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The FT brings a unique global perspective to news coverage, from the fallout after the EU referendum and a snap election to the Trump presidency, our network of correspondents provide detailed reporting and essential analysis of major events and trends in a changing world.
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UK general election
British election results: May’s gamble backfires
Humiliation of hung parliament for Conservatives as jubilant Labour beats expectations
by: George Parker

Theresa May’s gamble on a snap election has dramatically backfired after her quest for a “stronger mandate” to deliver Brexit ended up in the humiliation of a hung parliament, leaving her future as prime minister in doubt.

The Conservatives emerged as the biggest party but are projected to fall eight seats short of an overall majority, leaving the Tories trying to form a minority government.

A visibly shaken Mrs May said during the night that the Conservative party would “fulfil its duty” to ensure stability as the start of Brexit negotiations loom later in the month. “The country needs a period of stability,” she said after winning her constituency in Maidenhead.

However, senior Conservative figures said she might be forced to quit and Tory MP Anna Soubry said the prime minister should “consider her position” after running “a disastrous campaign”.

With three seats left to be declared, Mrs May’s Conservatives were projected to win 319 seats, Labour 261, the Scottish National Party 35 and the Liberal Democrats 13. In the outgoing parliament, the Tories had 331 seats; a governing party needs 326 out of 650 seats for a majority.

In addition to Mrs May’s shocking loss of seats, the other big loser of the night was in Scotland, where the SNP saw its total drop from 54 seat in a night of drama with both the party’s leader in Westminster, Angus Robertson, and Alex Salmond, former SNP leader, losing their seats as the nationalist tide receded.

Ruth Davidson, Tory leader in Scotland, said heavy SNP losses meant a second independence referendum was now “dead”.

The prime minister appeared shattered by the UK result. Speaking after winning her Maidenhead seat, her voice cracking, Mrs May said that the Conservatives appeared to have won the most seats and votes and would seek to govern.

But Labour leader, Jeremy Corbyn, celebrated a night of progress for his party and called on Mrs May to resign. “The mandate she has got is lost Conservative seats, lost votes, lost support and lost confidence,” he said.

George Osborne, former chancellor, said: “Clearly if she’s got a worse result than two years ago and is almost unable to form a government then I doubt she will survive in the long term as Conservative party leader.”

Investors sold off sterling in Asian markets when the exit polls were declared. After a volatile trading, the pound is down 2.1 per cent at $1.2682, taking it back to the middle of its trading range on April 18, when Mrs May called the election.

London’s FTSE 100 has opened up 0.6 per cent at 7,497.0. The main London index is home to multinational companies which benefit from a weaker pound, which makes exports more competitive and flatters earnings made in foreign currency when translated back into sterling.

The result could lead to a period of instability at Westminster, with speculation there may have to be a second general election, throwing into confusion Brexit negotiations which are due to begin in just over a week.

Guy Verhofstadt, the European Parliament’s chief Brexit negotiator, tweeted: “Yet another own goal, after Cameron now May, will make already complex negotiations even more complicated.”

Jeremy Corbyn jubilant afer the election result © AFP

David Davis, Brexit secretary, said the Tories had presented the voters with a policy of leaving the customs union and single market. “We will see whether they have accepted it or not,” he said.

Some Tory MPs have argued the “hard Brexit” strategy will have to be re-examined and the uncertain election result prompted some calls on Friday night for exit talks to be put on hold.

Mrs May is expected to try to form a government, possibly relying on about 10 Northern Ireland unionist MPs to bolster her position.

But Arlene Foster, leader of the Democratic Unionist Party, has said on Friday morning it would be “difficult” for Mrs May to survive as prime minister. The DUP’s 10 seats could prove critical to Mrs May’s efforts to form a coalition government or seek support for a minority administration to stay in government.

“It will be difficult for her to survive given that she was presumed at the start of the campaign, which seems an awfully long time ago, to come back with maybe 100, maybe more, in terms of her majority,” Ms Foster said in an interview with BBC Radio Ulster.

The unionist party, which supported Brexit in contrast with the official Ulster Unionists’ support for remaining in the EU, said it was “too soon” to say how the DUP would handle any coalition negotiations.

“There will be contact made over the weekend, but it is too soon to work out what we are going to do,” she said.

Labour outperformed most expectations as younger voters turned out in large numbers, vindicating Jeremy Corbyn’s energetic campaign and leftwing agenda. For the first time since 1970, the two big political parties both garnered more than 40 per cent of the vote each.

Mr Corbyn’s party performed strongly in the south, especially in London, while Mrs May’s stuttering campaign failed to deliver the big Tory wins in the Midlands and North that had been widely predicted.

Labour took a slew of southern seats from the Conservatives, including Enfield Southgate, Gower, Croydon Central, Brighton Kemptown and Bedford. At least five Tory ministers lost their seats, including Ben Gummer, Cabinet Office minister, who wrote the election manifesto.

John McDonnell, shadow chancellor, said Labour would seek to form a minority government, rejecting coalition deals.

“We will put ourselves forward to serve the country and form a minority government,” he said. “The reason for that is, I don’t think the Conservative party is stable. I think she’s a lame duck prime minister. I can’t see her surviving.”

The Ukip vote collapsed, but many of the party’s supporters turned to Labour rather than the Conservatives, in spite of Mrs May’s attempt to present herself as the only person able to deliver Brexit.

Labour also won the Sheffield Hallam seat of Nick Clegg, the former Liberal Democrat deputy prime minister, while Vince Cable regained Twickenham for the Lib Dems.

Mr Corbyn was credited with running a passionate and authentic old-style socialist campaign and has cemented his position as party leader. The question now facing moderate Labour MPs is whether to fall in behind a leader whom they tried to oust less than a year ago.

Mrs May’s campaign was ill-starred and was twice interrupted by terrorist incidents. After the second attack, on London Bridge, she faced questions over cuts to police numbers made on her watch as home secretary.

The U-turn over a Tory manifesto commitment to reform social care — dubbed a “dementia tax” — shook the faith of Conservative MPs in the party leader and prompted one minister to call it a “monstrous mistake”.

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US Politics & Policy
Steve Bannon pledges to turn fire on Donald Trump’s White House
Chief strategist’s departure is opening shot in battle for the soul of the presidency
by: David J Lynch, Courtney Weaver and Shawn Donnan in Washington

Returning to his former home Breitbart, Steve Bannon was a man triumphant.

“Populist hero Stephen K Bannon returns home to Breitbart” the alt-right news outlet declared on its website on Friday afternoon.

It was just hours after the White House had announced Mr Bannon’s departure as Donald Trump’s chief strategist and already he was presenting himself as a man back in play.

“I feel jacked up. Now I’m free,” Mr Bannon declared in an interview with the Weekly Standard. “I’ve got my hands back on my weapons.”

Ousted from the White House by Mr Trump’s new chief of staff John Kelly, Mr Bannon is viewing his dismissal as an opening shot in a battle against his former White House antagonists. So are his conservative allies.

“#WAR” tweeted Joel B Pollak, editor of Breitbart.

As Mr Bannon’s administration critics privately cheered the chief strategist’s long-awaited departure, Mr Bannon was plotting his next move: full-on media war against his opponents in the White House that will be motivated as much by revenge as ideology.

In Mr Bannon’s crosshairs are likely to be Jared Kushner, the president’s son-in-law; Gary Cohn, the head of the National Economic Council; and national security advisor HR McMaster.

The split between nationalists such as Mr Bannon, 63, who gave voice to the president’s “America first” instincts, and globalists in the administration has been a fixture of Mr Trump’s tumultuous presidency. Populists in Mr Bannon’s camp refer derisively to officials such as Mr Cohn and Mr Kushner, a counsellor to the president, as “Democrats”.

President Donald Trump with his White House team in January. From left to right: Chief of Staff Reince Priebus, Vice-President Mike Pence, chief strategist Steve Bannon, press secretary Sean Spicer and national security adviser Michael Flynn. Only the Vice-President remains today © Reuters

The president was a registered Democrat for more than eight years until as recently as 2009 and contributed more than $250,000 to Democratic candidates over the years.

As Mr Bannon put it to The Weekly Standard: “I can fight better on the outside. I can’t fight too many Democrats on the inside like I can on the outside.”

The president appeared to cheer him on in a pair of supportive tweets on Saturday. “Steve Bannon will be a tough and smart new voice at @BreitbartNews . . . maybe even better than ever before. Fake News needs the competition!” he wrote in one.

One White House adviser said Mr Bannon would be much more effective on the outside, and would create a campaign to push Mr Trump in a different direction to the one his advisers want him to go. “He’s likely to really unleash against those people.”

Mr Bannon’s departure is expected to alter the administration’s tone, according to several White House officials. But the tension between nationalists and globalists will not disappear.

Steve King, the conservative Republican congressman from Iowa, had warned the president not to fire Mr Bannon, calling him the “linchpin” of Mr Trump’s populist movement.

On Friday, Mr King told NBC News that Mr Bannon’s departure made him fearful that a purge was under way to rid the White House of real conservatives and that Mr Trump would not fulfil many of his campaign promises.

Hours after his firing, Mr Bannon announced he had returned to his former role of executive chairman of Breitbart — the same role he inhabited before joining the Trump campaign a year ago. At the time, Mr Bannon was credited with righting the listing campaign and fine-tuning Mr Trump’s nationalist message on trade, immigration and a less interventionist foreign policy.

The widely read Breitbart reacted to Mr Bannon’s ousting on Friday with a story calling him the conservative spine of the administration and warning that the president now risked becoming “Arnold Schwarzenegger 2.0”, a reference to the former California governor. After winning election as an anti-elite outsider, Mr Schwarzenegger disappointed conservatives by shifting to the left in his second term.

Mr Bannon, a crusader against the political and business elite, may launch a media venture to press his anti-elite message with the backing of Robert Mercer, a hedge fund billionaire, and his daughter Rebekah, the Washington Post reported hours after his exit.

“I’m sure he will redouble his efforts to promote what he calls the populist/nationalist worldview,” said Henry Olsen, a political analyst with the Ethics and Public Policy Center. “Anything Breitbart does now will be traced to him whether he is involved or not.”

As chief strategist in the White House, Mr Bannon pushed for tough trade measures against China, unsuccessfully sought a foreign policy role and feuded with several colleagues. The president fumed over his public prominence, which notably included a Time magazine cover in February.

On Saturday Night Live, Mr Bannon was parodied as a Machiavellian manipulator of the president, which did nothing to boost his White House standing.

More recently, Mr Trump was irked by Devil’s Bargain, journalist Joshua Green’s book, which portrayed Mr Bannon as the brains behind the president’s stunning November victory.

Nevertheless, the president dallied for weeks over a rupture with his media-savvy consigliere.

“In politics, the rule is: ‘keep your friends close, and keep your enemies closer’. Bannon is not an enemy, but Bannon’s supporters may be,” said Frank Luntz, a Republican pollster.

Likewise, any media war by Mr Bannon on the administration faces its own challenges. Even if he criticises the president’s aides rather than the president, Mr Trump may not appreciate the distinction.

“The challenge is Trump will know where it’s coming from,” said the White House adviser. “The more White House staffers get attacked, the more Trump may rally around them. It may very well backfire.”

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Opinion China
The challenge of Xi Jinping’s Leninist autocracy
Democracies have to recognise their failures to counter a China that sees itself as an ideological rival
by: Martin Wolf

Whether you like it or not, history is on our side. We will bury you!” Thus in 1956 did Nikita Khrushchev, then first secretary of the Communist party of the Soviet Union, predict the future.

Xi Jinping is far more cautious. But his claims, too, are bold. “Socialism with Chinese characteristics has crossed the threshold into a new era,” the general secretary of the Communist party of China told its 19th National Congress last week. “It offers a new option for other countries and nations who want to speed up their development while preserving their independence.” The Leninist political system is not on the ash heap of history. It is, yet again, a model.

Khrushchev’s claim seems ridiculous now. It did not seem so then. The industrialisation of the Soviet Union had helped it defeat the Nazi armies. The launch of Sputnik in 1957 indicated it had become a technological rival for the US. Yet 35 years after Khrushchev’s boast, the USSR, the Soviet Communist party and its economy had collapsed. This remains the most extraordinary political event since the second world war. Meanwhile, the most remarkable economic event is the rise of China from impoverishment to middle-income status. That is why Mr Xi is able to talk of China as a model. (See charts.)

