(ZH) China's Digital Yuan Comes With An Expiration Date

China's Digital Yuan Comes With An Expiration Date

It's been a long time coming, and now it's almost here.
Last August we reported that China's Commerce Ministry had released fresh details of a pilot program for the country's central bank digital currency (CBDC) to be expanded to several metropolitan areas, including Guangdong-Hong Kong-Macao Greater Bay Area, Beijing-Tianjin-Hebei region, and Yangtze River Delta region. This was the inevitable culmination of a process which started back in 2014 when as we reported at the time, "China Readies Digital Currency, IMF Says "Extremely Beneficial".
Fast forward a few months when China's preparations to rollout a digital yuan gathered pace, and we reported in October that China was poised to give legal backing to the launch of its own sovereign digital currency, "cementing its trailblazer status in virtual currencies far ahead of other countries, after already recently experimenting with large-scale trials of actual payments by consumers, which was met with mixed results." Specifically, the South China Morning Post reported that "The People’s Bank of China published a draft law on Friday that would give legal status to the Digital Currency Electronic Payment (DCEP) system, and for the first time the digital yuan has been included and defined as part of the country’s sovereign fiat currency."
The design framework for the digital yuan had been released one year ago on the heels of Facebook's ambitious but disastrous Libra token rollout after founding corporate partners split for lack of confidence in the project and on fears US federal regulators would seek to block it just as they did encrypted-messaging company Telegram's Gram cryptocurrency.
"The draft law would also forbid any party from making or issuing yuan-backed digital tokens to replace the renminbi in the market," the SCMP said.
This in turn brought us to the so-called "Shenzhen case study" when in October of 2020, China became the first nation to hold a trial run of its digital currency, when the government in Shenzhen carried out a lottery to give away a total of 10 million yuan (about $1.5 million) worth of the digital currency (nearly 2 million people applied and 50,000 people actually "won").
The winners were required to download a digital Renminbi app in order to receive a "red packet" worth 200 digital yuan ($30), which they can then spend at over 3,000 designated retailers in Shenzhen’s Luohu district, according to China Daily. After that, they’ll be able to buy goods from local pharmacies, supermarkets and even Walmart.
The idea was to not only test the technology involved, but boost consumer spending in the wake of the COVID-19 pandemic. In short, China is not only subsidizing the centrally-planned economy by manipulating the supply-side of the question- it now can prop up demand by handing out digital currency to anyone (or everyone).
Of course, unlike traditional central bank account-based currencies such as reserves, or decentralized cryptocurrencies like bitcoin, China’s digital currency would be controlled by the country’s central bank and will be instantly made available at a moment's notice to anyone who can receive it.
And since "China's adoption of digital central bank tokens is expected to be seamless as most of the nation's digital payments already pass through companies like TenCent and AliPay and are already very popular in the country", we concluded that "the successful Shenzhen test means that a broad rollout is just a matter of time."
Still, one thing was missing: a stamp of approval by the gatekeeper of not only the global payments system, but the protector of the dollar reserve system, SWIFT. But as two months ago, China got that too: as we reported in February, "SWIFT, the global system for financial messaging and cross-border payments, has set up a joint venture with the Chinese central bank’s digital currency research institute and clearing centre, in a sign that China is exploring global use of its planned digital yuan."
Actually, not just "exploring" but thanks to year of testing and partial rollouts, Beijing was about to become the first country in the world set to launch the digital yuan, and with both the IMF's and SWIFT's blessing, we said that it was "just a matter of months if not weeks."
We were right, because just a few days ago, China's "cyber yuan" became official when the WSJ finally caught up, writing "China Creates Its Own Digital Currency, a First for Major Economy."
While regular Zero Hedge readers are quite familiar with the details and chronology of China's transition to a digital currency, which incidentally is precisely the opposite of a cryptocurrency and has absolutely nothing to do with Bitcoin, a fact which Peter Thiel may want to dwell on a little more next time before making sweep and wrong statements about bitcoin, the WSJ focuses more on the geopolitical reasons of China's currency evolution - as a reminder, thousand years ago, when money meant coins, China invented paper currency, and now the Chinese government is minting cash digitally, in what the WSJ said is a "re-imagination of money that could shake a pillar of American power" - and specifically how to approach a decoupling from the global reserve currency, the US dollar so not only can Beijing avoid the "nuclear option", a weaponized US dollar, but allow countries that the US seeks to punish like Iran, a viable alternative (remember, the enemies of China's enemies - and none is bigger than the US - is China's friend). Here is the WSJ:
The U.S., as the issuer of dollars that the world’s more than 21,000 banks need to do business, has long demanded insight into major cross-border currency movements. This gives Washington the ability to freeze individuals and institutions out of the global financial system by barring banks from doing transactions with them, a practice criticized as “dollar weaponization.”
...
The digital yuan could give those the U.S. seeks to penalize a way to exchange money without U.S. knowledge. Exchanges wouldn’t need to use SWIFT, the messaging network that is used in money transfers between commercial banks and that can be monitored by the U.S. government.
To be sure, a credible alternative to the dollar, reduces the need to hoard the currency for US trade partners which in turn would have profound implications on global saving patterns, from there, global capital flows. The consequences for the perpetual US current account deficit would be unprecedented.
In addition to realigining the global balance of monetary power virtually overnight, China's the digital currency kills another bird with the same binary stone: it allows unprecedented surveillance and supervision over every single transaction.
[The digital yuan is] also trackable, adding another tool to China’s heavy state surveillance. The government deploys hundreds of millions of facial-recognition cameras to monitor its population, sometimes using them to levy fines for activities such as jaywalking. A digital currency would make it possible to both mete out and collect fines as soon as an infraction was detected.
