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China Evergrande’s electric-vehicle ambitions stall



A $4bn factory in central China has come to symbolise the world’s most indebted property group’s moonshot attempt to become a leading electric-car brand.

The unfinished Evergrande Auto plant in Lu’an, a city of 5m in Anhui province, is a far cry from the futuristic structure depicted on a faded billboard near the site’s entrance.

When the Financial Times visited in December, the site was home to a single steel skeleton. It “has basically been on hold since the [coronavirus] epidemic started”, said a truck driver, who declined to be named, of the project that was announced in September 2019. 

Evergrande New Energy Vehicle Group, whose Chinese parent owes about $120bn, has invested billions of dollars into developing its electric-vehicle capabilities as it anticipates a boom in the sector. The moves also come as China’s property market faces pressure.

But the venture has been hit by setbacks, including possible government scrutiny of its investments, and is yet to release a vehicle commercially. While two other factories in Shanghai and Guangzhou near completion, work on another three has been slow.

According to Chinese media reports, the group was named in a directive in November from China’s National Development and Reform Commission that asked local governments to investigate land use, investment and progress of EV projects initiated since 2015. The directive is part of an attempt to rein in largesse in the sector.

Evergrande told the Financial Times that the Lu’an factory construction was progressing as planned and the company had not received “any inquiry from any authorities”. The NDRC did not respond to requests for comment.

Evergrande’s EV strategy is unusual compared with many of its smaller competitors in China. Many have been reluctant to build their own factories, instead outsourcing production to established carmakers. Evergrande has vowed to splash Rmb30bn ($4.6bn) on production capabilities between 2019 and 2021.

Evergrande Auto’s plans may have raised suspicions with the government because they look like a “land grab”, said Deng Haozhi, an independent commentator and economist.

Government policies designed to limit aggressive expansion by property developers have restricted land sales, he added. By designating land for electric-car production, Mr Deng believes, Evergrande is able to acquire it more cheaply and it may also help the group negotiate separate deals for other land nearby that it can later build properties on.

Line chart of Share price for Evergrande Health/China Evergrande New Energy Vehicle in HK$ showing Evergrande Auto's stock revs up on electric car push

Some analysts are less sceptical. They point to Evergrande’s growing technical acumen, such as through its acquisition of UK-based component maker Protean Electric and a majority stake in Swedish carmaker NEVS AB, which included intellectual property for an EV model made by Saab.

Analysts believe that Evergrande could also benefit from huge investor interest in the sector, shown by the rocketing share prices of US group Tesla and Chinese rivals like Nio and Xpeng.

Hong Kong-listed Evergrande Auto has raised hundreds of millions of dollars from investors including internet group Tencent and car-hailing platform Didi Chuxing. It is also considering a secondary listing on Shanghai’s technology-focused Star board.

Beijing is keen to cool China’s property sector, in August announcing its so-called “three red lines” approach, which limits how much developers can borrow.

That raised the impetus on debt-laden Evergrande to explore interests outside of property. The company owed $120bn as of June and last March unveiled a plan to reduce its debt by Rmb150bn a year through to 2022 partly by selling assets.

Evergrande’s first EV model, the Hengchi 1 (pictured), is intended to compete with Tesla’s premium Model S when it goes into mass production later in 2021
Evergrande’s first EV model, the Hengchi 1, pictured, is intended to compete with Tesla’s premium Model S when it goes into mass production later in 2021 © Evergrande New Energy Vehicle Group

But Evergrande’s record of swapping between sectors is a reason for caution, believes Nigel Stevenson, an analyst at consultancy GMT Research in Hong Kong. The car unit’s listed entity was known as Evergrande Health until August last year.

“You feel a sense of déjà vu with Evergrande. A few years ago they were investing in solar panels. None of these spin-offs have made a significant contribution to resolving the parent’s debt problems,” he said.

Evergrande Auto’s losses are mounting, reaching Rmb2.5bn in the first half of 2020, up 24 per cent compared with the same period a year before. 

That could increase the urgency for Evergrande to get a vehicle to market. The company’s first model, the Hengchi 1, is intended to compete with Tesla’s premium Model S when it goes into mass production in 2021, about a year later than initially expected. The company has a total of 14 Hengchi-branded models in the works.

Delays have not helped. A technician at Evergrande’s factory workshop in Guangzhou, southern China, told the FT in early December that a trial of production at the facility had been pushed back because of equipment adjustments.

Evergrande will have also have to deal with concerns that the Chinese market has already been flooded with electric vehicles, which still only make up about 5 per cent of the country’s car sales.

About $60bn in state support for EVs, mostly in consumer subsidies, between 2009 and 2017 prompted hundreds of new companies to spring up. Many pocketed these sweeteners without ever manufacturing a car.

The withdrawal of much of this support in 2019 prompted a year-long downturn in the EV market.

However, sales have since been reinvigorated by the release in China of new, tech-laden offerings such as Tesla’s Model 3 and Xpeng’s P7.

The onus is now on Evergrande to prove it has a concept that can sell. “The market and opportunity is too big for them to abandon their investments now,” said Tu Le, founder of Sino Auto Insights, a consultancy.

Additional reporting by Emma Zhou in Beijing and Qianer Liu in Guangzhou

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Emerging Markets

Australia’s treasurer warns global stimulus threatens financial stability




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




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




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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