Yet how has the system that failed in Moscow succeeded in Beijing? The big difference between the two outcomes lay with Deng Xiaoping’s brilliant choices. China’s paramount leader after Mao Zedong kept the Leninist political system — above all, the dominant role of the Communist party — while freeing the economy. His determination to maintain party control was made clear by his decisions during what the Chinese call the “June 4 Incident” and westerners the “Tiananmen Square massacre” of 1989. Yet his resolve to continue with economic reform never faltered. The results were spectacular.

Whether the Soviet Union could have followed such a path is open to debate. But it did not. As a result, today’s Russia does not know how to mark the October revolution of a century ago: President Vladimir Putin is an autocrat, but the communist system has gone. Mr Xi is also an autocrat. His dominance over party and country was on display at the party congress. But he is also an heir to the Leninist tradition. His legitimacy rests on the party’s.

What are the implications of China’s marriage of Leninism and market. China has indeed learnt from the west in economics. But it rejects modern western politics. Under Mr Xi, China is increasingly autocratic and illiberal. In the Communist party, China has an ostensibly modern template for its ancient system of imperial sovereignty and meritocratic bureaucracy. But the party is now emperor. So, whoever controls the party controls all. One should add that shifts in an autocratic direction have occurred elsewhere, not least in Russia. Those who thought the fall of the USSR heralded the durable triumph of liberal democracy were wrong.

Will this combination of Leninist politics with market economics go on working as China develops? The answer must be: we do not know. A positive response could be that this system not only fits with Chinese traditions, but the bureaucrats are also exceptionally capable. The system has worked spectacularly so far. Yet there are also negative responses. One is that the party is always above the law. That makes power ultimately lawless. Another is that the corruption Mr Xi has been attacking is inherent in a system lacking checks from below. Another is that, in the long run, this reality will sap economic dynamism. Yet another is that as the economy and the level of education advances, the desire for a say in politics will become overwhelming. In the long run, the rule of one man over the party and that of one party over China will not stand.

All this is for the long run. The immediate position is quite clear. China is emerging as an economic superpower under a Leninist autocracy, controlled by one man. The rest of the world has no choice but to co-operate peacefully with this rising power. Together, we must care for our planet, preserve peace, promote development and maintain economic stability. At the same time, those of us who believe in liberal democracy — the enduring value of the rule of law, individual liberty and the rights of all to participate in public life — need to recognise that China not only is, but sees itself, as a significant ideological rival.

The challenge occurs on two fronts.

First, the west has to keep a margin of technological and economic superiority, without developing an unduly adversarial relationship with Mr Xi’s China. China is our partner. It is not our friend.

Second and far more important, the west (fragile as it is today) has to recognise — and learn from — the fact that management of its economy and politics has been unsatisfactory for years, if not decades. The west let its financial system run aground in a huge financial crisis. It has persistently under-invested in its future. In important cases, notably the US, it has allowed a yawning gulf to emerge between economic winners and the losers. Not least, it has let lies and hatred consume its politics.

Mr Xi talks of the “great rejuvenation of the Chinese nation”. The west needs rejuvenation, too. It cannot rejuvenate by copying the drift towards autocracy of far too much of today’s world. It must not abandon its core values, but make them live, once again. It must create more inclusive and dynamic economies, revitalise its politics and re-establish anew the fragile balance between the national and the global, the democratic and the technocratic that is essential to the health of sophisticated democracies. Autocracy is the age-old human norm. It must not have the last word.

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Market intelligence and analysis
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FT Confidential Research
Southeast Asia ready to embrace blockchain
Central banks are wary of cryptocurrencies but keen on the underlying technology
by: FT Confidential Research
  • Southeast Asian central banks have a cautious stance on the rise of cryptocurrencies but adoption of the underlying technology, blockchain, appears inevitable.
  • Speculative investment in cryptocurrencies doesn’t pose systemic risks but greater regulatory scrutiny is likely.
  • The need for the interoperability of customised blockchain platforms is likely to drive the creation of a universal platform under the control of central banks.

While central banks in Southeast Asia are receptive to new payment systems from financial technology start-ups, most are cautious when dealing with the rise of cryptocurrencies such as bitcoin and ether. 

For central banks, one problem is that they have no influence on the creation and circulation of such cryptocurrencies. Another is that global cryptocurrency trade does not acknowledge domestic statutes governing financial transactions, particularly those regarding consumer declaration and money laundering.

Central banks are keen, however, to harness blockchain, the underlying technology behind cryptocurrencies, also known as Distributed Ledger Technology (DLT). This is a form of decentralised digital ledger that functions without central record-keeping. It uses the resources of large peer-to-peer networks to validate and approve new records, or “blocks”, which are timestamped, chained interdependently and secured with cryptography, making them resistant to modification. The technology is suitable for recording anything of value.

For the financial sector, blockchain promises faster, more cost-effective and more secure transactions. The transfer of funds between accounts across countries can be done in seconds, versus days using current systems.

No systemic threat

Central bankers and other financial institutions worry that in private hands this technology may upend their authority and circumvent their intermediary role.

As a result, Southeast Asian central banks have not recognised private cryptocurrencies as payment instruments — although this is hardly surprising, as real-world foreign currencies are not legal tender in most of the region’s markets.

Citizens remain free to trade cryptocurrencies just as they trade fiat currencies. The Philippines is the only Southeast Asian country where a special permit is needed to set up a cryptocurrency exchange (see chart).

Bitcoin and other cryptocurrencies seldom serve as payment instruments; mostly, they are treated as capital assets. Driven by speculative investors, the price of a single bitcoin reached $11,000 on November 29, up from $10,000 the day before, bringing the total market capitalisation of all cryptocurrencies to $330bn, according to coinmarketcap.com (see chart).

An FTCR survey of 5,000 respondents in five of the largest Asean economies (excluding Singapore) shows that only 2.5 per cent of urban consumers used cryptocurrencies in the three months to the end of September. Indonesia was slightly ahead in cryptocurrency use, with 3.3 per cent of respondents, followed by the Philippines with 2.9 per cent. With the survey’s margin of error of 3 per cent, these adoption levels are negligible (see chart).

Tighter scrutiny

Although the financial threat is almost non-existent, tighter scrutiny is to be expected soon — not on the cryptocurrencies but on the exchanges.

Among the five Asean countries we survey, the Philippines has made the most regulatory progress. Since February, its central bank has required all exchanges to obtain a permit for trading cryptocurrencies and to register with the country’s Anti-Money Laundering Council. They are also subject to annual fees. We expect the rest of Asean-5 to follow, in response to concerns that bitcoin is being used to fund terrorism and other crimes.

In January, Indonesia’s Financial Transaction Report and Analysis Centre said it had evidence of Islamist militants using bitcoin to finance their domestic operatives. Bitcoin.co.id, Indonesia’s largest cryptocurrency exchange with approximately 520,000 clients, has pre-empted regulatory moves. The company already makes it mandatory for currency traders to provide their identity and other personal information.

Meanwhile, Malaysia’s securities commission will next year label cryptocurrency exchanges “reporting institutions”, obliging them to report suspicious transactions and avoid assisting illicit money transfers.

Another regulatory aspect we anticipate is taxation. We expect Asean-5 countries to follow Singapore, which treats cryptocurrencies as products subject to the country’s goods and services tax. Indonesia, for instance, is considering a 10 per cent VAT on cryptocurrency trade.

Fostering innovation

Nevertheless, central banks and other regulatory bodies are trying to avoid overregulation, for fear of stifling innovation. Some already provide a regulatory sandbox to promote research and development of blockchain across the financial sector.

In late 2016, Singapore’s OCBC Bank became the first bank in Southeast Asia to conduct cross-border money transfers between branches in Malaysia and Singapore using a customised blockchain platform. In October, Krungsri Bank became the first in Thailand when it announced successful international transfers for the country’s petrochemical company, IRPC, carried out using a blockchain platform it developed internally.

Such individual efforts are significant but central banks will have to take the lead in the creation of a universal blockchain to ensure interoperability. This would bode well for the idea of central banks issuing national currencies in the form of digital tokens.

The Monetary Authority of Singapore has been experimenting with three prototypes to conduct tasks such as hosting real-time gross settlements and issuing digital currencies. Bank Indonesia is also conducting trial runs with blockchain, although officials have not said what their aim is.

We think it will take another three to five years before blockchain has a material impact on the global financial sector and perhaps longer before central banks issue their own cryptocurrencies. For now, stakeholders need to come up with solutions to satisfy often conflicting objectives such as privacy versus efficiency, and security versus cost.

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Emerging market investing
Venezuela stakes claim as Schrödinger’s cat of the debt world
Gaps open between prices of almost identical bonds in guessing game over payments
EM Squared
by: Jonathan Wheatley

It has been called the Schrödinger’s cat of the debt world — the country that simultaneously both is and is not in default.

This month, Venezuela announced it would restructure all its foreign debts. Soon after, it began missing deadlines for bond payments and was declared to be in default by rating agencies and others.

Nevertheless — apparently — it continues to make payments on its bonds.

As if the complexity of Venezuelan debt was not already on a par with quantum mechanics, investors appear to have identified another paradox, as gaps have opened between the prices of almost identical bonds.

By any ordinary definition, Venezuela is already a serial defaulter. It has defaulted on miners, oil companies and other enterprises whose assets it has seized without compensation. It has defaulted on unpaid suppliers to PDVSA, the national oil company. Most seriously, it has defaulted on its people, denying them access to basic foods and medicines, causing an epidemic of weight loss and turning injury or illness into a mortal danger.

Until this month, however, it had not defaulted on its bondholders. But it has now — or maybe not.

“Nobody knows what the hell is going on,” says Russ Dallen of Caracas Capital, a boutique investment bank that closely follows Venezuelan bonds.

Prices of Venezuelan bonds have rebounded from their lows on November 3, the day after President Nicolás Maduro announced the restructuring.

But not all bonds have rebounded together. The first chart shows two pairs of bonds, with similar maturities and coupons, issued by the sovereign and by PDVSA.

Previously, the pairs traded at similar prices. Yet, while the sovereign and PDVSA bonds at first fell in lockstep, they have since moved apart. The PDVSA bonds are now priced about 6 cents on the dollar above their sovereign counterparts.

“People think they are more likely to default on the sovereign,” says Mr Dallen. That makes sense, he says, because sovereign immunity laws make asset seizures unlikely in the event of default.

“The idea is that they would protect PDVSA because it’s the money generator,” he adds, “and they can keep paying because it doesn’t have large maturities over the next two years.”

As the second chart shows, PDVSA has just come through a period of heavy payments. Next year, it is the sovereign that will struggle, with more than $5bn in interest and amortisation coming due, compared with less than $3bn at PDVSA, which has several months with no payments at all.

One factor in investors’ calculations changed abruptly on Friday, when it emerged that Crystallex, a Canadian gold miner seeking compensation for the seizure of its Venezuelan assets, had reached an undisclosed settlement that may be the biggest agreed to by Caracas.

If confirmed, the settlement will end attempts by Crystallex to seize assets owned by PDVSA. This may reinforce the notion of sovereign immunity and of a preference in Caracas to give up first on its sovereign bondholders.

Yet even if investors expect PDVSA to survive longer, both issuers are now priced for imminent default.

“If you’d asked me a month ago I’d have said it was a matter of months or years,” says Siobhan Morden, head of Latin American fixed income strategy at Nomura. “Now it’s weeks to months. But people have not given up hope of receiving payments. If they had, we’d be at price lows.”

Indeed, even after saying it cannot pay, Caracas appears willing to try, perhaps on the conviction that outright default would plunge the country into chaos and bring the government down. Its options are limited by US sanctions, which would severely complicate any restructuring.

Nevertheless, Caracas made a payment on a bond issued by Elecar, an electric utility, when late payment had already put the bond into default and when continued non-payment would not have constituted a credit event for other bonds. On Friday, PDVSA’s Twitter feed issued several statements saying payments were on their way.