A burst of cash-accumulation in China last year indicates residents’ concern about the central bank’s eye on every transaction. Song Ke, a finance professor at Renmin University in Beijing, told a recent conference that China’s measure of yuan in circulation, or cash, popped up 10% in 2020.
Then there are the myriad boosts to China's ironclad capital controls:
While China hasn’t published final legislation for the program, the central bank says it may initially impose limits on how much digital yuan individuals can keep on their person, as a way to control how it circulates and provide users a dose of security and privacy.
To be sure, none of this is actually new as we have discussed all these nuances of the digital yuan before. What is now, is this blurb in the WSJ article:
The money itself is programmable. Beijing has tested expiration dates to encourage users to spend it quickly, for times when the economy needs a jump start.
And there you have it: the Keynesian wet dream to boost the velocity of mean finally comes true. For the past decade we have joked that it is only a matter of time before central banks slap on an expiration date on every monetary unit in circulation...
... to offset the creeping petrification of the monetary system, where negative rates have sparked even more saving and not spending as central banks had intended...
... and where only the threat of money confiscation - which is what a monetary expiration date actually does - can spark aggressive spending, and eventually, runaway inflation.
Well, that's precisely what China is now ready to do... and it's only a matter of time before other central banks follow suit. As a reminder, according to tentative estimates for the rollout of ISO 20022, which is the required universal transaction standard which will make payment in digital currencies possible, we are looking at a 2022 launch date, although China looks ready to go live as soon as this year.
There is one final, geopolitical reason behind China's decision to give its digital currency an expiration date: as Byrne Hobart writes, "programmable money, tied to real-world identities, and universally tracked by a central bank, starts to look suspiciously like a substitute for the consumer of last resort. Every year that China gets richer, domestic consumption plays a bigger role (exports were 26% of China's GDP in 2010, and 18% last year). If domestic consumption can be tightly controlled, then it's a way to not just increase the volume of consumption but to control the variance of demand for the goods China produces. It's not yet enough to match the size and variability of global demand for China's exports, but every year it gets closer."
In short, while the US and China are both talking seriously about decoupling, the digital yuan - which is now a reality - indicates that China's government is not only more effectively planning for it, but will be the first to fully sever all ties with the US... when the moment comes.
Finally, for those who have missed our reporting on this fascinating issue, here again is Rabobank's Wim Boonstra explaining not only why China will be the first country to launch a digital currency but also looking at what happens next:
China Will Be The First Country To Launch A Digital Currency: What Happens Then
  • China may be the first major country to launch a central bank digital currency or CBDC
  • The Chinese CBDC, named DCEP, will strengthen the position of the central bank and help to further modernize the Chinese economy
  • The DCEP will probably also be available for China’s trade partners, to begin with Africa
  • The DCEP may strengthen the international position of the renminbi to the detriment of the euro
  • The arrival of the DCEP should be a strong wake-up call for Western, especially European, policymakers
Introduction
Most central banks are busy preparing for the potential introduction of central bank digital currency (CBDC). CBDC is a digital currency issued by the central bank. It is sometimes referred to as a digital version of a bank note, but in many cases this is not correct. There are indeed many different potential variants.
So far, virtually all the central banks are keeping their options open as to whether a CBDC will ultimately appear.
China, where a far-reaching trial is under way, is the major exception. If this trial is successful, one can expect the Chinese CBDC to be introduced widely in the near future. China is therefore comfortably leading the way because the country has big ambitions for its digital currency. First, it should provide a sizable boost to the Chinese economy; second, it will concurrently further increase the Chinese government’s control of Chinese society; finally, the new currency is part of an ambitious plan to strengthen the international position of the renminbi, the Chinese currency, and potentially at the expense of the euro in particular. This Chinese decisiveness should spur European policymakers into action by further strengthening the euro.
China: from cash-based to almost completely cashless money in 10 years’ time
Not so long ago, retail payments in China were still almost entirely made in cash. There has been a revolution in payments traffic since that time, and China is now one of the leading countries in cashless payments. Unlike in other countries, such as the Netherlands and Sweden, in China this development did not originate from the banking system, but it was induced by a few key apps from relatively young Fintech companies such as WeChat (Tencent) and Alipay (Ant Financial). These parties, that form a kind of extra layer between the banks and their customers, now have a collective market share of more than 90% in Chinese payments cashless retail payments. The Chinese cashless payments system is already able to settle approximately 100,000 transactions per second.
The Chinese CBDC: DCEP
Against this background, the People’s Bank of China (PBoC), the Chinese central bank, has taken the initiative of developing its own digital currency known as the Digital Currency Electronic Payment (DCEP). Above all, the DCEP is a digital alternative to bank notes, although it has features that differ from cash in certain respects (see below). The DCEP does however have the same value as a renminbi.
The technology that can be used by the public for payments is based on traditional payment technology and not on blockchain technology. This is the only way to achieve the necessary scale. The aim is to reach a capacity of 300,000 transactions per second. The central bank might itself use blockchain, for example for wholesale transactions or settlements in DCEP between private banks. Although the DCEP is a cashless currency that will be held in an account with a private entity, there is also the possibility of using a token-based functionality on for example a chip to effect peer-to-peer payments, even where there is no Internet. This is especially needed for successful adoption in the rural areas of China. This token-based functionality will be widely used, as a result of which the DCEP will compete with cash. A sizable trial has been running for several months in which tens of thousands of people have been participating.
