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How Carbon Neutrality Triggered The Rise Of New-Energy Vehicles (NEVs) In China

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What is the biggest revolution happening in the Chinese economy? The answer definitely is related to Carbon neutrality. The rapid development of industrialization has made China the world’s second largest economy and as a corollary, China is also the world’s biggest emitter of carbon dioxide. In order to prevent further global warming and undertake social responsibility from an international perspective, Chinese President Xi Jinping put forward the audacious target of reaching “carbon neutrality” by 2060. By becoming carbon neutral, China aims to significantly reduce carbon dioxide emissions and at the same time balance the carbon dioxide emission and absorption through an investment shift to more renewable resources. By doing so Beijing hopes to fundamentally redesign an industrial system focused more on products with higher efficiency, higher added-value and lower environmental degradation.

Since most of the carbon dioxide emission comes from four major areas including electricity generation, manufacturing industry, respiration and transportation, shifts in these industries must become a clear and inherent priority. Among the four industries, making more pro-environmental changes in the transportation industry provides investors the most significant opportunities to be commercialized and capitalized more quickly when compared to the other sectors mentioned. Moreover, given the fact that China imports over USD 200 billion in oil from the US has put pressure on foreign reserves. To reduce the dependence on foreign oil, Beijing believes it is critical for China to develop innovative energy ecosystems especially in the transportation sector.

To better incentivize mechanisms for carbon neutrality and support the development of new energy systems, The Chinese government launched a national carbon trading market in July, 2021 targeting the power sector initially. China’s emissions trading scheme (ETS) puts a higher emphasis on reducing carbon dioxide emissions particularly at a unit level instead of the total emissions. According to historical emissions levels and output, enterprises would provide information to the supervisors and receive corresponding allowances under the ETS system. Similar to the “cap-and-trade” program, each enterprise in the trading market will have carbon credits which will directly determine how much carbon dioxide is emitted in a certain period. For the enterprises requiring more carbon dioxide emission in their production process, they will need to buy corresponding amounts of carbon credits from the enterprises willing to sell. This gives the added benefits to the enterprises which emit less carbon dioxide during production. For the transportation industry, and specifically for automobile sector, the market of carbon credits for China works in a different way. Instead of setting standards on the quantity of zero emission vehicles production for each state like the US, The Chinese government instead imposed a dual-credit policy. The policy takes fuel consumption of the automobile into consideration, and allows for the production of automobiles with fuel consumption that have lower than required standard to earn credits. The other standard relates to whether the automobile produced is designed as a new energy vehicle (NEV) and there is a required ratio of NEVs for the manufacturers to produce and sell. If the production ratio of NEVs is above standard, credits will be earned and vice versa. This results in many automobile manufacturers investing more in the research and development for new energy use in their production. Based on the research done by Statista, the share of NEVs in total vehicle production in China from 2010 to 2022 shows a steady growth and the growth is expected to continue for the next decade.

Tesla TSLA is an automobile manufacturer focusing on the production of electric cars, solar and integrated renewable energy solutions using sustainable energy. Accordingly, Tesla can earn a profit of $390 million from trading credits this year in China. Another automobile producer benefiting from selling credits is a Chinese vehicle producer, BYD, which has 750,000 points in total  and currently is ranked in second place in China.

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The accumulative credits of 750,000 have a net worth of $350 million which exceeds half of the net profit of BYD. According to Carsalesbase, starting from 2017, BYD tends to close the gap between the production of conventional cars and NEVs. Clearly, BYD complies with the is strategically positioned to benefit from trends in the current global market ecosystem. Trading Carbon credits is now widely regarded as the new way to creating wealth in the Chinese automobile industry. On the other side of the story, Volkswagen turns out to be the biggest loser in the credits trading market. With two of its joint ventures having negative credits, Volkswagen needs to buy surplus credits from other companies resulting in a loss of 400 million yuan from c trading credits.

           With the target of realizing carbon neutrality by 2060 in China, changes in many industries can be expected and enterprises should develop keen market sense and insights to respond to the rapidly changing market situation.

Special Thanks to Mandy Liu for her exceptional editorial and research skills which contributed greatly to this article.

Earl Carr is the Chief Global Strategist at Pivotal Advisors based in New York City. His responsibilities include working closely with the firm’s CEO and President to manage the Global Research Team and to develop and execute the firm’s global thought leadership and cross-border business development mandate. Earl is the Editor of the recent book, “From Trump to Biden and Beyond: Reimagining US-China Relations” Palgrave-Macmillan Press, September 2021.