Holders of defaulted PDVSA and sovereign bonds appear not to have received those payments. However, Clearstream, which handles bond payments, told holders last week it had received payments “apparently in discharge of the issuer’s interest payment obligation” due October 13 on a PDVSA bond maturing in 2027 but that, because it had been paid “in an irregular form and manner”, it would withhold the funds until it had completed inquiries, probably by the middle of this week.

Investors have been left to second-guess the government in Caracas.

It may be driven by domestic politics, says Robert Koenigsberger, head of Gramercy, a hedge fund. “Maduro could be using this opportunity to set the stage domestically for a future default. Or, the government could be naively expecting bondholders to lobby for sanctions relief in order to be able to renegotiate the debt.”

Ms Morden thinks Caracas is no longer making calculations of any sort but merely muddling through an endgame with whatever resources it can find.

She says favouring bondholders over citizens may no longer be a valid survival tactic. She notes that Venezuela’s currency has gone into freefall on the parallel market and inflation has shot to the sky. She expects imports, critically low at $10bn this year, to fall to $5bn next year.

“I used to think the catalyst for regime change would be default,” she says. “Now we can’t rule out a domestic shock.”

Schrödinger’s or otherwise, Caracas may have no more cats to pull out of the bag.

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Uber
Can Uber ever make money?
Ride-hailing company’s new CEO will have to stem billions of dollars in losses
by: Leslie Hook

The upheaval at Uber will leave the next chief executive facing an even bigger challenge in how to solve one of the main conundrums about the company: how does the business of booking a car actually make money.

Uber is the most lossmaking private company in tech history, and the next chief executive will be under pressure to accelerate the company’s efforts to reduce losses.

During the past four quarters, Uber’s operating losses were more than $3.3bn on a measure that excludes interest, tax and share-based compensation — a figure that dwarfs other famously lossmaking companies such as Amazon.

The way Uber sees it, booking a car is a commodity product, and the company’s goal is to be the biggest and lowest cost provider of that product.

To achieve that goal, Uber initially focused on supercharging its markets by injecting huge amounts of capital to attract drivers and riders. That strategy has been successful in achieving tremendous growth: Uber’s revenues were $3.4bn in the first quarter of this year, triple the levels of the year prior. 

During the past four quarters revenues were $9.1bn, which is more than Twitter or Tesla, and investors valued the company at $62.5bn last year.

However, the challenge now will be to shift Uber’s model from one that has been very successful at revenue growth, to one that is more financially sustainable and, eventually, profitable. 

Some economists say there was no obvious way to do that, even before the extra challenges Uber now faces as the company rebuilds its C-suite and tries to recover from a series of crises, including the resignation of Travis Kalanick as chief executive earlier this week.

“There is no clear pathway I can see for Uber to go from a high-revenue growth company to a profitable company,” says Aswath Damodaran, a professor of finance at the Stern School of Business. “Normally the story for start-ups is that as revenues grow economies of scale will kick in, but that story is tough to tell with Uber.”

Furthermore the leadership vacuum at Uber has left a question over one of its main advantages, the ability to raise ample money at low cost.

Uber has between $6.5bn and $7bn of unrestricted cash in the bank, with a further $2.3bn untapped line of credit. This could cover the company’s cash needs for roughly three more years, extrapolating from its losses during the first quarter of this year. 

Uber’s path to sustainability will depend on controlling the company’s two main costs: the subsidies for drivers and riders, and general costs such as engineering and research and development.

These general costs benefit from economies of scale — as Uber grows, the overhead becomes less expensive on a per-ride basis.

The subsidies are essential because Uber uses these as levers to maintain a two-sided transportation marketplace, one that balances driver demand and passenger supply. Sign-up bonuses attract new drivers and maintain a sufficient driver pool, while more specific bonuses for certain times and places help steer drivers to places of high demand. 

These incentive payments typically come down on a per-ride basis as a new market matures. However, the tenacity of Uber’s rivals has meant that the company has not been able to eliminate them altogether. 

Even in the US, its biggest and oldest market, Uber was not profitable last year, partly because it had to fight off a fresh push from its smaller rival Lyft.

That onslaught has continued this year as Lyft raised fresh funds and benefited from the #DeleteUber campaign: Uber’s market share has fallen from 84 per cent at the beginning of the year to 77 per cent at the end of May, according to Second Measure, a research group that analyses credit card data. 

The fact that switching costs are so low between one service and the other — both drivers and riders can easily flip between the apps — means that it can be hard for Uber to defend its market dominance.

Nevertheless the company did succeed in narrowing its global operating losses in the first quarter of this year to $708m, from $990m the previous quarter.

One area where Uber and Lyft have been experimenting with a different revenue model is through subscriptions — offering a monthly membership “pack” to frequent riders. (One example might be a $20 monthly fee that buys the rider 20 shared rides for $2 each.)

Subscription models could make sense if — as Uber and Lyft hope — more urban dwellers ditch their private cars and use Uber and Lyft instead, particularly in cities that lack good public transport.

The fantasy for both companies is that car-booking usage will surge, making private car ownership a thing of the past (right now ride-hailing accounts for just 0.4 per cent of passenger car miles travelled in the US, so there is still some way to go). 

“Subscription models are always very beneficial,” says Santosh Rao, head of research at Manhattan Venture Partners. “There is visibility, it is a nice recurring revenue model. To the extent that they can get it, that is great.”

As their markets begin to mature, investors in both companies have come to believe that ride-hailing is not a winner-take-all market, but rather one in which multiple companies can coexist.

Mitchell Green, an Uber investor and a partner at Lead Edge Capital, says that his thesis is that the ride-hailing market will keep growing — and both Uber and Lyft will benefit.

He draws an analogy to telecoms companies. “There is absolutely room for multiple players, like AT&T and MCI, there is not going to be one player in the market.”

This shift has become even more paramount after Mr Kalanick was ousted earlier this week by a group of investors who want the company to pursue an initial public offering. “The new management means we are probably a little bit closer to the big IPO than we were before Travis left,” says Rohit Kulkarni, managing director at SharesPost.

As Uber’s new chief executive grapples with the unusual dynamics of the ride-hailing market, they will also have to make sure Uber lives up to investors’ expectations. With a valuation of $62.5bn, there is a lot riding on the question of how ride-hailing can make money. 

Uber locks horns with homegrown Asian rivals

After an expensive struggle in China that ended in defeat last year to Didi Chuxing, Uber is now embroiled in another costly strategic battle in south-east Asia,write Michael Peel in Bangkok and Jeevan Vasagar in Singapore.

The world’s most valuable private technology company is vying with homegrown start-up Grab for dominance of the diverse region of 10 countries, home to more than 600m people and some of the world’s highest economic growth rates. 

The prize is substantial. A joint study by Google and Temasek last year predicted south-east Asia’s ride-hailing market will grow from revenues of $2.5bn in 2015 to $13.1bn in 2025.

“Exiting China must have been sobering for Uber,” says Adrian Lee, research director at Gartner in Singapore. “South-east Asia will be critical for Uber to claim true global leadership.”

Singapore-based Grab, founded in 2012, appears to have a solid early-mover advantage. It has expanded aggressively and is present in 55 cities across a region that arcs from Myanmar to the Philippine archipelago. Uber is in 35 cities. 

Grab says it has 2.5m daily rides across south-east Asia, and 70 per cent of the market for private cars and motorbikes — and it claims an even higher share of the market for taxis summoned by app. Uber declines to give equivalent information. 

Valued at $3bn after raising $750m in a funding round in September led by Japan’s SoftBank, Grab has forged partnerships with Chinese giant Didi, Uber’s US rival Lyft, and India’s Ola. 

Neither Uber nor Grab has turned a profit. But Uber has a brimming war chest: the American company, valued at $62.5bn, had $7.2bn in cash on hand at the end of the last quarter. 

Both have had to improvise repeatedly in south-east Asia to navigate obstacles including sometimes-hostile authorities, severe congestion and rapidly expanding and changing cities. They also have to serve differing client bases in a region of vast income variations. 

Grab has pushed into mobile payments as it seeks to bind customers closer. The company aims ultimately to be a dominant force in regional ecommerce for the region, and wants to make more sophisticated use of the large volume of data it is gathering on customers’ movements and their preferences to offer additional layers of service, according to Anthony Tan, a Grab co-founder. 

Despite Grab’s early claims of primacy, all remains to play for in south-east Asia — and much information about the performance of both companies is still unclear. But analysts say Uber may face problems if it has already fallen behind in the race for customers in a market where it is likely to be difficult to change people’s preferences given the similarities of the apps.

“If Grab’s lead is in customer usage, and the lead is a substantial one, it is a real moat,” says Ferry Grijpink, a Singapore-based partner at McKinsey, the consultancy.

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The Big Read Renewable Energy
The Big Green Bang: how renewable energy became unstoppable
The shift to cleaner power is disrupting entire industries. Will the 21st century be the last one for fossil fuels?
by: Pilita Clark

At the start of this year, a British businessman named Adam Robson received some awful news. Mr Robson runs an English company called Torotrak that invents fuel-saving contraptions aimed at solving one of the auto industry’s great dilemmas: how to make a petrol car that is green enough to meet tightening pollution rules but does not feel like a lawnmower to drive.

One of Torotrak’s most promising gadgets has long been the V-Charge, a smarter version of a turbocharger that took six years to develop. In the middle of last year, Mr Robson began pitching it to the world’s top auto component and carmakers, including General Motors, Volkswagen and Toyota.

About a dozen said they were interested. But by January, things changed. Company after company turned him down. Suddenly, none wanted new products for cars running on fossil fuels.

“They all said, ‘We think the shift to electric vehicles is accelerating and we have only limited R&D money to invest and we are going to put all of it into the electric car revolution’,” Mr Robson says. “This is a colossal structural shift and it’s come at a pace that has never occurred in people’s careers before in this industry.”

Torotrak was hit hard. Its shares plunged 40 per cent. It has shut down one of its main engineering sites, making about 40 staff redundant, and put the V-Charge on ice. It is now focusing on heavy-duty diggers and other gear it hopes will not go electric any time soon.

Mr Robson’s experience is just one example of the disruptive impact of green energy on companies — and entire industries — around the world. After years of hype and false starts, the shift to clean power has begun to accelerate at a pace that has taken the most experienced experts by surprise. Even leaders in the oil and gas sector have been forced to confront an existential question: will the 21st century be the last one for fossil fuels?

It is early, but the evidence is mounting. Wind and solar parks are being built at unprecedented rates, threatening the business models of established power companies. Electric cars that were hard to even buy eight years ago are selling at an exponential rate, in the process driving down the price of batteries that hold the key to unleashing new levels of green growth.

“This clean energy disruption has just started and what is striking is how much of a financial impact it is already having on some companies,” says Per Lekander, a portfolio manager at London’s Lansdowne Partners hedge fund, who has tracked global energy markets for more than 25 years.

“It hit the electricity sector first, in Europe in 2013 and then the US two years later. Now it has spread to the auto sector and I think the oil industry is next.”

The shift has come as increased government efforts to curb climate change and smog have driven down costs and spurred technical advances, creating a green energy industry that looks nothing like it did a decade ago: expensive, sluggish and German.

Today, China and India have picked up the baton and are driving a sector that has spread to every continent. The result was a banner year for green energy in 2016.

Global renewable power generation capacity rose by 9 per cent last year — a fourfold increase from the start of this century — buoyed by the growth of newer sources such as solar power that shot up by more than 30 per cent. For the second year in a row, renewable energy accounted for more than half the new power generation capacity added worldwide. Sales of plug-in electric vehicles last year were 42 per cent higher than in 2015, growing eight times faster than the overall market. The storage capacity of big lithium ion battery systems more than doubled last year.

These advances have become too significant for the oil and gas industry to ignore. In the first three months of this year, the heads of some of the world’s largest oil companies have spoken of a “global transformation” (Saudi Aramco) that is “unstoppable” (Royal Dutch Shell) and “reshaping the energy industry” (Statoil). Isabelle Kocher, chief executive of French power and gas group Engie, calls it a new “industrial revolution” that will “bring about a profound change in the way we behave”.