What does the PBoC want to achieve with the DCEP?
The PBoC has several objectives with the introduction of the DCEP.
Prevention of a monopoly in the payment system
The PBoC wants to prevent a situation in which WeChat and AliPay take over the Chinese payment system. It is concerned that the entire payment system will soon fall into the hands of these private parties. The DCEP therefore has to restrict the involvement of these parties and increase the role of the central bank in the payment system. It is even more likely that any key private firm will be prevented to become a dominant player, as ultimately China is not a ‘normal’ market economy (which explains Beijing's current crackdown on Ant Financial far better than just a feud between Xi Jinping and Jack Ma).
Promotion of financial inclusion and further reduction of the role played by cash
Highly efficient cashless payments dominate in large parts of China. But in the poorer regions, especially the rural areas, people have less access to banking services such as regular credit. In these areas, cash still plays an important role. Payments in the criminal underworld, including the illegal gambling industry, are also still largely made in cash. The DCEP will offer people in these regions full access to financial services, but it can also reduce the importance of cash payments. The main aim of the DCEP is therefore to replace cash. In terms of features, it will also closely resemble cash.
Better information on payment flows and prevention of illegal transactions
Unlike payment transactions using a bank account, which by definition leave traces in a bank’s records, cash payments are highly anonymous. As we have said, the DCEP will closely resemble cash, with the possibility of making payments directly from one person to another. Some degree of anonymity would thus appear to be safeguarded. But on further consideration, it becomes clear that the PBoC, and therefore the Chinese government, will have full insight.
To be precise, in a transaction between two people effected with DCEP, anonymity between these two people will be assured, as is the case with a cash payment. But the PBoC can always establish at a later date who were involved in the transaction. This will enable more effective tracing of illegal transactions than if these were effected in cash. But there will also be detailed insight into the payment behavior of individuals.
Restricting capital flight
Although China does not have free cross-border capital movements, capital flight is a common and substantial phenomenon. Capital flight can occur in various ways, and is often difficult to trace. For example, internationally trading Chinese companies can for instance manipulate invoices, as a result of which money can be transferred abroad. People can also use the Bitcoin system to hide money from the authorities and/or transfer it abroad.
The Chinese government, like its counterparts in Europe and the US, is concerned that stablecoins could assume an important role as an alternative to the regular money in circulation, but also may develop into a vehicle for capital flight (read "How The Chinese Use Illegal Online Gambling And Tether To Launder Over $1 Trillion Yuan"). Stablecoins are cryptos like Bitcoin, but unlike Bitcoin they are, at least in theory, secured by financial assets. When Facebook announced in April 2020 that it intends to add national stablecoins to its Libra, a digital currency basket that it announced in 2019, central banks reacted immediately by devoting more urgent attention to CBDC.23 Such stablecoins could for example create the possibility that people could use a Libra-stablecoin to transfer money abroad. With the DCEP, the PBoC intends to slow the momentum of private stablecoins. This is also an important consideration for the Western central banks.
Retention of monetary sovereignty
This is connected with the previous point. If people have easy access to a private stablecoin, it could actually in a sense reduce the role of the national currency. Something similar actually happened in Zimbabwe, where confidence in the national currency completely vanished as a result of hyperinflation and people turned en masse to foreign currencies such as US dollars and South African rand. In such a situation, the national central bank loses control of monetary conditions in its own country. Importantly, however, the DCEP could also be used by China to interfere with monetary sovereignty in other countries.
What about privacy?
The PBoC says it will respect the privacy of people and therefore the anonymity of the transactions but at the same time it says that DCEP will help it to detect illegal transactions. What this probably comes down to in practice is that people will be able to effect payments and retain anonymity between each other, but that the central bank will on the other hand be able to view the transactions. Anonymity will therefore not be guaranteed and the central bank will have much greater insight into people’s payment behaviour than it has at the moment. The DCEP will also have the status of legal tender. This means that Chinese residents will be obliged to accept the DCEP, as confirmed by various statements from the central bank on the issue (South China Morning Post, 10 November 2020). The DCEP is thus not really coming into being as a result of strong demand from the Chinese public, but it is being imposed on the population by the government. Moreover, the way the DCEP is designed, it may develop into a perfect vehicle for a quasi-command economy: it allows all transactions to be monitored, and opens the door for a retreat to a more Soviet model of banking, viz. banking under full state control.
Internationalization of the renminbi
The use of the renminbi in international transactions is still relatively limited, certainly in comparison with the dollar and the euro. But China is working steadily on increasing its usage, and even hopes that one day the renminbi can succeed the dollar as the global reserve currency. China sees the DCEP as an important vehicle for strengthening the renminbi’s international position, as foreigners will also be able to use the DCEP in transactions with China.
The benefit of this for China is that it can settle more of its international trade in (digital) renminbi. China has initially targeted Africa in this respect. Many African countries do not have fully convertible currencies and mutual trade is frequently settled in US dollars, which is expensive. China is aiming to achieve a situation in which African countries can use the DCEP not only in their trade with China, but will also use it for their domestic transactions. This is a good example of how China is aiming to position itself internationally and how various projects and institutions will cooperate under the direction of the government. The newest model of the Huawei smartphone indeed includes an app enabling payment in DCEP without the need for Internet (Eurasia). Huawei is currently already a leading telecoms provider in Africa, which gives China a head start. In other parts of the world, where Huawei is less dominant or even banned, it will off course be less simple for China to push the DCEP ahead.
