FT : Hong Kong plans stricter money laundering checks on Chinese officials

Hong Kong plans stricter money laundering checks on Chinese officials
Territory’s banks will have to monitor transactions by politically connected mainlanders

Chinese mainland officials who stash ill-gotten wealth in Hong Kong will face fresh scrutiny over their financial affairs under a planned tightening of money laundering regulations in the territory.

The Hong Kong government has proposed changes to the requirements on financial institutions and advisers that would introduce checks on the bank accounts and transactions of politically connected people from mainland China.

Businesses in Hong Kong currently only need to apply stricter money laundering checks on politically exposed persons (PEPs) “outside of the People’s Republic of China”. But Hong Kong’s Joint Financial Intelligence Unit, the money laundering watchdog, has proposed amending the rules to apply to everyone outside of the territory.

“The amendment will make it crystal clear to banks, lawyers, accountants and others in Hong Kong that the enhanced due diligence requirements that apply to foreign PEPs must also be applied to PEPs from China,” said Alan Linning, a partner at law firm Mayer Brown. “Banks and law firms will have to treat all PEPs from China on their clients’ lists as high-risk customers.”

The Chinese government has long been concerned about illicit capital outflows and has indicated it is keen to curb officials and other individuals using Hong Kong and other jurisdictions to hide their wealth.

President Xi Jinping has said that tackling corruption is a hallmark of his leadership, vowing to catch both “tigers and flies” — meaning senior leaders as well as lower-ranking bureaucrats.

The effort has been extended to monitor Chinese officials in Hong Kong and the territory’s own leaders. Xi recently appointed an anti-corruption tsar to Hong Kong, Shi Kehui, who will scrutinise the affairs of local officials.

The Hong Kong government closed consultations with the financial and legal services industries on the proposed money laundering changes at the end of last month.

The plans will bring the territory in line with recommendations made by the Financial Action Task Force, a global body that co-ordinates policy on dirty money.

In a review of Hong Kong’s money laundering controls in 2019, the FATF criticised the city’s compliance with standards to prevent the risk of breaches by PEPs and ordered it to “close the technical gap” in relation to the rules for PEPs from China.

The changes will make it harder for any individual connected to the Chinese Communist party to move money into or around Hong Kong without checks on their identity, their public functions, associates and close family.

PEPs are considered as presenting a higher risk of potential money laundering breaches because they are exposed to more opportunities to accept bribes or participate in corruption.

FT : The moment of danger for Europe will be when the recovery starts

The moment of danger for Europe will be when the recovery starts
EU leaders can learn from US president Joe Biden and go for bold fiscal support measures

If you look for them, you can find reasons for optimism in the European Commission’s economic forecasts published last week. While Europe is back in recession because of renewed lockdowns, last year turned out better than expected. With improved growth prospects from the end of this year, the EU will recoup its pandemic output losses by mid-2022, earlier than previously thought.

But looking for optimism would be to miss the most important finding in the forecast, which is that the bloc’s economic output will remain significantly below the pre-pandemic trend. Some economies — Spain and Italy — will still not have recovered their end-2019 national income levels by the end of next year.

In other words, Brussels at present expects the EU to suffer economically from the pandemic long after the health threat itself is (hopefully) beaten back and lockdowns are lifted. Political leaders should not allow that to happen. Instead, they must aim to outperform the forecasts with more aggressive policy action than currently foreseen.

That means, above all, to give the recovery as much fiscal support as possible. Governments have by and large done an admirable job of supporting their economies so far. The point of danger will come as growth picks up in earnest from the middle of the year, when vaccination programmes will be sufficiently complete for most restrictions on activity to be lifted.

At that point, governments will rightly phase out the income support packages that have kept businesses and households afloat. The risk is that this will pull too much demand out of the economy and jeopardise the recovery. According to IMF projections, many economies including Germany, Spain and the Netherlands are set for massive structural fiscal tightenings this year.

This may not doom the recovery: pent-up consumption desires and post-pandemic optimism could boost private demand more than enough to offset public-sector retrenchment. But that hope is a shaky basis for policy. The risks that threaten to hold back private demand are too great and numerous.

Among them is the large number of troubled companies whose day of reckoning has been postponed by cheap loans and suspended bankruptcy procedures. Soon enough, corporate debt overhangs and a potential wave of business failures will curtail the private sector’s ability to bounce back.

Another risk is that optimism and confidence fail to materialise. The extraordinary changes that have turned our lives and livelihoods upside down could lead people to save more of their incomes than before out of precaution.