None of this means the problem of climate change has been solved, or that fossil fuels will vanish in the near future. Oil, gas and coal still account for about 86 per cent of the energy keeping the world’s lights on, cars running and homes warm — a share that has barely changed in 25 years. Coal and gas-fired power plants are still being built, especially in the developing world where 1.2bn people lack electricity.

Modern renewables, in contrast, are growing from a tiny base and are often less dependable than dirtier power generators that do not rely on the weather. Wind and solar power accounted for a puny 4.4 per cent of global electricity in 2015, and big battery systems can only store enough power to satisfy a few seconds of global electricity demand, says the International Energy Agency. Electric vehicle sales last year were just 0.9 per cent of all vehicles sold, according to the EV-Volumes consultancy.

But the emerging energy transition is already causing trouble for companies around the world, from writedowns and shrinking sales to sliding share prices and wholesale break-ups:

  • In sunny Nevada, casino companies are unplugging from the state utility. NV Energy lost nearly 6 per cent of its customer base virtually overnight in October after MGM Resorts International and Wynn Resorts agreed to pay a combined $103m to defect and buy their power elsewhere. MGM cited “the sharp decline in the cost of renewable energy” as a primary driver of its decision. Caesars later did a $47.5m deal to quit.
  • In Chile, shares in some of the country’s electricity companies, including AES Gener and Colbún, slid in August after they lost out in an auction that pitted renewables against fossil fuel generators for 20-year power contracts. Among the winners was a solar scheme that undercut fossil fuel bids with a record low price of $29.10 per megawatt hour.
  • In Australia, a $200bn investment splurge in liquefied natural gas projects has put the country in position to overtake Qatar as the world’s largest LNG exporter. But new schemes have come online as LNG prices have collapsed amid fears of a supply glut that some economists say could linger as renewables become more affordable. “It just makes sense for countries to think about renewables as an alternative,” says Jürgen Weiss of the Brattle Group consultancy.
  • In Michigan, car parts supplier BorgWarner, which makes most of its money selling components for conventional combustion engine vehicles, made one of the largest acquisitions in its 89-year history in 2015, when it paid $950m in cash for US electric motor maker Remy International. BorgWarner’s shares subsequently dived but analysts say the industry’s shift to electric cars means the deal made sense. “Without Remy, the narrative of their long-term value would have been difficult to justify,” says Adam Jonas, head of global auto research for Morgan Stanley.
Isabelle Kocher, chief executive of French energy group Engie: "[This is] an industrial revolution [that will] bring about a profound change in the way we behave" © Leo Novel/FT

Thanks, Germany

When the definitive history of the energy transition is written, the taxpayers of Germany will deserve their own chapter. They bankrolled the green energy revolution known as the Energiewende, pioneering generous subsidies nearly 20 years ago that helped drive renewables up from 9 per cent of Germany’s electricity mix in 2004 to 32 per cent last year.

As other European nations — and some US states — boarded the green power wagon, it kindled a wave of demand for wind turbines and solar panels that helped drive costs down worldwide. Solar’s price fall was especially steep after a Chinese manufacturing boom spurred global over-supply.

The result was doubly miserable for conventional fossil fuel generating companies: renewables crowded them out while simultaneously driving down wholesale power prices, causing billions of euros in losses.

Germany’s two largest power utilities, Eon and RWE, shook the industry last year when they split themselves in two, hiving off struggling fossil fuel operations from cleaner power businesses.

“For two real pillars of the German corporate world to radically break themselves up is something I cannot recall ever seeing in my lifetime,” says Peter Atherton, a UK power analyst.

Yet a lot of places have begun to look more German this year — even the US, where President Donald Trump wants to unleash more fossil fuel production.

The US solar industry employs more than twice as many workers as the coal sector, a report showed in February. Manhattan has more Tesla charging spots than petrol stations, though many are in fee-paying parking garages.

And across the US, where power companies are facing lower wholesale prices thanks to cheaper natural gas, renewables are adding pressure too — even in unlikely spots such as oil-rich Texas.

Texas now has more installed wind power capacity than Canada and Australia combined. If it were a country, it would rank as the world’s sixth-largest wind power, after China, the US, Germany, India and Spain.

NRG, the second-largest US power producer, has about a quarter of its generation capacity in Texas and has been reshaping its business so it relies less on squeezed wholesale power prices.

Mauricio Gutierrez, NRG’s chief executive, warned in February that companies failing to do this would be rendered “obsolete” by the “unprecedented disruption” in the industry.

Brian Marrs, NRG’s director of policy and strategy, says: “I think what we’re seeing in the US now is the German postcard from the future finally arriving across the Atlantic.”

Yet fast-growing industrialising nations are seeing some of the most profound changes. Towering over them all is smog-choked China, which has become a green energy juggernaut after designating renewables a strategic industry.

China has more than a third of the world’s wind power capacity; a quarter of its solar power; six of the top 10 solar-panel makers; four of the top 10 wind turbine makers and more battery-only electric car sales last year than the rest of the world combined.

India is eager to follow: it built one of the world’s largest solar photovoltaic farms last year; ranks fourth in the world for wind power capacity; and could become the world’s third-biggest solar market this year. It also wants to boost its use of electric cars.

The big debate

The world has been through energy transitions before, often shaping the course of human history. The age of wood gave way to coal in the 1800s. Coal was in turn squeezed by oil and natural gas, transforming the fortunes of Middle Eastern desert kingdoms.

Such shifts usually take decades. But the growth of the latest one has prompted some to wonder if the age of fossil fuels might fade faster. Some mainstream thinkers are dubious.

Their view is embodied by Professor Vaclav Smil, an energy scholar whose fans include Microsoft co-founder Bill Gates. (“There is no author whose books I look forward to more,” Mr Gates says.)

Prof Smil says “naive” people who are “enchanted” by the idea of a rapid end to fossil fuels ignore the fact that it has typically taken 50 to 60 years for a widespread shift from one dominant fuel to another. As coal gradually displaced wood, for example, it reached 5 per cent of all fuel energy in 1840 but was still only about 50 per cent by 1900.

“People want to be deceived,” he says in an interview. There is a dearth of green alternatives to the fossil fuels used to make steel, cement or plastics, he adds. And replacing a global fossil fuel energy system that took an estimated $25tn to create over the 20th century with today’s crop of renewables is a job that will occupy us “for generations”.

Still, a much-discussed paper published last year by Professor Benjamin Sovacool of the University of Sussex suggests energy transitions in some places can be speedier. Nuclear power in France went from 4 per cent of the country’s electricity supply in 1970 to nearly 40 per cent in 1982, for instance.

The Ivanpah Solar Electric Generating System, owned by NRG Energy, Google and BrightSource Energy, in the Mojave Desert in California near Primm, Nevada © Getty

Others think the latest energy transition could be swifter because it is driven by deliberate efforts to curb climate change, rather than chance. Countries around the world have adopted more than 1,200 climate change laws, up from about 60 two decades ago, a study this month showed. Renewables now receive direct policy support in an estimated 146 countries, nearly triple the number in 2004.

That backing has seen the cost of wind turbines fall by nearly a third since 2009 and solar panels by 80 per cent, says the International Renewable Energy Agency. This underlines an advantage for renewables: unlike coal, oil or gas, every country has wind and sun.

As panel and turbine costs have fallen, “It is as if every country in the world woke up one bright morning to find that it had a North Sea at its disposal”, says London energy analyst Kingsmill Bond.

He says the more relevant point for investors is not the decades it may take for fossil fuels to be eliminated but the fact that small falls in market share can have a profoundly disruptive impact.

Exhibit one: most major carmakers are planning new electric models even though fewer than 1 per cent of cars sold each year have a plug.

The end of subsidies

There is another reason some energy industry watchers expect the green power sector to accelerate: the more costs fall and technologies improve, the less it needs conventional subsidies.

Costs are already lower than widely understood. “In 2010 we financed a 15 megawatt solar plant in southern California that cost $55m to build,” says Jim Long, a partner at Greentech Capital Advisors, a global clean energy advisory firm. “This year we have done another one the same size in the same area that has cost $15m and will produce at least 40 per cent more energy.”

This is one reason countries managed to adopt the global climate change agreement in Paris in 2015 after years of negotiations, says Christiana Figueres, the former UN climate official who helped seal the accord. “Switching away from coal no longer looked impossible, even in developing countries,” she says.

Costs are expected to fall further as countries spurn expensive subsidies guaranteeing set prices for generators in favour of competitive auctions or tenders. The amount of auctioned renewable electricity last year was triple that in 2015, according to Bloomberg New Energy Finance, while the average global price of auctioned solar power has plummeted fivefold since 2010.

One of the most striking auction results came in Germany in April when Denmark’s Dong Energy, the largest builder of costly offshore wind farms, said it would build two new schemes without subsidies, relying instead on market prices alone. Advances in wind technologies — including the prospect of much more powerful turbines — were one reason for Dong’s move, a step others are expected to follow.

“Renewables have reached a tipping point globally,” says Simon Virley, head of power and utilities at KPMG. “A subsidy-free future is now in reach for a number of technologies and geographies.”

Mainstream Renewable Power, an Irish wind farm developer, shows how new technology is making a difference. It was a winner in last year’s power auctions in Chile, which require customers’ demand for electricity to be met 24 hours a day. That means generators face the potentially pricey risk of buying power on the spot market to make up for any shortfalls.

Mainstream says more precise wind measuring technology makes it easier to predict how much extra power is needed, and therefore whether wind projects can be profitable.

Investors say important trends like this are obscured in countries where the existence of climate change is still so widely contested that the scale of the energy transition is under-estimated.

“I think it’s happening much faster than most well-educated business people in America understand,” says veteran investor Jeremy Grantham, co-founder of Boston asset manager GMO. “Because the science is being deliberately obfuscated in the US, the consequences are being obscured as well.”

Even the experts have been caught out by the pace of the shift. In 2010, IEA projections suggested it could take 14 years before there was 180 gigawatts of installed solar capacity. It took less than seven years for the world to reach more than 290 gigawatts, nearly the entire generating capacity of Japan.

Still, some predictions have proved overblown. Former US President Barack Obama said that by 2015, the US could be the first country with 1m electric cars. Only about 400,000 materialised.

This time could be different

Some green energy veterans bruised by past setbacks think there is a reason to be more optimistic today: batteries.

“I have been early twice in financing the low-carbon energy transition,” says Bruce Huber, co-founder of the Alexa Capital advisory group. “But we feel it’s third time lucky.”

One reason for his optimism is what he calls the “tectonic plate-shifting” in the car industry that is driving down the cost of energy storage. Storing clean power has long been a holy green grail but prohibitive costs have put it out of reach. This has begun to change as battery production has ramped up to meet an expected boom in electric cars.

Lithium ion battery prices have halved since 2014, and many analysts think prices will fall further as a slew of large battery factories are built.

The best known is Tesla and Panasonic’s huge Nevada “gigafactory”. Tesla claims that once it reaches full capacity next year, it will produce more lithium ion batteries annually than were made worldwide in 2013.

It is only one of at least 14 megafactories being built or planned, says Benchmark Minerals, a research group. Nine are in China, where the government is backing electric cars with the zeal it has directed at the solar industry.

Could this led to a China-led glut like the one that helped drive solar industry write-offs and crashing prices after the global financial crisis?

“It’s something to watch,” says Francesco Starace, chief executive of Italy’s Enel, Europe’s largest power company. The thirst for electric cars, not least in China, means “the dynamics of demand are completely different” for batteries than for solar panels, he adds.

Tesla Motors founder Elon Musk © Reuters

Still, Enel’s internal forecasts show battery costs falling by about 30 per cent between 2018 and 2021 and it is among the companies already pairing batteries with solar panels to produce electricity after dark in sunny places where power is expensive, such as the Chilean desert.

Tesla finished a similar system in Hawaii in October and its chief executive, Elon Musk, made a characteristically flamboyant offer this year — via Twitter — to build a much larger one within 100 days to help fix power outages in southern Australia.

For all the excitement about batteries, the technology is still not ready to let householders in any part of the world stick a solar panel on the roof, a battery in the garage and abandon grid power completely. It would cost hundreds of thousands of dollars in snowy places like Nebraska and probably require an extra garage to house all the batteries, the CLSA brokerage calculated last year.

However, other analysts say investors need to pay attention to the disruption that even partial grid defection could cause in places where batteries make more financial sense.