Note that while China intends to strengthen its own monetary sovereignty with the DCEP, it clearly has no qualms regarding its use to undermine the monetary sovereignty of other countries. If not only a larger proportion of the trade between China and African countries but also part of intra-African trade could soon be settled in DCEP, therefore renminbi, international use of the Chinese currency will significantly increase. Note, that if a larger share of China’s international trade will be conducted in DCEP, it will also become more difficult for Chinese im- and exporters to use trade as a way to channel funds abroad. So it will held the Chinese government to reduce capital flight, although complete elimination of this phenomenon will not be possible.
Decision time: is the DCEP a wake-up call?
China is leading internationally with the introduction of CBDC, and is clearly moving in a different direction than many other countries considering a similar move. The debate in Europe is still mainly about the form the digital euro, its CBDC, should take, the question of whether there is consumer demand for it, and who should pay for it. The Chinese authorities are taking a more strategic approach, and most of all from the perspective of whether a digital currency can contribute to strengthening/entrenching China’s international position.
Assuming that the current Chinese trials are successful, we could very well see the DCEP appear as early as next year. This could be a significant step in the further movement of the Chinese economy towards cashless money. The payments system would be further strengthened by the DCEP, as this will prevent large private parties gaining a duopoly with the market power that this would entail. Financial inclusion would be improved in the underdeveloped areas, and everyone would have access to cashless money and the associated financial services that this would make possible. The black economy would be further reduced, and the Chinese government will have better insight (and control) of the payment behaviour of its citizens to an extent that we in the West would probably see as unacceptable. Lastly, the introduction of the DCEP can discourage capital flight and probably strengthen the renminbi’s international position.
All in all, the DCEP will certainly make a positive contribution to the further development of the Chinese economy. Although the DCEP looks to be less innovative than the CBDCs under consideration by the Western central banks in certain respects, the determination shown by China is undoubtedly impressive.
This Chinese resoluteness also shows that China is working very actively on strengthening the renminbi’s international position, with the central bank and companies such as Huawei working closely together to achieve this. While still a long way off, a scenario in which first parts of the African, but later maybe Asian, Latin American of even some European economies will use the renminbi for cross-border and in due course also domestic transactions is gradually becoming more plausible.
One may also expect China to try to get all countries involved in its Belt and Road Initiative to use the DCEP and therefore the renminbi. Today, the renminbi is still a small currency in comparison to the euro and most of all the dollar. But this situation could change if the DCEP becomes widely accepted. In the context of a situation in which the euro’s international position has more or less stagnated over the last decades, this is at the very least somewhat disconcerting.
Of course we may expect that, once the digital renminbi takes off and gains traction, other central banks will react strongly. Especially the US will be determined to hold on to the dollar’s international dominance. The US authorities will soon understand that a successful digital renminbi may in the long run turn out to be a larger threat to the position of the dollar than the euro ever was. The most important difference is that the euro is institutionally weak and European politicians have so far failed to use their currency as a geopolitical instrument. The Chinese government, in contrast, understand very well the power of money as a ‘peaceful’ instrument to increase international political clout.
But after all the good news may be, that the DCEP also turns out to be the important wake-up call that prompts European policymakers to finally devote serious attention to strengthening the international role of the euro. Having the second currency after the US dollar is maybe not optimal, but is not disastrous. Being third after the Chinese renminbi is a different story. In the end, money talks.
* * *
Appendix: what will the DCEP look like?
The exact design of the DCEP is still not clear. According to the BIS, the DCEP will be what is known as a hybrid CBDC. People will hold balances in their names at the central bank, but transactions will be approved using an intermediate layer of private parties (possibly including commercial banks). There will then be no direct interaction between the central bank and the account holders, but people will have an account in their names at the central bank. This would be similar to the ideas being mooted at other central banks such as the ECB and the Bank of England. Bloomberg, Blockchain News and the China Daily on the other hand describe the DCEP as a two-tier system, in which people will not directly hold accounts with the PBoC. According to these reports, in the Chinese system people will hold only a DCEP account with a bank or, more likely, with a payment service provider. These parties will in turn hold a balance with the PBoC as a liquidity reserve that exactly covers the amount of DCEP. They will also settle interbank payments in DCEP. This kind of system is also known as a synthetic CBDC (sCBDC), as people will not have their own CBDC accounts with the central bank. The PBoC will however receive regular statements of effected transactions.
If this last model is adopted, the Chinese CBDC model would be more like a full (liquidity) reserve bank than a real CBDC. A full liquidity reserve bank is a bank that would hold a 100% cash reserve with the central bank against the CBDC payment accounts held with it. But in the Chinese model, there would be no additional institution created, the existing financial institutions would offer additional accounts that would then be 100% backed by central bank reserves. Statements from the PBoC also suggest the direction is more towards a synthetic model. Technically speaking, this would represent a less innovative move than a true CBDC.
For those looking for more, Goldman's report on "China's digital yuan and its macro implications" can be found in the usual place for all pro subs.

