Schroders, and BlackRock, JPMorgan Asset Management and Goldman Sachs Asset Management from the US, lured by the country’s liberalisation of its financial markets.

“There’s a fast-growing middle class in China that has huge [asset management] needs for savings and retirement,” said Valérie Baudson, chief executive of €1.8tn group Amundi, which recently launched a wealth management subsidiary with the Bank of China. This year the joint venture has launched over 50 funds to sell to the Chinese bank’s network of clients, and raised €3.4bn in assets. 

Executives downplayed the political risk of these initiatives, pointing to the importance of partnering with domestic Chinese institutions. “It’s not a risk that keeps me up at night. For us it’s about a long-term investment,” said Peter Harrison, chief executive of £700bn asset manager Schroders, which gained approval in February for a wealth management subsidiary with China’s Bank of Communications. Bringing Schroders’ long-term investment approach to China, “is very much for the benefit of long-term Chinese savers,” he added.

The value of Amundi has been updated since first publication.

Additional reporting by Eric Platt in New York



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Analysis

Can plant-based milk beat conventional dairy?

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Plant-based milk brands are churning up the global dairy business, with a surge in sales, investment, and new products coming to market. The plant derived dairy trade is now worth an estimated $17bn worldwide.

Growing consumer demand has boosted investment. According to data firm Dealroom, venture capital funding across the plant-based dairy and egg sector has skyrocketed, from $64m in 2015 to $1.6bn in 2020.

The world’s biggest food company, Nestle, recently launched its first international plant-based dairy brand, a cow’s milk substitute made from yellow peas. Wonder will come in a variety of flavours, competing with established brands like Oatly oat-based milk. Founded in Sweden in the 1990s, that company is now valued at around $15bn. Demand for alternatives to soya, which once dominated the dairy free market, continues to escalate.

In the west, sales for other plant-based milks, including oat, cashew, coconut, hemp, and other seeds overtook soya back in 2014. Since then, they’ve raced ahead to be worth almost three times as much as soya products, with a combined projected value of more than $5bn in sales by 2022.

Advocates argue that plant-based production emits less greenhouse gas than cattle, making it the way forward to help feed the world and curb global warming. But dairy groups are fighting back with their own sustainability campaigns. And cow’s milk is hard to beat when it comes to naturally occurring nutrients, like protein, vitamins and minerals.

The average 100 millilitre glass of cow’s milk contains three grammes of protein, compared to 2.2 grammes in pea milk and just one gramme in oat-based substitutes.

Dairy producers have also won a legal bid, preventing vegan competitors in the EU from calling their products milk and yoghurt. Despite their growing popularity, plant-based brands are a long way from displacing conventional milk products. Their current $17bn turnover is still a drop in the pail, compared with the traditional cattle-based dairy trade, which is worth an estimated $650bn worldwide.



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'It’s more than sport – every day we are fighting for our rights to be equal’

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French pro basketball player and podcaster Diandra Tchatchouang on her role beyond the court



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