In Australia, where household electricity prices nearly doubled in the decade up to 2014 and rooftop solar levels are among the world’s highest, more than 6,700 battery systems were sold last year, up from 500 in 2015, says the solar consultancy SunWiz. By 2020, about 1m homes could have batteries, according to Morgan Stanley analysts.

“We think most incumbent utilities downplay the earnings risks from solar and battery take-up,” the bank said last year. “All utility investors should monitor Australian market developments” to anticipate how the market will evolve elsewhere, it added.

Battery companies flocking to Australia say it is only one example of a new breed of “prosumers”, people using renewables and batteries to produce and consume their own power.

“We were doubted before,” says Philipp Schröder, managing director of Germany’s Sonnen home battery group. He says big utilities are copying his company’s business model now, purely because “the economics are right”.

In quake-prone Japan, a hotbed of battery technology, industry leaders say it is inevitable that home solar-storage systems will become commonplace.

“In future we think all new houses will generate and consume their own electricity and grid power will only be used for industry,” says Hiroichi Yoshida, founder of Eliiy Power, a lithium ion battery-maker that specialises in solar storage systems.

When a powerful earthquake rocked the southern Japanese city of Kumamoto last year, black-outs plunged most homes into darkness for nearly a week. But the lights stayed on in at least 20 houses with solar-storage units, says Eliiy, which is planning to open a third battery production plant in 2019 as sales rise.

“I think even the industry has been surprised at the momentum it has gathered over the past two years,” says IHS Markit solar analyst, Sam Wilkinson. “The possibilities this opens up are extremely compelling.”

Hedging their bets

Meanwhile, some fossil fuel companies are starting to put serious money into green energy.

Seven oil and gas groups, including France’s Total, Royal Dutch Shell and Norway’s Statoil, have together invested almost $15bn in renewables over the past four years, according to the Oil and Gas Climate Initiative industry group.

Total bought France’s Saft battery company last year for almost €1bn, having already acquired a controlling stake in a US solar company, SunPower.

Norway’s Statoil is spending $500m a year on clean energy projects and expects to spend even more after 2020, says Irene Rummelhoff, head of the company’s “new energy solutions” unit.

“It is the first time we’ve devoted this much money to clean energy,” she says, adding she expects to see more companies follow suit amid the “tremendous shift” of plummeting renewables costs.

“Clearly it is to some degree a threat but at Statoil we have chosen to see it as an opportunity,” she says. The company has six offshore wind projects operating or in development, including an innovative floating wind turbine park off the coast of Scotland it plans to hook up to a battery system next year.

Royal Dutch Shell is also ploughing into offshore wind farms, to the point that Henrik Poulsen, chief executive of Dong Energy, says he now regards both Shell and Statoil as “competitors”.

But oil and gas companies may need to act faster if the ambitious plans of other large energy companies succeed.

France’s Engie, for example, is investing €1bn over three years on new energy technologies that could strike at the heart of fossil fuels. The company’s head of research, technology and innovation, Thierry Lepercq, says this includes creating zero-emissions power plants that generate electricity for “the Rio Tinto price” — the price that the metals and mining company seeks when deciding where to build a new smelter.

Mr Lepercq thinks Engie will find a way to build such plants “within two years”, partly because of “sinking and sinking” battery costs. Engie has no interest in technology requiring subsidies, he says. “It’s a fundamentally business-driven approach.”

None of this means the future of clean energy will be entirely smooth. Indeed, its very success poses a raft of questions for governments that some have barely contemplated.

Chief among them: what to do with power markets that were never designed for millions of people turning their rooftops into mini power stations?

How to pay for upgrading grids to cope with the influx of all this renewable power? What to do about incumbent companies calling for the brakes to be slammed on to protect them from green power incursions? Then there is Mr Trump, who is seeking to unwind the clean power policies of his predecessor.

In the rest of the world, however, the future of green power appears assured. So much so that an industry that has spent years on the defensive is beginning to show a rising sense of confidence.

“Fossil fuels have lost,” says Eddie O’Connor, chief executive of Irelands’s Mainstream Renewable Power. “The rest of the world just doesn’t know it yet.”

Copyright The Financial Times Limited 2017. All rights reserved.
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The Big Read Labour Party UK
UK politics: can business learn to live with a ‘hard-left’ Labour?
The relationship has often been uncomfortable. But with both backing a softer Brexit, there may be room for rapprochement
by: Jim Pickard and Sarah Gordon in London

“Hello. Are you looking forward to having a Marxist in No 11?” It was an unusual welcome from the shadow chancellor to a senior executive visiting his office. But while John McDonnell had a jokey glint in his eye, the phrase highlights the chasm that remains between the opposition Labour party under Jeremy Corbyn and those who own and run businesses in the UK.

With Theresa May’s grip on power looking ever more vulnerable, business leaders are starting to realise they need to take the prospect of a “hard left” UK government seriously. Should the prime minister’s minority administration implode, perhaps under the weight of Brexit, it could trigger a snap election that delivers Mr McDonnell into the Treasury, deciding all fiscal and economic policy for a G7 nation.

Mr McDonnell has been at pains in recent months to suggest that the relationship between his party and the country’s business community has improved, while industry bodies say Labour has stepped up its engagement. Yet despite shared interest in a softer Brexit deal and higher infrastructure spending, business remains wary primarily over taxation and demands for greater state intervention.

“Clearly they [senior Labour leaders] have got their act together,” says one business figure. “But I think there’s a combination here of McDonnell and Corbyn appearing to be more moderate than they are in order to catch more of the centre ground of the voting public which business is a part of.”

Mr Corbyn, firmly in control of Labour after its surprise gains in the June general election cemented his position, has more in common with the US’s Bernie Sanders or Jean-Luc Mélenchon, the veteran French politician, than predecessors such as Tony Blair. He wants a decisive break from what supporters call the “neoliberal” consensus.

Before the election Labour trailed the ruling Conservatives by 20 points in some polls: now it is slightly ahead. Its offer of extra money for health, education and the police is hitting home with voters tired of austerity. Policies once derided as a return to the 1970s are proving hugely popular, including the nationalisation of the railways and utilities. This is not the Blair “New Labour” which pursued a “third way” between free markets and socialism. Instead, Mr Corbyn unashamedly backs much higher taxes to fund better public services, along with greater state control of industry.

Iain Anderson, founder of the public affairs company Cicero, whose clients include big banks, says that when he gives boardroom presentations he uses a slide projection featuring Mr Corbyn in Downing Street. “The first time I did it was August, and back then you’d have a few smiles, you’d see people laugh,” he says. “They aren’t laughing now.”

There sometimes appear to be two people who go by the name John McDonnell. The first has in the past called for “insurrection”, joked about “lynching” a female MP and praised a worker for spitting in her boss’s tea. In Who’s Who, he lists his hobby as “generally fermenting [sic] the overthrow of capitalism”.

Labour leader Jeremy Corbyn addresses the CBI business group

This version spooks some executives. “Our clients tend to think: ‘Oh. My. God.’ They think the combination of Brexit, McDonnell and Corbyn together would be unimaginably, catastrophically terrible,” says one corporate adviser.

The other John McDonnell cuts a more considered figure. He resembles an old-fashioned bank manager, or maths teacher, and claims to be a moderate pragmatist. Yes, he says, “I believe there’s a lot to learn from reading Das Kapital”, but he plays down the idea that he is still a firebrand Marxist.

Some business lobbyists speak of Mr McDonnell’s “supreme” communication skills. In an echo of Mr Blair’s “prawn cocktail offensive” in the 1990s, designed to reassure the corporate world before Labour took power in 1997, Mr McDonnell is on what he calls a “tea offensive”, meeting business people for frank exchanges of views. (He only takes tea because he believes “there is no such thing as a free lunch”.)

To some extent Labour has a fair wind, with many business leaders terrified of a hard Brexit — leaving the EU single market and customs union — while others are still stinging from Mrs May’s first year in office, when she froze out executives for fear of looking too elitist.

Yet the courtship is characterised by mutual suspicion. Adam Marshall, director-general of the British Chambers of Commerce, says engagement is constructive and is proceeding at a higher tempo than before. “But in some cases, is it possible to feel that people are hearing but not necessarily listening to business concerns? Yes.”

“There’s definitely a change in tone,” adds Josh Hardie, deputy director-general for policy and campaigns at the CBI business group. “In terms of substance, I think we’re waiting to see.”

Executives are worried about many of the promises in the Labour election manifesto from June, with its multiple nationalisations, a higher minimum wage and hint of a land tax. The document promised £48bn a year of additional public spending, partly funded by £19bn of extra corporation tax and higher income tax on top earners, an “excessive pay levy” and a new crackdown on tax avoidance. Mr McDonnell says he would only borrow more money for infrastructure, which would amount to about £250bn over 10 years.

While business might welcome the thought of billions of pounds going into roads, railways and power plants, there is unease about the impact of that further borrowing on Britain’s credit rating. The CBI has warned that plans to nationalise the rail, energy and water industries — as well as Royal Mail — would “send investors running for the hills”. Furthermore, no one knows if the manifesto is the threshold of Mr Corbyn’s ambitions or whether it is a prelude to an even more radical approach when in power.

Labour moderate Keir Starmer, the shadow Brexit secretary and a former director of public prosecutions

Richard Angell, head of the Blairite think-tank Progress, says the manifesto was more idealistic than ideological, or “less Leninist and more John Lennon-ish”. But he warns: “They are growing in confidence and the ideologues run the show. They are going to start asking fresh questions, such as, why stop at three big nationalisations?”

Morgan Stanley predicted in November that a Corbyn government could play havoc with stock markets and the pound, which has fallen more than 10 per cent since the eve of the EU referendum vote. CME Group, a US financial company, sent a paper to investors warning of a “nightmare scenario for the pound”.

Labour-controlled Camden Council in London has been advised by its own pension manager, CIV, to shift investments abroad because of the “political risk” of a future change of government and “concerns over renationalisation”. CIV denies this was a comment on any future Labour government. Meanwhile, Mr McDonnell admits the party has been “war-gaming” scenarios around a Labour win, including a “run on the pound”.

Danny Blanchflower, a former member of the Bank of England’s Monetary Policy Committee who advised the shadow chancellor between September 2015 and June 2016, expects some market “volatility” if the party wins. “If they say idiotic things, the Bank of England could have to act,” he says.

Yet there is still a scattering of moderates in the new-look, Corbynista Labour party: for example Keir Starmer, the shadow Brexit secretary and a former director of public prosecutions.

Labour’s preparations for government are being led by Sir Bob Kerslake, previously co-head of the civil service. His advice to executives is to forget the idea that Corbynism is a “reincarnation of old Marxism”. Instead they should see it as a political manifestation of serious societal concerns, such as wage stagnation and out-of-control executive pay. “You don’t have to be a Marxist to see this,” he says. He argues that some Labour policies, allowing the state to run the railways or offering free university tuition, are standard for the European centre-left.

Support for Labour in June’s election surged among educated, white-collar workers under the age of 45. Allen Simpson, a banker who runs the party members’ group Labour in the City, says: “City people looked at the Labour manifesto and saw a traditional social democratic offering, it wasn’t radical in a negative sense, whereas the Tories now seem closed-doors and nativist.”

Sir Bob Kerslake, former co-head of the civil service, is advising the Labour party on how to prepare for government

Before June, Mr Corbyn was told by everyone — polls, the press, his MPs, even his own advisers — that he would fail at the ballot box and possibly lose control of his party. It seemed impossible for a leftwinger to win on a platform of nationalisation and higher taxes.

Mr Corbyn did not win; in fact, Labour fell 64 seats short of an overall parliamentary majority. But having won 40 per cent of the vote and gained 30 seats, the Labour leader is in no mood to listen to sceptics. Days after the Morgan Stanley warning, he released a video saying that City “speculators and gamblers” who paid themselves billions in bonuses faced a day of reckoning: “When they say we’re a threat, they’re right.”

In targeting a rich Wall Street bank, Mr Corbyn is confident he is on the side of a public sick of “austerity” and in tune with the resentment displayed across the globe to political and business elites in the past two years.