WSJ : Athletes Who Waited for the Tokyo Olympics Are Asking: Why Not Stick Aroun

Athletes Who Waited for the Tokyo Olympics Are Asking: Why Not Stick Around for Paris 2024, Too?
After a long wait for this summer’s Games, some old hands who had planned to retire are figuring they can also hang on another three years

Many veteran U.S. Olympians were planning to hang it up after the 2020 Olympic Games in Tokyo. When the pandemic pushed them back a year, aging bodies sighed, contemplated quitting, and then went back to training anyway.

Now a curious thing is happening: the Tokyo Games haven’t even happened yet, and some of those athletes are already committing to trying to keep going another three years for the 2024 Olympic Games in Paris.

Gymnast Simone Biles, who has been undefeated in all-around competition since 2013, had already announced her intention to retire after trying to defend her Olympic crowns in Tokyo. She had also initially said, after the pandemic postponement, that she wasn’t sure she could even manage another 12 months of training.

But Biles, 24 years old and still getting significantly better, now says that her French coaches, Cecile and Laurent Landi, have already got her thinking about continuing to train to compete in Paris on a subset of the gymnastics events.

“Cecile and Laurent are from Paris and so they’ve kind of guilted me into at least being a specialist and coming back,” Biles told reporters this week. “The main goal is 2021 Olympics first, then tour, and then we’ll have to see.”

She did not specify which apparatus she might consider focusing on. Biles is the reigning world champion on balance beam, floor exercise and vault. She also holds a world silver medal from 2018 on the uneven bars, her weakest event that she has dramatically improved under the Landis.

Not every American star can imagine France. Four-time Olympic sprinter Allyson Felix, who already holds nine gold and three silver medals and is 35 years old, said this week that she plans for Tokyo to be her final Olympics, though she might not stop racing immediately after the Games.

And Sam Mikulak, a 28-year-old male gymnast who has won the U.S. all-around title six times, is adamant that he’s done.

“The only way I’m able to keep going right now is because I’m doing at least an hour of manual treatment every day, an hour of rehab a day, an hour of strength and conditioning–and then I have to do gymnastics,” he said.

But the prospect of Biles competing on anything is a suggestion to make television executives, sportswriters and American fans giddy. And if they’re lucky, it will play out across a variety of other sports too.

The U.S. Olympic & Paralympic Committee’s sports psychologists say they’ve noticed more athletes indicating interest in continuing past Tokyo because Paris is now one year closer than in a normal four-year Olympic cycle.

April Ross, a 38-year-old beach volleyball player, said she hadn’t been clear heading into 2020 on her plans for after Tokyo. The postponement changed that.

“Now that there’s only three years between Tokyo and Paris, it seems more attainable to do three more years,” said Ross, who won a silver medal at the 2012 Games in London with Jennifer Kessy and a bronze at the 2016 Games in Rio with Kerri Walsh Jennings.

“I don’t want to retire prematurely, physically I feel great, still love competing and I would love to go to Paris for the Olympics…and have my family be able to be there, if that’s going to be my last one.”

Several older athletes said they were motivated in part by the recent announcement that overseas spectators will not be able to attend the Tokyo Games, a ban that will likely include athletes’ family members.

“I started a family with my wife a little over a year ago and the thought of the grind of our overseas professional seasons, and coming back to the States, playing with the national team, not really having much time off to be active in my children’s life definitely came to the forefront of my brain in thinking about my future as a volleyball player,” said Matt Anderson, 33 years old, who has competed at two Olympics already and won a bronze medal with the U.S. team in Rio.

“That being said, not allowing international fans to this Olympic Games, I want my family to be part of it…. So yeah, I believe I will be trying for Paris 2024!”

Lora Webster, a four-time Paralympian and four-time medalist in sitting volleyball, also said she wanted to be able to bring her three children to Paris. And, she added, she wanted to compete again in front of a large audience at least one more time. It isn’t yet clear how many Japanese spectators, if any, will be allowed to attend the Tokyo Games.

“The fans make such a big deal, and whether they’re rooting for you or against you, as athletes we feed off of that so it’s going to be weird this Games. So with the hopes of Paris being back to fans and having that, that’s a great motivator,” she said.

“And the three years seems like nothing when you look back on what these five years have felt like.”

WSJ : Sizzling Stock Market Sets High Bar for Earnings Season

Sizzling Stock Market Sets High Bar for Earnings Season
Investors will watch for clues about future profits as they consider pricey shares

The stock market is running hot entering first-quarter earnings season.

A formidable rally has propelled the S&P 500 up 9.9% this year to 20 record closes, keeping stock valuations at historic highs. Some investors, though, say shares may have more room to run as the rollout of Covid-19 vaccines and bountiful government spending strengthen the outlook for corporate profits.

Earnings season kicks off in earnest this week, with results from America’s big banks—including JPMorgan Chase & Co., Bank of America Corp. and Wells Fargo & Co—and companies ranging from Delta Air Lines Inc. to PepsiCo Inc. and UnitedHealth Group Inc.


Investors will be watching for signs of confidence from executives that customer demand will keep rising and cost increases can be managed to help ease their concerns that stocks are looking expensive.

The S&P 500 traded Thursday at 22.6 times its projected earnings over the next 12 months, above the five-year average of 18.14, according to FactSet. Paying up, even for shares of high-quality companies, raises the prospect of muted future returns for shareholders.

“Our biggest concern is really valuations,” said Gene Goldman, chief investment officer at Cetera Investment Management. “Has all the good news been priced in?”