From Trump to BidenBook | From Trump to Biden and Beyond

Finance

Teacher, Police And Firefighter Pensions Are Being Secretly Looted By Wall Street

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America’s severely underfunded public pensions are allocating ever-greater assets to the highest cost, highest risk, most secretive investments ever devised by Wall Street, such private equity, hedge funds, real estate, and commodities—all in a desperate search for higher net returns that, not surprisingly (given the outlandish fees and risks), fail to materialize. Transparency—public scrutiny and accountability—has been abandoned, as pensions agree to Wall Street secrecy schemes that eviscerate public records laws.

Our nation’s state and federal securities laws are premised upon full disclosure of all material risks and fees to investors: “Read the prospectus before you invest,” is the oft-cited warning by securities regulators. Nevertheless, teachers, police, firefighters and other government workers today are not allowed to see how their retirement savings are managed or, more likely, mismanaged by Wall Street.

For nearly a decade, the United States Securities and Exchange Commision has warned investors that malfeasance and bogus fees are commonplace in so-called “alternative” investments and, more recently, Chairman Gary Gensler has called for greater transparency to increase competition and lower fees.

Gensler has asked the agency’s staff to consider recommendations on ways to bring greater transparency to fee arrangements in private markets. “More competition and transparency could potentially bring greater efficiencies to this important part of the capital markets,” he said. “This could help lower the cost of capital for businesses raising money. This could raise the returns for the pensions and endowments behind the limited partner investors. This ultimately could help workers preparing for retirement and families paying for their college educations.”

Gensler has stated he would like to see a reduction in the fees these investments charge and has also commented on industry abuses such as ”side letters” which permit private funds to secretly give preferences to certain investors—preferences which harm public pensions.

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But that’s not good enough to protect public pension stakeholders.

No one—including the pensions themselves—seems to care that the government workers whose retirement security is at risk are being kept in the dark.

The SEC needs to do more—actually alert public pensioners as to those abuses the Commission knows full well are rampant, at a minumum. Advise them, Chairman Gensler, to demand to see and read prospectuses and other offering documents related to their hard-earned savings.

Does the SEC think it’s kosher for Wall Street to conspire with public pension officials to withhold this information from investors—any investors?

Since my 2013 forensic investigation of the Rhode Island state pension exposing gross mismanagement by then General Treasurer Gina Raimondo which I accurately predicted would cost workers dearly; my 2014 North Carolina state pension investigation exposing that $30 billion in assets had been moved into secretive, offshore accounts and, most recently, my investigation of the State Teachers Retirement System of Ohio, I have provided my expert findings to the SEC staff for their review. Each and every public pension forensic investigation I have undertaken has extensively discussed Wall Street secrecy schemes that enable looting. In my book, How To Steal A Lot Money—Legally, I quote disclosures from SEC filings that detail industry abuses.

Join me, Chairman Gensler, in giving government workers a clue, a glimpse, a peek, at the alternative investment abusive industry practices that are carefully guarded by Wall Street and being hidden from them.

Teachers, police and firefighters deserve a fighting chance to protect their retirement savings.

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Finance

It Is Time To Buy Bonds

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US 10-year note prices are likely to rise through August. The monthly histogram below shows that July and August have been the two strongest months for the note price.

Monthly Return- US 10-Year Notes

Blue: Average Percentage Change

Red: Probability of a rise on that day

Green: Expected Return (Product of the first 2)

These numbers are static in the sense that they change little over the years. This is only one cycle, the one-year cycle, whereas there are many cycles operative at any one time. In order to get a reading on such other rhythms, a scan is run to identify other profitable price cycles. The graph below reveals the most valuable cycles that are operative at any one time.

10-Year Note Monthly Cycle

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These cycles reinforce the seasonal tendency for notes to rise. Prices have risen in 60% to 65% of the time in these summer months. With the dynamic cycle also in ascent, the probabilities rise to about 65% to over 70%. There are similar and supportive developments in the Japanese and German fixed income markets.

The cycle projection must be confirmed by market activity. The daily graph reveals that price broke through a downtrend line.

10-Year Notes Broke Through Resistance

Here is a helpful sentiment indicator that supports the bullish view. The cover page of this week’s Barron’s points to much higher rates. Applying contrary opinion, this suggests lower rates and higher note and bond prices. The first objective is 123.0.