Soon after becoming shadow chancellor, Mr McDonnell created an advisory panel of seven economists, including Ann Pettifor and Mr Blanchflower. Several quit in the wake of the EU referendum, leaving just Ms Pettifor, who predicts that a Corbyn government would be good for business because it would be “economically expansionary”.

The leadership will ultimately turn out to be pragmatic, she suggests. “You just have to look at past Labour governments. The party is prepared to work with business and the City of London.”

The Labour team has made a positive pitch to business, especially small business which has been singled out with the offer of a lower rate of corporation tax, no quarterly reporting and action on late payments. Small business representatives point out that many of these policies have already been enacted by current or former governments.

But above all Labour’s pursuit of a softer Brexit — it wants the UK to stay in the single market and customs union for a two-year transition — is what many, probably most, in business want. Some business leaders would prefer Labour to go further and endorse staying in the single market and customs union permanently, but the Corbyn team fear this would alienate millions of Leave voters in its traditional regional heartlands.

The CBI’s annual conference in November gave some credibility to this line. At a gathering which normally sees a Conservative prime minister received with enthusiasm, Mrs May was met with only polite applause. The welcome for Mr Corbyn, who confidently strode across the stage while aiming jokes both at himself and the audience, was distinctly warmer.

“Business is pragmatic,” says one lobbyist. “They are adept at having to adapt their modus operandi to the political climate to try and ensure their companies are not damaged.”

One business adviser says that in the New Labour era, international conglomerates had “sensible conversations” with the leadership. “I don’t know whether the current leadership would be pragmatic or diplomatic enough to hold those talks,” he says. “In the old days, they would have just picked up the phone . . . and asked for a meeting. But now, getting meetings one to one is very difficult.”

The Corbyn team believes New Labour got far too close to business, allowing companies to foist damaging private finance initiative contracts on the public sector — which Mr McDonnell now wants to unravel — dodge their fair share of tax and nibble away at the welfare state.

The attitude of many business people is less love for Labour and more a frustration with the fractured May government. At a recent business gathering, there was a lack of enthusiasm for Labour, with one person present saying he was “scared” of the party. But afterwards, one attendee said he was open to listening to Mr Corbyn’s party on the basis that the Conservatives no longer stood for him: “The Tories have become a one-issue party, on Brexit, where I don’t agree with them at all.”

Copyright The Financial Times Limited 2017. All rights reserved.

Timely and authoritative commentary and analysis written by the FT's award-winning columnists and global network of specialists, to give readers a head start in understanding the implications of big breaking stories of the day.

Instant Insight
Mueller charges pitch US towards constitutional crisis
Trump is an expert at diversion so expect fireworks in coming days, writes Edward Luce
by: Edward Luce

Is this the beginning of the end for Donald Trump? Only Robert Mueller, the special counsel, is in any position to answer that, and perhaps not even then. But his target is clear.

The decision to indict Paul Manafort, Mr Trump’s former campaign manager, for money laundering, tax evasion, and ten other criminal counts, is dramatic enough. Never before has a presidential campaign manager been charged with laundering millions while working for a foreign agent — nowhere close.

That Mr Mueller swiftly followed up with the disclosure that George Papadopoulos, a former Trump campaign adviser, had confessed to having lied to the FBI over his contacts with Russia cemented the message. Mr Mueller could have published the Papadopolous charge sheet weeks ago. He did so within two hours of releasing the Manafort indictment.

Three things are clear. First, Mr Mueller aims to prove that Mr Trump’s campaign colluded with Russia. We cannot know whether he will succeed. But it is clear that he is shaking every tree and pursuing every lead available.

Papadopolous has clearly “flipped” and is co-operating with his investigation. Mr Manafort, and his business associate, Richard Gates, are now under pressure to follow suit. The multiple charges against them could result in many years behind bars. They will be highly incentivised to strike a plea deal with Mr Mueller to slim down their charge sheets.

Others in Mr Mueller’s sights include Michael Flynn, Mr Trump’s first national security adviser, who resigned shortly after he took the job over having failed to disclose his campaign contacts with the Russian government.

Further up the chain, Mr Mueller’s targets could include Donald Trump Jr, the president’s eldest son, and Jared Kushner, his son-in-law, both of whom joined Mr Manafort for a meeting with a Russian government-linked lawyer during the campaign.

The more Mr Mueller squeezes, the more indictments are likely to follow. As the most seasoned investigator in the US, it is safe to say Mr Mueller knows what he is doing. When and how he moves will be carefully thought out.

Second, Mr Trump is an expert at diversion. Expect dramatic fireworks in the coming hours and days. Over the weekend, Mr Trump sent a flurry of tweets about Hillary Clinton’s alleged collusion with a Russian-owned uranium company while she was secretary of state. The story has been relentlessly pursued by Fox News, Breitbart and other pro-Trump outlets.

Republican legislators are threatening to set up congressional inquiries into Mrs Clinton’s role in approving the sale of a controlling stake in Uranium One, a Canadian-owned company that mines roughly a fifth of US uranium extraction. That story is likely to intensify. Mr Trump urged nameless entities on Twitter on Sunday to “DO SOMETHING” about Mrs Clinton’s “crimes”. Either way, the “lock her up” mantra is back in the headlines and is directly related to Mr Trump’s sense of vulnerability.

Meanwhile, Mr Trump’s 11-day trip to Asia, which is his most strategically-important since becoming president, is likely to be overshadowed, if not consumed, by the fire back in Washington. He leaves on Friday. Should we expect a new round of rhetorical salvos on North Korea?

Third — and most critically — the judgment that matters most is that of the Republican party. Mr Trump has made it clear he would like to fire Mr Mueller. Most people would see that as obstruction of justice, which is an impeachable offence. No court can prevent Mr Trump from firing Mr Mueller. Mr Trump can only be impeached by Congress, which is Republican controlled. Nor can any court stop Mr Trump from pardoning people whom Mr Mueller indicts. Only Republicans can hold Mr Trump to account.

So far very few elected Republicans have said anything about the Manafort indictment. Nor have they drawn a red line against the firing of Mr Mueller.

Opinion polls suggest Republican voters remain strongly behind Mr Trump, which is the number that matters most to Republican legislators. Unless that changes, Mr Trump may feel that he can get away with sacking Mr Mueller. At that point America would be plunged into a constitutional crisis. I would now put the chances of that happening at more than 50-50.

Copyright The Financial Times Limited 2017. All rights reserved.
Throughout the year, we run a special series of articles on current trends that get behind the headlines. China may be a superpower-in-waiting but it has struggled to appear as an attractive alternative to the US-led liberal world order. This series explores President Xi Jinping’s dream of boosting his country’s appeal and turning it into a soft superpower. On this page, you’ll find one of the fascinating stories we published in this series.
FT Magazine
How the panda became China’s diplomatic weapon of choice
The black-and-white bears have done wonders for the country’s image — but is panda diplomacy harming the species?
by: Jamil Anderlini in Hong Kong

A traditional Chinese gong clangs. Adoring sighs break out as a red curtain is pulled aside. Behind it are China’s newest ambassadors to the west — a pair of chubby black-and-white bears sitting on their haunches munching bamboo stalks.

Standing in front of the glass just metres from the pandas, German Chancellor Angela Merkel beams and pumps her hands up and down like an excited schoolchild. Beside her, Chinese President Xi Jinping watches like a proud parent as Merkel coos at the animals, loaned by the Chinese government to Berlin’s Tierpark Zoo for the next 15 years at an annual cost of $1m.

“This event is symbolic of relations between our two countries,” Merkel says as she introduces three-year-old Meng Meng (“little dream”) and her seven-year-old prospective mate Jiao Qing (“darling”). “We’ve worked very closely over the past year in the G20 framework and now we have two very pleasant diplomats here.”

This is panda diplomacy at its most sophisticated and successful. Xi and Merkel, leaders of the world’s first and third-largest trading nations, appeared with the bears in front of the world’s media in early July, just two days before a tumultuous G20 meeting in Berlin. 

“On this particular state visit the main point was to show . . . how smooth the relationship was ahead of the G20, where Donald Trump was going to show up and not be anybody’s friend,” said one person involved in preparations for the visit on the German side. “That moment [of handing over the pandas] was when we celebrated how close our countries are.”

Angela Merkel with Xi Jinping welcoming Meng Meng and Jiao Qing to Berlin’s Tierpark zoo, July 2017 © Reuters

By entrusting Berlin with two “national treasures” and personally witnessing their unveiling, Xi was subtly signalling China’s belief that Germany has the potential to replace the US as leader of the western world, according to people familiar with the matter. It was a moment of high diplomatic theatre with an extremely political animal as the main protagonist.

Everything about Ailuropoda melanoleuca (literally “black-and-white cat-foot”) or da xiongmao (“big bear-cat” in Chinese) is laden with meaning and symbolism. The oldest extant species of bear, the panda is found only in a small strip of mountainous terrain on the eastern edge of the Tibetan plateau. 

To many in the west, the animal represents wildlife conservation (a panda has been the logo of the World Wide Fund for Nature, or WWF, since its inception in 1961), poor sexual performance and perhaps comedic kung-fu cartoons. In China it is a majestic “national treasure” that embodies the country’s benign nature, uniqueness and ancient culture. 

Far more money, time and effort has been spent on saving the giant panda from extinction than on any other animal. As such, it is considered a touchstone species — if humans can’t rescue such an icon with all of this exertion, then what hope is there for less charismatic fauna?

In dozens of interviews with Chinese and western experts, as well as trips to reserves and zoos in China and abroad, the FT has uncovered a more complicated picture than that presented by most western zoos, conservation groups or the Chinese government. At the heart of this story is a tension between the panda’s role as a political symbol of China’s power and its global role as an icon of conservation.

“In some ways the panda is the luckiest species on earth — but in other ways it is not lucky at all,” says Professor Wang Dajun, a wild-panda expert at Peking University. “Humans want to protect pandas not for scientific reasons, or because they are ecologically important, but because they have cute faces and they are politically important.”

China now has the world’s second-largest economy and second-largest military budget. It is seen as a superpower in waiting, if not yet in fact. But in terms of “soft power” — the ability to get other countries to like you, or at least do what you want without coercion or bribes — China remains a weakling. This is something it wants to change.

According to the classic definition of soft power coined by Harvard professor Joseph Nye in the early 1990s, a country makes itself attractive in three main ways: through its culture, its political institutions and its foreign policy. The US has been the most successful nation in history in projecting soft power but others, including the UK, have also fostered it over the centuries. 

Ancient imperial China ruled vast swathes of Asia through cultural and political attraction but until recently few countries have been drawn to modern China’s political system or its foreign policy. That leaves its rich and ancient culture and its cultural symbols, such as the panda.

Chinese state media describe the giant panda as one of President Xi’s most “powerful weapons” in his effort to build soft power. Through Twitter, Facebook and YouTube (all of which are blocked in China) state media pump out countless videos of cute panda antics in an attempt to make China look soft and cuddly to a global audience. 

Canada’s prime minister Justin Trudeau with twin cubs Jia Panpan and Jia Yueyue at Toronto Zoo, March 2017 © Twitter/Justin Trudeau

Politicians all over the world often assist them in this propaganda effort. Apart from Merkel, pandas have been photo-opportunity props for leaders ranging from former UK prime minister Edward Heath to Michelle Obama, Justin Trudeau, Bill Clinton, François Hollande and the queen of Spain.

Our universal love of pandas has even prompted neurologists to investigate why humans find these animals so damn cute. The theory (known in German as kindchenschema) is that their resemblance to human infants — fat cheeks, waddling gait, snub noses and oversized eyes — triggers the same circuitry in our brains as babies. “For China, pandas are the equivalent of the British royal family,” Nye tells the FT. “Like the royals, they are a terrific asset because you can put them on display. You trot them around the world and they add an enormous amount to the country’s soft power.”

Part of the panda’s clout derives from its international role as a symbol of conservation. Late last year, the International Union for Conservation of Nature (IUCN), the global authority on endangered species, officially downgraded the animal from “endangered” to “vulnerable” in what was ostensibly a validation of China’s decades-long effort to save its national icon from extinction.