It’s no surprise that earnings are expected to leap for the quarter because Wall Street measures profits against the same three-month period a year earlier—one that in 2020 included the rapid shutdown of much of American business in the face of the spreading coronavirus pandemic.

Even so, investment analysts have grown more upbeat since the start of the year, lifting their forecasts for profit growth among S&P 500 companies to 24%, from 16% at the end of December.

For 2021 as a whole, profits for companies in the index are expected to rise 26% from a year earlier. They are forecast to keep climbing in 2022.

Long before the approval of vaccines offered a path toward reopening the economy, trillions of dollars in government spending and support from the Federal Reserve sent stocks rocketing off their early-pandemic lows.

Central bank officials have indicated they expect to keep supporting the economy with near-zero short-term interest rates and bond purchases. President Biden, meanwhile, recently put forward his $2.3 trillion infrastructure plan, pushing the S&P 500 above 4000 for the first time.

Signs that the economy was strengthening and the vaccine rollout gaining steam drove a recent resurgence in shares of cyclical stocks, whose fortunes tend to rise and fall with economic growth. The energy and financial sectors are the top-performing S&P 500 groups for the year, after badly trailing the market in 2020.

That rotation has recently cooled, suggesting that expectations for rapid economic expansion may already be factored into stock prices. Despite lagging behind the broad stock index for the year, technology shares are the best-performing group in April.

For stocks to keep reaching new heights, money managers say companies will need to show they can deliver profits that surpass even the rising forecasts.


“The market’s going to respond to earnings,” said Susan Schmidt, head of U.S. equities at Aviva Investors. “If we keep seeing earnings beat and earnings increase and surprise to the upside as we move through 2021, I think that is going to fuel the market.”

Beyond the quarterly results in the coming weeks, investors will pore over executive commentary about key issues. Will rising raw-material costs lead to announcements of price increases, as they recently did at Kimberly-Clark Corp. , the maker of Huggies diapers and Scott paper products? How would Mr. Biden’s proposal for corporate tax increases affect the bottom line? With investors counting on sharp economic growth, how much further can rising consumer confidence improve the outlook for companies?

“Consumers are not going to buy five Peloton bikes,” said Mr. Goldman, of Cetera Investment Management. “They’re not going to buy five new cars and five new TVs. So at what point is all that future growth already priced in?”


For the first quarter, analysts expect earnings to rise in nine of the 11 sectors in the S&P 500. The strongest growth is projected among the consumer discretionary, financial and materials groups, all of which tend to be sensitive to the strength of the economy. Only the energy and industrial groups are forecast to post lower profits.

Companies reporting early have found that simply beating profit estimates may not satisfy the market. Shares of Nike Inc. fell 4% the day after the sneaker giant reported higher-than-expected earnings but also said shipping problems had dented sales.

But with economists lifting their growth forecasts, vaccinations continuing and the potential for more market stimulus, many investors believe U.S. shares could have further gains in store.

“We do think the momentum is still around stocks grinding higher from here,” said Greg Calnon, global head of multiasset solutions at Goldman Sachs Asset Management.

TechCrunch : Scale CEO Alex Wang and Accel’s Dan Levine explain why sometimes un

Scale CEO Alex Wang and Accel’s Dan Levine explain why sometimes unconventional VC deals are best

Few companies have done better than Scale at spotting a need in the AI gold rush early on and filling that gap. The startup rightly identified that one of the tasks most important to building effective AI at scale — the laborious exercise of tagging data sets to make them usable in properly training new AI agents — was one that companies focused on that area of tech would also be most willing to outsource. CEO and co-founder Alex Wang credits their success since founding, which includes raising over $277 million and achieving break-even status in terms of revenue, to early support from investors including Accel’s Dan Levine.

Accel haș participated in four of Scale’s financing rounds, which is all of them unless you include the funding from YC the company secured as part of a cohort in 2016. In fact, Levine wrote one of the company’s very first checks. So on this past week’s episode of Extra Crunch Live, we spoke with Levine and Wang about how that first deal came together, and what their working relationship has been like in the years since.

Scale’s story starts with a pivot, and with a bit of rule-breaking, too — Wang went off the typical YC book by speaking to investors prior to demo day when Levine cold-emailed him after seeing Scale on Product Hunt. The Product Hunt spot wasn’t planned, either — Wang was as surprised to see his company there as anyone else. But Levine saw the kernel of something with huge potential, and despite being a relative unknown in VC at the time, didn’t want to let the opportunity pass him, or Wang, by.

Both Wang and Levine were also able to provide some great feedback on decks submitted to our regular Pitch Deck Teardown segment, despite the fact that Levine actually never saw a pitch deck from Wang before investing (more on that later). If you’d like your pitch deck reviewed by experienced founders and investors on a future episode, you can submit your deck here.

Knowing when to bend the rules
As mentioned, Levine and Accel’s initial investment in Scale came from a cold email sent after the company appeared on Product Hunt. Wang said the team had just put out an early version of Scale, and then noticed that it was up on Product Hunt — it was submitted by someone else. The community response was encouraging, and it also led to Levine reaching out via email.

“One of the side effects of that, one of the outcomes, was that we got this cold email from Dan,” he said. “We really knew nothing about Dan until his cold email. So like many great stories that started with a bold, cold email. And we were pretty stressed about it at the time, because in YC, they tell you pretty definitively, ‘Hey, don’t talk to a VC during the batch,’ and we were squarely in the middle of the batch.”