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Finance

Will There Be War Over Taiwan – The Next Spy Thriller

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I usually go through a rhythm of reading one or two serious books, followed by a few works of fiction and with summer on the way I wanted to highlight a few of both. In that regard I have just finished Laurence Durrell’s ‘White Eagles in Serbia’, an old-fashioned espionage thriller where the hero Colonel Methuen is dropped behind enemy lines in post war Serbia (he speaks excellent Serbo-Croat) and becomes embroiled in a violent plot to overthrow Tito.

The book is a warm-up to reading Durrell’s ‘The Alexandria Quartet’, a work that nearly won him the Nobel Prize. Durrell was part of an interesting Anglo-Irish family, who largely considered themselves Indian – his brother Gerald, the naturalist and writer, touches on this in ‘My Family and Other Animals’.

Thrillers

Though I am not an expert on these matters, I found ‘White Eagles’ a more realistic account of espionage than much of what we see in the media today (Mick Herron’s ‘Slow Horses’ is good), and overall it is a tale of derring-do that is more in keeping with the work of the founding fathers of the genre – Eric Ambler, John Buchan, Erskine Childers and Ted Allebury for example.

It also made opportune reading given what seems to be an epidemic of espionage – with reports of the Chinese hacking group APT40 using graduates to infiltrate Western corporates and notably the admission by the head of Switzerland’s intelligence that Russian espionage is rife in that country (notably in Geneva – for which readers should consult Somerset Maugham’s ‘Ashenden’ as background material).

These and other trends – such as the outbreak of a heavy cyber battle last week (against Lithuania and Norway for instance) and the increasingly public ‘clandestine’ war between Israel and Iran (they have just sacked their spy chief) point to a world that is ever more contested and complex.

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Secret World

One of the new trends in the space is cyber espionage – both in the sense of stealing state and industrial/corporate secrets, influencing actors (such as the manipulation of the 2016 US Presidential election) and outright acts of hostility such as the hacking of public databases and utilities (i.e. healthcare systems). Here, if readers are looking for some serious literature I can recommend two excellent books – Nicole Perlroth’s ‘This is how they tell me the world ends’ and ‘Secret World’ by Christopher Andrew.

I am personally more intrigued by the difference between a spy and a strategist. A spy’s work could well be described as the pursuit of information about someone who is acting with a specific intent, as well as a sense of their reaction function. There are plenty of examples – from Christine Joncourt (‘La Putain de la Republique’) to Richard Sorge (see Owen Matthews’ ‘An Impeccable Spy’).

In contrast a strategist may try to plot trends and the opportunities, spillovers and damage they may cause. The US National Intelligence department is good in this regard, becoming the first major intelligence agency to publish detailed warnings on the side effects of climate damage.

Spies and strategists might work together, but history is full of examples (LC Moyzisch’s ‘Operation Cicero’) where intelligence fails to make it through the strategic process or is simply ignored for political reasons (might the early warnings on the invasion of Ukraine be an example).

Asia next?

In the spirit of the Durrells and Flemings of the world, what issues might be of interest in terms of digging into unknown knowns and unknown unknowns. Here are a few ideas, most of which are Asia focused (we might see an uptick in Asia focused thrillers).

On the diplomatic front, an interesting recent development was the visit of Indonesian president Joko Widodo to Ukraine, and then Moscow. It was a rare visit to Ukraine by an Asian leader and potentially marks the emergence or at least aspiration of Indonesia (population 273 million) as an emerging world diplomatic player. What has intrigued me so far is that there has been little coordination by the populous emerging (largely Muslim) nations (Nigeria, Indonesia, Pakistan) in the face of high energy and food prices, and that potentially Widodo could play a unifying role here.

Then, still in Asia, but on a more deadly footing, if the Western commentariat is to be believed, China is preparing an assault on Taiwan, and looking to learn from Russia’s military errors in this regard. Other countries are reacting, and I suspect that there will be much intrigue around Taiwan’s ability to acquire sufficiently powerful ballistic missiles that could strike the coastal cities of China, and relatedly how long might it take Japan to produce nuclear missiles (my sources say they could very ambitiously do it in five months!).

So, whilst the espionage literature of the 20th century has tended to be focused on Geneva, Berlin and London in the 21st century we may find ourselves reading about ‘behind the lines’ exploits in Jakarta and Tanegashima.

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