But the Chinese government did not see it that way. According to five people familiar with the matter, Chinese officials were livid about the decision and have been furiously lobbying for a reversal ever since. The authorities worry the downgrade makes pandas less valuable, from both a financial and political perspective, and could threaten tourism revenues and the business of panda loans to foreign countries. “There was huge anger about [the panda being downgraded] because it makes pandas less important, and makes it harder to raise money and draw attention to them,” said one of the five people familiar with the government’s reaction.

The IUCN’s decision was a purely scientific one based on the Chinese government’s own official data, which show a stable and growing population of pandas in the wild, as well as a steadily regenerating habitat. But much of that data and the methodology by which they are collected are shrouded in secrecy. Even the official population of pandas in the wild — a ludicrously precise 1,864 according to a 2015 census — is described as a “political number” by top Chinese scientists.

These scientists, who asked not to be named for fear of angering the authorities and jeopardising their careers, worry that the IUCN downgrade is based on a deceptively rosy picture painted by Chinese officials that does not accurately reflect the deteriorating situation for pandas in the wild.

Foreign zoos and governments send large sums of money (the standard agreement is $1m per pair of pandas, per year) to China for “conservation”, and rely on this same optimistic picture from the Chinese government to assess its success. They have no say over where their money goes and hardly any idea how it is actually spent.

Meanwhile, China’s breeding facilities have become virtual “panda mills”, pumping out far more animals than scientists say are necessary to maintain genetic diversity or viability of the species in captivity. The captive panda population has doubled in less than a decade to more than 510 bears today, but attempts to reintroduce pandas to the wild have so far failed. This is partly because the animals born in captivity have limited survival skills but also because human activity continues to degrade their natural habitat in south-western China.

So, the ruling Communist party has put the surplus bears to work as soft-power ambassadors — the symbol of Chinese beneficence towards countries it considers friendly and important.

Perched on the edge of a steep valley in the remote mountains of western Sichuan province stands an extraordinary wooden building — part European gothic cathedral and part traditional Chinese courtyard complex. Built in 1839 by French Catholic missionaries, this was the home of Father Jean Pierre Armand David, an avid zoologist and botanist who, in 1869, became the first westerner to “discover” the giant panda, when local hunters brought him the carcass of a young “black and white bear”.

In fact, the first recorded example of panda diplomacy dates back much further to 685 AD, when Empress Wu Zetian of the Tang dynasty presented a pair of live bears to neighbouring Japan. But there are surprisingly few other historical mentions of the panda until Father David’s encounter set off a frenzy of international interest that eventually led to its role as an emissary of the Chinese state.

In the late 1920s, the sons of the first President Roosevelt, Kermit and Teddy Jr, led an expedition to Sichuan to shoot a panda, which they skinned and sent to the Chicago Field Museum. Then, in 1936, US adventurer Ruth Harkness sparked a wave of panda-mania after she smuggled a live baby panda disguised as a puppy to the US.

In the first modern example of the panda as an explicit political gift, the wife of Chinese leader Generalissimo Chiang Kai Shek presented a pair of the animals — named Pan-Dee and Pan-Dah — to the Bronx Zoo in 1941 to thank the US for war-time aid in fighting the occupying Japanese. And after the communists came to power in 1949, Chairman Mao Zedong resurrected the practice of gifting pandas to favoured allies — in his case North Korea and the Soviet Union.

This marked the first of roughly five phases of panda diplomacy that have closely mirrored the momentous changes China itself has undergone. These can be broadly categorised as the communist, rapprochement, capitalist, conservation and soft-power phases. 

Former US president Richard Nixon with premier Zhou Enlai, during Nixon’s visit to China in 1972 © Getty

The second phase began in 1972, during President Richard Nixon’s famous visit to China, when a pair of pandas arrived at Washington DC’s National Zoo to mark rapprochement with the capitalist west. The bears prompted a renewed outpouring of “pandamonium” in America and, over the next decade, China sent more than a dozen bears to countries including the US, the UK, Japan, France, Germany, Spain and Mexico.

The capitalist phase began in the early 1980s, echoing the get-rich-quick market reforms transforming China at the time. This era involved highly lucrative short-term loans in which western zoos, primarily in the US, rented pandas to attract crowds and make money. 

Eventually, the US Fish and Wildlife Service banned the short-term import of pandas and the purely commercial era of panda diplomacy gradually ended. But demand from zoos and the public remained extremely high, as did China’s desire to exploit this goodwill. In 1996, the San Diego Zoo agreed to take a pair of pandas on a 12-year “research loan”, at the cost of $1m a year. This pioneering arrangement satisfied China, which no longer wanted to give away the animals in perpetuity, while mollifying conservationists, who complained the bears were being exploited for profit in violation of several US laws. The agreement launched the conservation phase of panda diplomacy and became the model for all future panda loans. 

It is hard to pinpoint when panda diplomacy became such an explicit vehicle for soft power, but in the past few years the emphasis has clearly shifted away from conservation and back towards the political symbolism of the panda. 

“Today, the political and diplomatic message of the panda is undermining the benevolent conservation message,” says Henry Nicholls, author of The Way of the Panda: the Curious History of China’s Political Animal. “This shift . . . is the result of very deliberate high-level policy decisions in China and that is visible in the data.”

As recently as the middle of 2015, there were just 42 pandas in zoos in 12 countries outside mainland China, according to official statistics. Today, there are 70 pandas in 20 countries outside China and several more loans have been agreed or are under negotiation. In just the past few months, China has sent — or promised to send — pandas to Germany, the Netherlands, Finland, Denmark and Indonesia.

The most important reason for the surge in panda emissaries is President Xi’s emphasis on enhancing Chinese soft power abroad. Xi personally signs off on every panda loan to a foreign country, according to several people with knowledge of the process. But before he decides whether to grant a country pandas or not, China requires the foreign head of state — the queen of Denmark, Angela Merkel herself — to ask for the bears in person. People involved say the convoluted negotiations and personal involvement of a foreign leader remind them of ancient rituals in which Chinese emperors would receive barbarian supplicants.

There is also a more practical and mercenary aspect to all this. Many of the loans extended in recent years have coincided with major trade deals between China and the recipient country. For example, Australia, France and Canada all received pandas after agreeing to sell nuclear technology and uranium to China. Scotland accepted a pair of pandas in 2011 as part of an agreement to share offshore drilling technology and supply salmon to China, while the Dutch loan this year came as the Netherlands agreed to supply advanced healthcare services.

“If you look where pandas are now in the world, you will see the countries that are important in terms of providing goods and services to China,” says Paul Jepson, a senior research fellow at the Smith School of Enterprise and the Environment at Oxford University. “The way to think about it is as a ‘panda seal of approval’ — a gesture that signifies and seals a long-term trust relationship with another country.”

Michelle Obama with her mother and daughters feeding pandas in Chengdu, Sichuan province, 2014 © Getty

Implicit in the granting of pandas is the understanding that the country receiving them accepts China’s cherished political positions — that only the authoritarian Communist party has the right to rule the country, and that Tibet and democratic, separately governed Taiwan are integral parts of China.

Pandas can also be used to punish countries that stray from this unspoken agreement. In 2010, just two days after China warned President Obama not to meet the Dalai Lama, the exiled spiritual leader of Tibet, the first-ever surviving panda cubs born in Zoo Atlanta and the National Zoo in Washington DC were repatriated on China’s orders. This punishment was possible because a clause in all panda-loan agreements stipulates that any cub born while abroad remains the property of China, as does any biological material from the animals such as blood, fur and semen. 

Back in the mountains of Sichuan, Father David’s cathedral is today a little-visited tourist attraction celebrating Sino-French “panda love”, according to signs on its dusty exhibits. It sits on the fringe of the 40,000-hectare Fengtongzhai national nature reserve, one of 67 panda reserves scattered across the region that supposedly protect about a third of the animal’s remaining habitat.

By far the biggest threat to the giant panda’s survival in the wild is the loss of its natural habitat. A recent study by 11 Chinese and international scientists found that despite decades of conservation efforts, their total area of current habitat is 5 per cent smaller than it was in the mid-1970s, and there are three times as many roads as there were then. Livestock grazing causes enormous damage to the bamboo forests that provide 99 per cent of the animal’s diet.

Directly across the valley from the church, in an area outside the formal reserve but within a designated Unesco world heritage “panda sanctuary”, bare patches of regenerating scrub mark where Chinese logging companies have previously cut down large swathes of forest. Between 2009 and 2015, at least 3,200 acres of panda forest were cleared here to make way for commercial timber plantations, according to a Greenpeace report. Greenpeace says the logging in the area stopped after the report was published but other activity, including dam-building and mining, is rampant throughout the “sanctuary” and on the edges of most panda reserves.

As with so many things related to pandas, the precise boundaries of China’s nature reserves are often treated as state secrets by local governments, thus allowing them to move these boundaries when it suits them. The FT was able to obtain the exact co-ordinates of the Fengtongzhai reserve, which revealed a disjointed patchwork of supposedly protected zones drawn apparently intentionally to exclude most economic activity. On a recent visit, I drove for hours along a riverbed pockmarked with large shingle quarries and punctuated by hydro-electric dams, cement plants, new tourist villages and even an enormous marble quarry.

Although overall panda habitat did increase very slightly from 2001 to 2013, fragmentation caused by roads, railways, dams, mining and other activity means the remaining pandas are isolated in more than 30 separate groups, most of which have fewer than 10 individual bears.

“When I think about the long-term fate of the panda then I’m not very optimistic,” says Fan Zhiyong, a scientist working for the WWF in China. “We’ve seen a 200 per cent increase in fragmentation in the past 10 years and this will only get worse in the next 10 years. Even though the overall habitat area looks quite big, if the pandas can’t get to each other because roads and humans are in the way, they will still disappear.”

In March, the Chinese government announced plans to merge the existing panda reserves to form an enormous national park three times the size of Yellowstone in the US. Scientists and conservationists have cautiously welcomed the plan but some have raised serious concerns about its viability and even suggested it could make things worse.

The proposal calls for the forced relocation of at least 170,000 people, and one of its main objectives is to promote tourism throughout the area. “Tourism is probably the main threat to the giant panda and its habitat, and the biggest potential problem with this reserve proposal is it could emphasise tourist development at the expense of conservation. This could have a huge negative impact on the panda population,” says Peking University’s Wang.

Government propaganda posters across the region suggest Wang is right to be concerned. “Ecology should enrich the masses” reads one billboard. “Make the region beautiful and green so we can turn green into gold!” says another.

Yet, outside the tiny scientific community, conservation for its own sake is not a popular goal in China. More pandas in the wild are often viewed as a wasted resource, since tourists cannot see them and they do not bring additional revenues. “I think there are enough pandas already,” says Shu Bing, a local who drives tourists through the area for a living and who says his view is widely shared by ordinary people and government officials. “We can already go look at them in lots of zoos, so why do we need any more?”

This does not mean the Chinese government is indifferent to the fate of the panda. In fact, the animal’s political significance ensures it receives a level of attention that is unheard of in almost any other country, or for any other species.

In 2012, the WWF conducted its own survey of 12 endangered animals in China and found the populations of four of these species — the panda, Asian elephant, crested ibis and Pere David deer (named after the same Father David who discovered the panda) — had started to recover in the wild, while the other eight continued to decline at a rapid rate.

All of the recovering animals have some degree of political importance for China. For example, the crested ibis is a traditionally revered national treasure in Japan and its extinction would be a diplomatic headache for Beijing. But for less political species such as musk deer, pangolins and various amphibians, Beijing has shown little interest in protecting their habitats or reviving their crashing populations. Even for the panda, the priorities of economic development often clash with the need to protect its habitat.

Western zoos and governments that manage to secure panda loans usually claim they are making huge contributions to conserving pandas in the wild. The standard panda contract states that 70 per cent of the annual $1m fee should go to the “conservation of the giant panda in China”, but foreigners have no say over how this money is spent. “In the past, definitely, some of this money was stolen and squirrelled away, and even today, foreign zoos and governments have no idea where that money goes,” says Nicholls, the author and panda expert. 

In the heart of the Fengtongzhai reserve, I visited a collection of derelict buildings, including abandoned offices and a large empty structure marked “animal rescue center”, tokens of where at least some of the “conservation” money has gone.