Wang and the team were so nervous that they even considered “ghosting” Dan despite his obvious interest and the prestige of Accel as an investment firm. In the end, they decided to “go rogue” and respond, which led to a meeting at the Accel offices in Palo Alto.

FT : Can CVC pull off a $20bn ‘deal of the century’ at Toshiba?

Can CVC pull off a $20bn ‘deal of the century’ at Toshiba?
Proposed management buyout looks like an improbable win for the Japanese conglomerate’s embattled CEO

When news leaked on Wednesday that Toshiba was examining a $20bn buyout proposal from European private equity giant CVC, it left many stakeholders stunned. Not least, said people close to CVC, some of the firm’s own executives. 

Buying Toshiba, whose chief executive Nobuaki Kurumatani is the former head of CVC’s Japan business, would be the firm’s biggest deal ever, and the largest leveraged buyout in Japan’s history, transforming a market that has slowly warmed to private equity dealmaking but has never had a transaction involving a strategically important household name. 

Toshiba’s internal machinations in the week the offer became public, as well as the sheer scale of the proposition and the reaction from the board, have led people close to the company to interpret it as a sign of a much deeper power struggle within the 146-year-old group. 

“I have no doubt that CVC’s interest is genuine: there isn’t a private equity house that wouldn’t like to do a deal like this,” said one of the company’s large investors. “The real issue is whether we are hearing about it now because there is a civil war within Toshiba and this is being used by one of the sides as a weapon.”


The sources of tension at Toshiba have recently been in the open for all to see. Just one month ago, its management was defeated during an unprecedented shareholder showdown and forced by activists to initiate a potentially embarrassing investigation of alleged misconduct related to last year’s AGM.

Kurumatani was approaching this year’s AGM at high risk of being voted out, and the company’s largest shareholders believe he was already under pressure to resign.

On the face of it, the CVC proposal for a management buyout that would keep Kurumatani in charge and spare him the scrutiny of activist investors looked like an improbable win for the struggling CEO.

By the end of the week, the shares were 11 per cent higher and the foreign funds who invested in 2018 when the shares were around ¥2,600 ($23) could be expected to sell into an offer above ¥5,000.

Kurumatani, who did a stint at CVC after a long career in banking, would be working with old friends. His closest ally on the Toshiba board, Yoshiaki Fujimori, is an executive adviser to CVC.

Hidetaka Kawakita, a corporate governance expert at Kyoto University, said the timing of CVC’s proposal raised questions particularly considering the company’s long fight to keep its shares listed even as it has faced an accounting scandal and near bankruptcy in the past six years.

“At a time when the focus has been on how many opposition votes Mr Kurumatani will get at the next AGM, it wouldn’t be surprising if retail investors think the company has not been managed well if it accepts the [CVC] proposal and ends up being delisted,” Kawakita said. 

CVC and Toshiba declined to comment.

It is not the first time a foreign private equity fund has contemplated a leveraged buyout of Toshiba. According to people close to Toshiba, at least three global firms have submitted non-binding proposals over the past 12 months.

Those approaches have happened, in the words of one private equity executive in Tokyo, because a leveraged buyout of Toshiba would be the deal of the century.

Private equity discovered some years ago that because of the availability of cheap funding and the generally high cash flow of Japanese companies, the returns on deals in Japan were unusually high.


M&A bankers, lawyers and other advisers have long built expectations of a wave of dealmaking, with demand led by private equity groups and helped, in come cases, by geopolitics.

“We are seeing growing outside interest in Japanese technology groups partly as a result of the US-China dispute,” said Kenneth Siegel, head of the M&A team in Japan at law firm Morrison & Foerster. 

Others point to signs of softening of the Japanese government’s attitude to foreign investment, citing recent deals such as Chinese technology group Tencent’s acquisition of a 3.6 per cent in ecommerce giant Rakuten.

Jesper Koll, an adviser at WisdomTree Japan, said that there had been a distinct change since the 2019 departure from Japan’s Ministry of Economy, Trade and Industry of Hiroshige Seko, a minister known for a highly protective attitude to “national treasure” companies like Toshiba.

“With him no longer there, it is possible that private equity firms will think that some barriers have fallen,” said Koll.

But while large asset sales to private equity, like Blackstone’s $2.3bn acquisition of Takeda’s consumer healthcare business, have grown more frequent, a sale of Toshiba to a foreign buyer would bring an exceptionally close level of scrutiny by the Japanese government because it is in the highest category of national security-related business.

Citigroup analyst Kota Ezawa said government clearance would likely include specific conditions such as promises to protect nuclear technology as well as the inclusion of a government-backed fund in the CVC-led consortium. 

“It is important to create and maintain a management structure that will allow operations to continue on a stable basis,” chief cabinet secretary Katsunobu Kato said. 

Within Toshiba, people close to the company say tensions have emerged between Kurumatani and other members of the board following his repeated clashes with activist investors.

In an indication of internal turmoil, Satoshi Tsunakawa, the former CEO, returned to an executive officer position on Wednesday to handle shareholder engagement. Within four days of receiving the CVC proposal, the board’s chair Osamu Nagayama criticised the offer as lacking a “detailed review” of the group’s business.

While the board would carefully study the proposal, he said, it was “completely unsolicited and not initiated by Toshiba by all means”. Scrutinising the financial details would take time, he added.

Another key factor is the valuation of Kioxia, the chip business bought by Bain Capital in 2018 that is still 40 per cent owned by Toshiba.

Having shelved a $3.2bn listing last year because of US-China trade disputes, Kioxia is expected to file for an initial public offering in the coming months. According to people close to the situation, the company is also in discussions to form a three-way alliance with US chipmakers Western Digital and Micron to compete against industry leader SK Hynix, which last year agreed to buy Intel’s NAND memory business for $9bn.

The US-Japan chip tie-up is unlikely to be a full merger, one of the people said, citing the risk of the deal being blocked by Chinese antitrust regulators. Kioxia said there was no change to its IPO plans. Western Digital and Micron declined to comment.


Irrespective of the tie-up, analysts say Kioxia’s valuation will be significantly higher than the $20bn it sought last year, in light of surging chip demand during the pandemic. Depending on Kioxia’s valuation, there is likely to be investor pressure for CVC to increase its offer of ¥5,000 a share. 

Already, some big investors argue that Toshiba, which is now worth $18bn, should be valued as high as $27bn or ¥6,600 per share. Any rival bids could also put pressure on CVC to increase its offer.

If CVC does manage this largest ever deal, it would be out of character for a firm that tends to buy companies worth up to €5bn, typically injecting between €200m and €1bn in equity, according to documents shared with potential investors. In Asia, it generally invests in smaller companies still, focusing on those worth up to $1.5bn.

Nagayama said CVC would “seek financing assistance from certain co-investors and financial institutions”, though it is unclear how much of its own equity it could inject. The firm has $4.3bn in a fund for Asian deals, less than a quarter of Toshiba’s price tag.

It has €21bn in a separate “Europe and the Americas” fund, though it is constrained by legal limits that prevent it from investing more than 12.5 per cent of this fund outside those regions.

Private equity deals of this size often involve several buyout groups and additional money from investors such as pension funds and sovereign wealth funds. However “club deals” of this sort are not typical of CVC.

“To do a massive equity syndication like that, it’s not hugely CVC,” said one person who has advised the group. According to another who has worked with the firm: “CVC doesn’t have a long track record of teaming up with other people.”

WWD : Nike Again Tops Annual Apparel 50 Study From Brand Finance

Nike Again Tops Annual Apparel 50 Study From Brand Finance
Nike maintained its lead despite dropping in value while Gucci ranked second and Louis Vuitton overtook Adidas for the third position.

PARIS — Nike has once again topped Brand Finance’s annual “Apparel 50” report, which ranked the most valuable labels for the seventh year in a row, in a year that saw the value of leading apparel brands decline by 8 percent, according to the firm’s study.
Nike Inc. dropped 13 percent in value to $30.4 billion while Gucci ranked second at $15.6 billion, down 12 percent from last year. Louis Vuitton overtook Adidas for the third position, valued at $14.86 billion.
Brand Finance said it measures brand value as a label’s earnings related to its reputation, through a method that includes reviewing royalty agreements, estimating “brand strength” with figures like market share as well as other market research, and looking at revenues as a proportion of the parent company.

Marking the steepest drop in value, Coach fell 31 percent to $4.7 billion, according to the brand consultancy firm, which noted that owner Tapestry Inc. forecasts a better year ahead because of e-commerce and a rebound across China.
Fila — which counts members of boy band BTS as brand ambassadors — grew the fastest, up 68 percent, and is worth $2.7 billion, according to the study.
Chinese label Bosideng notably joined the rankings, rising 39 percent to a value estimated by the firm at $1.5 billion.
In a category ranking “brand strength,” which measures marketing investment, customer familiarity, staff satisfaction and corporate reputation, Rolex topped the list, followed by Moncler, Gucci, Nike and Hermès.

NY Times : A New Unicorn Takes Shape

A New Unicorn Takes Shape
A richly valued fundraising deal cements Kim Kardashian’s billionaire status.

Kim Kardashian’s billions
Pandemic lockdowns that consigned form-fitting clothing to the back of many closets would seem disastrous to Skims, the start-up that made its name with shapewear. But the brand has helped make Kim Kardashian West, its co-founder, a billionaire, DealBook’s Michael de la Merced reports.

Skims has raised $154 million at a $1.6 billion valuation, Michael is the first to report. The round was led by Thrive Capital, the venture firm that has backed the likes of Warby Parker and Glossier, and it included the existing investor Imaginary Ventures.

The deal cements Ms. Kardashian West’s status as a billionaire, after Forbes anointed her as such this week, based on a far lower valuation for Skims. She will remain the single biggest shareholder after the fundraising round, and with her business partner, Jens Grede, will control a majority stake.

But how will shapewear fare after the pandemic? Skims is betting on renewed interest in going-out clothing, with Mr. Grede expecting a “rebalancing” of sales across the company’s categories (read: an uptick in body-hugging fashions). A well-timed introduction of loungewear helped Skims offset the 30 percent drop in shapewear across the industry last year, according to NPD.

Skims has defined itself by aiming for a younger market and emphasizing inclusivity, offering nine sizes and as many skin-tone shades. It reported $145 million in sales last year, and has sold more than four million units since its founding in late 2019.

Ms. Kardashian West isn’t ruling out a sale down the road, so long as she still has a big role in operations. “I think I’m open to the conversation, for sure,” she said. But “I would never want to give up my process. I would hope that whoever we partner with in a sale one day would believe in that, too.”