“The money from these loans is supposed to go to conservation but that isn’t happening,” says Kati Loeffler, a panda expert who worked full-time in China from 2005 until 2011. “There are hardly any park rangers, they have no equipment and there is barely any implementation or enforcement of the rules in these reserves. There are lots of empty buildings that they label as research labs.”

Visitors to the Giant Panda Adventure at Ocean Park, Hong Kong © Kurt Tong

A similar lack of transparency surrounds the true number of pandas that remain in the wild. China has conducted four censuses over the past 40 years but Chinese scientists involved in the process raise troubling questions. “The methodology is a black box and everything apart from the final number they publish is regarded as virtually a state secret,” says one scientist who asked not to be named because they did not want to lose their job for speaking about politically sensitive matters. “That final number must be politically correct, and not decided by the scientists based purely on their results but by higher-level party officials.”

In the mid-1990s, the Chinese government quietly reached out to artificial insemination and husbandry experts at the San Diego Zoo and the Smithsonian Institution in Washington DC, and asked for help in hitting what was seen as a wildly ambitious target of 300 captive bears. At the time, there were only about 100 pandas in captivity, and Chinese scientists would frequently snatch pandas from the wild to boost the number. 

The Chinese government no longer acknowledges this crucial US contribution, but by 2004 the collaboration began to yield piles of baby pandas. When China blew past its original target of 300 bears about five years ago, the target was raised to 500. Last month, Chinese state media declared the 2017 breeding season, with 42 surviving cubs, the most successful on record, bringing the total in captivity to at least 512. The target has now been raised again — to 600 bears.

Chinese and western experts all agree there is no scientific reason for producing so many animals in captivity if they cannot be released in the wild. But after struggling for so many years to produce even a few surviving cubs, the machinery of panda production is now almost unstoppable, thanks to financial incentives and rivalry between competing agencies.

China’s State Forestry Administration (SFA) is mainly responsible for pandas in the wild, while the Ministry of Housing and Urban-Rural Development (Mohurd) oversees most of those living in zoos. Both run large breeding centres and they compete fiercely for the bonuses the government pays for each surviving cub.

In order to ensure maximum genetic diversity, mating pandas are supposed to be matched using the “panda studbook” — a record of every panda ever born in captivity. But the SFA and Mohurd rarely allow their panda populations to mate with each other, and in recent years the Chinese government has kept the studbook secret from all but a handful of approved scientists.

Several people who have worked in China’s breeding centres say the facilities often operate as little more than “panda mills”, with productive females forced to give birth at a much higher rate than in the wild, and baby pandas taken from their mothers and raised mostly by humans.

A lack of focus on the animals’ welfare and behavioural development is partly to blame for the inability of captive bears to survive in the wild. “The facilities in China are overflowing with cubs,” says Loeffler. “They keep producing captive pandas because that’s all they know how to do, and then they have to find a market for them, which is why they have so many pandas to loan to other countries for political purposes.”

For foreign zoos and governments that borrow pandas, the process is like applying to host the Olympics. They must build special enclosures with elaborate facilities and pay for Chinese experts to oversee the bears. Berlin’s Tierpark Zoo spent about $10m on the new enclosure for Meng Meng and Jiao Qing, and must also pay large amounts for bamboo to feed the bears, on top of the annual $1m loan fee.

Le le enjoying a snack © Kurt Tong

A key motivator is the mistaken belief that pandas will bring a huge windfall in ticket sales, as they did in the earlier days of panda diplomacy. “It is generally the case that zoos lose money on pandas,” says Ron Swaisgood, a panda expert at the San Diego Zoo who also chairs the IUCN’s giant panda expert team. “The costs of leasing, feeding, housing and handling pandas typically exceed the revenues they bring in, and the economics are similar around the world.”

Many zoos and governments remain keen to make a deal with China to receive these cuddly emissaries but the proliferation of politically charged panda loans has already lowered their value. Faced with a tortuous diplomatic negotiation process, many Beijing-based diplomats now dread the prospect of engaging in panda diplomacy. “I really hope we don’t do it,” says one European diplomat from a country that does not have pandas but may officially request them soon. “It’s just not worth the expense or the hassle.”

This illustrates the central problem of panda diplomacy today. The process has become onerous and expensive, the conservation benefits are dubious and there are now so many pandas outside China that more and more countries are likely to decide they would rather not bother. If that does happen, then not only will modern panda diplomacy have undermined, rather than enhanced, China’s soft power, it will have damaged this iconic animal’s chances of survival in the wild for nothing. 

Chi Chi, the most famous panda in history

At the height of the cold war it was not just China that dabbled in panda diplomacy. Perhaps the most famous panda in history was a bear named Chi Chi that ended up in the London zoo almost by accident in 1958 and lived there until her death in 1972. For that entire time she was the only panda living in a western country.

Rather than a state gift from China, Chi Chi was one of three bears procured from the Beijing zoo in 1958 by an Austrian animal dealer called Heini Demmer, who swapped them for three giraffes, two rhinos, two hippos and two zebras. Chi Chi was originally intended for a US zoo but America had an embargo on all imports from Communist China so Demmer reached out to the director of the CIA, Allen Dulles, to see if he could convince his brother, secretary of state John Foster Dulles, to make an exception for Chi Chi.

The CIA archives show Dulles took the request surprisingly seriously, and although he was not ultimately able to convince his brother to change his mind, the agency put so much work into the effort that the director’s assistant earned the nickname “vice-president of pandas” from his colleagues.

After she arrived in London, Chi Chi became the original model for the WWF logo (on the group’s founding in 1961). She was also a focal point in relations between Britain and the USSR, which agreed in 1966 to host Chi Chi at the Moscow zoo in an attempt to get her to mate with the resident male panda An An.

The rendezvous was a disaster as Chi Chi showed no interest in her suitor, who promptly attacked her. This attempt at panda matchmaking coincided with two visits to Moscow by UK prime minister Harold Wilson and elicited great mirth and mockery in the British press.

One memorable cartoon in the Daily Mirror portrayed Soviet premier Sergei Kosygin as An An, scaling a tree in amorous pursuit of Harold Wilson as Chi Chi. Several more attempts to convince the pair to mate were unsuccessful and Chi Chi died childless in 1972. Today you can see Chi Chi’s stuffed remains on permanent display in the central hall café of London’s Natural History Museum.

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Equity Valuation
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Policy rate normalisation, European shares lag, UK shares downgrade and cryptocurrency exchanges
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Your “springboard” guide to current market concerns, presented in a logical and concise manner.

  1. Policy rate normalisation (new)
  2. An inflection point for European shares (new)
  3. The downgrade of UK shares after vote for Brexit (new)
  4. CME and CBOE reap share price gains as bitcoin futures loom (new)
  5. A peak for market liquidity?

A firming global recovery as shown by robust surveys of the manufacturing sector for leading economies suggests that the era of easy money has done its job. For bond markets, slumbering in low yield territory as many central banks still suppress borrowing costs via quantitative easing, the question looms: does 2018 beckon as the year for fireworks?

As Alan Ruskin at Deutsche Bank shows, plotting ISM and the US real 10-year yield — the nominal Treasury yield minus the year-on-year rate for the core consumer price index — there’s a large gap between these measures.

The current level of real yields suggests an economy stuck in a recession, says Mr Ruskin. However, the US economy is humming along and that’s before it receives a fiscal shot in the arm via tax reform next year.

“The breadth and depth of the global recovery should reinforce one of the most important themes for next year: policy rate normalisation is coming,’’ says Mr Ruskin.

While bonds suggest low yields are here to stay for some time, bearish traders may finally have their moment. Michael Mackenzie

As Wall Street cheers tax reform and continues setting a record pace, the story in Europe has become a little worrying.

The Euro Stoxx 600 index lost momentum last month after setting its 2017 high at the start of November. Now the market is back testing its 50-day moving average and for now holding above the 200-day measure.

Banks have been the main drag on the market that has fallen 2 per cent since the start of last month. Back then the euro was trading at $1.16 and has subsequently risen more than 2 cents.

Hence the importance of US tax reform hopes boosting the dollar at the expense of the euro. For all that, investors are still looking at disappointing price action after strong gains earlier in the year generated plenty of buzz for European equities. Michael Mackenzie

It has became popular among Brexit supporters to cite the strong performance of UK stocks in sterling terms as a vote of confidence. But if we compare the FTSE 250, somewhat more exposed to the UK economy than the FTSE 100, with FTSE’s index for the rest of the world, we see a marked degree of underperformance.

Markets decided UK assets deserved a huge downgrade immediately after the referendum, and have not been persuaded to change that view since then. The best guess is that current prices assume a hard Brexit but not a “no-deal” outcome. That outcome looked most likely in June last year, and it has grown more likely since then.

It is just possible that the events of the next two weeks will open up “no-deal” as the most likely outcome, or that a “soft Brexit” involving access to the single market might somehow come back on to the agenda. Either of these would make a difference. 

But as it stands, the markets are pricing the UK on the assumption that Brexit will be harmful, but not an extreme disaster. John Authers

Whether futures trading on bitcoin really takes off is a big question as Chicago’s two big exchanges, the CME and CBOE, race to list contracts this month. The volatility of bitcoin’s price entails hefty margins of more than 30 per cent to backstop futures trades and not spark instability in clearing houses, the market buffers that act as counterparties to a trade and prevent any defaults from infecting the rest of the market.

Still, for shareholders in the two exchanges at the forefront of opening cryptocurrencies to derivatives and possibly a broader audience, the developments are proving rather beneficial. Shares in both the CME and CBOE have jumped more than 10 per cent since the start of November, handily beating the S&P 500’s rise of 2.4 per cent for the same period. Philip Stafford

Many markets have generated robust gains this year — and we are not just talking about cryptocurrencies — and plenty argue that this reflects the very favourable liquidity backdrop. Here we look at broad financial market liquidity, which is generally defined by the relationship between growth in M2 (a broad measure of the money supply) and the growth in the economy. When the supply of money is growing faster than the economy, the excess money is not invested in people, plant or equipment, but tends to find its way into asset markets, pushing up their prices.

Thus expanding liquidity tends to translate into positive equity performance. But we may have reached an inflection point.

Jim Paulsen of Leuthold, using a simpler measure of six-month growth rates in M2 and GDP, finds that the two lines have just met. With the Federal Reserve appearing set on tightening conditions somewhat, it looks a good bet that in the US liquidity will grow more slowly than the economy. John Authers

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Barclays/UBS: kin beneath the skin
The Swiss and US heads of the banks possess certain similarities
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Barclays boss Jes Staley is banking’s answer to UK entertainer Mr Tumble. You may not have caught the act of the latter if you are older than five, but pratfalls abound. So too with Mr Staley, fronting a £1.2bn first-half attributable loss. At UBS, helmed by Sergio Ermotti, profits were 40 per cent higher at SFr2.4bn (£1.9bn). Yet the suave Swiss and the accident-prone American have unremarked similarities.

Differences are more glaring. Investors doubt Mr Staley can reform Barclays, assuming he is not forced to step down for compliance howlers. He is doubling down on investment banking, where earnings are volatile and capital needs are high. An anaemic economy imperils the UK retail arm. The group return on tangible equity is a negative 4.6 per cent.

Mr Ermotti, in contrast, basks in the afterglow of a well-managed turnround. UBS has placed its chips on capital-light wealth management, which yields steady earnings. That, combined with a tilt to Asia, supplies a growth story underpinned by demographics. The RoTE, adjusted for tax deferrals, is an Alpine 15.9 per cent.

Don the rose-tinted specs currently worn only by Mr Staley’s closest friends and the banks look more alike. Ignore write-offs on a discontinued African division and further provisions for insurance mis-selling and Barclays’ core return on tangible equity rises to 10.4 per cent. Take a seat if it makes you dizzy, but that might even cover the bank’s cost of capital.

Core tier one capital, a measure of financial strength, has risen to 13.1 per cent of risk-weighted assets. UBS is only narrowly ahead at 13.5 per cent. And while Barclays boasts a capital-light cash machine of its own in Barclaycard, UBS retains a substantial investment bank.

Shares in Barclays, trading at 0.7 times tangible book value, half the rating for UBS, have contrarian appeal. Especially if you can stomach Mr Staley’s unwitting propensity for slapstick.

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