Then there is “hysteresis”: the tendency of the economy’s permanent capacity to shrink if it is not fully utilised for too long. These are different problems that require different policy solutions. But they would all be moderated by forceful fiscal stimulus. That is why it is precisely when income support is phased out that more conventional fiscal stimulus must take its place.

Europe should learn from Joe Biden, who has decided that the risk of doing too little outweighs that of doing too much. Perversely, the US president’s fiscal package has come under friendly fire from luminaries such as Lawrence Summers and Olivier Blanchard, who worry it will overheat the economy.

In fact, overheating is both unlikely and would be a nice problem to have. “Excessive” growth would automatically scale down the proposed fiscal response — some of which takes the form of extended unemployment benefits. And the last few pre-pandemic years proved that sustained high demand pressure, far from causing inflation, could instead reverse the long decline in US labour force participation.

It would be tragic if scepticism in the US strengthened doubts about a punchy fiscal stimulus in Europe, which needs one at least as much. This will not come from the pan-EU recovery package, which is dwarfed in size by national budgets. Brussels expects its “recovery and resilience” money to boost Europe’s economies by up to 2 per cent of gross domestic product, and more in less well-off areas. But the necessary extra boost must come from governments letting loose their greater fiscal firepower.

Removing national inhibitions against more deficit spending could, economically speaking, be the most important contribution EU money makes. The bloc must also without delay extend the suspension of the regular fiscal rules, which are otherwise set to expire at the end of this year.

Americans have the luck to be governed by a president who has learnt the lesson of the previous crisis. Time to show Europeans that this luck can be theirs, too.

>>> Barron’s Weekend Summary

Barron’s Weekend Summary: Barron’s fourth annual list of the 100 Most Sustainable Companies; Dominant vaccine makers face a challenge from upstarts

* Cover Story: Barron’s fourth annual list of the 100 Most Sustainable Companies, created in partnership with Calvert Research, is topped by BBY, A, ECL, ADSK, VOYA, TIF, RHI, VFC, VZ, and ON, five of which are newcomers this year; “Sustainability means many things, but companies usually are judged on a series of environmental, social, and corporate governance metrics, known as ESG, that measure how a company’s managers make decisions and plan for the future in areas beyond profitability”; Calvert looked at more than 230 ESG performance indicators, such as workplace diversity, data security, and greenhouse-gas emissions.

* Tech Trader: Story profiles Ryan Jacobs, portfolio manager of the Jacob Internet Fund, which rose 123 percent last year and is up nearly 40 percent in 2021; Jacobs shuns most megacaps and takes a bottom-up approach to finding growing businesses with strong network effects, creating a portfolio that includes an eclectic mix of microcaps (top holdings: APPS, OPRX, SHSP, Voyager Digital, Z, TWLO, TWTR).

* Trader: A survey carried out by Evercore ISI found that the biggest concern for stocks was higher taxes and regulation, followed by inflation and higher interest rates, though the duration and severity of the pandemic remained a significant focus; Positive on COTY: The pandemic has taken a toll on consumer brands, and the company, well-known for its range of beauty brands, had too much debt, too little growth, and a changing executive suite—but accelerating growth in its fragrances division and a management upgrade bode well for the stock.

* Profile: Janet Rilling is co-manager of the Wells Fargo Core Plus Bond fund, which ranks in the top seven percent of its category for the past year; A hallmark of her strategy is focusing on a six-month investment horizon, with the goal of anticipating market inflection points and tilting allocations accordingly (sector allocations: US Securitized, US Investment Grade, Treasuries/Government Related, US High Yield, Emerging Markets, European Investment Grade, European High Yield, Foreign Currency).

* Interview: Mark Mobius, founder of Mobius Capital Partners, once described as “the Indiana Jones of emerging markets,” sees a strong global economic recovery that should finally help emerging markets outperform after a decade of lagging behind developed markets, says he’s not worried about a US-China decoupling, and thinks central bankers’ fixation on inflation is misguided.

* Features: 1) Positive on GLW: Corning is a one-of-a-kind business, and has no listed US peers, and it serves many of the same end markets as the semiconductor industry, including telecommunications, consumer electronics, mobile phones, and auto manufacturing—though its shares are cheaper than those of chip makers; It is recovering nicely from pandemic-related challenges and investors are starting to take a fresh look at its valuation; 2) Positive on HOLX: The medical-diagnostic company has benefitted from the pandemic but is also set to thrive as things return to normal, since testing is likely to continue, and its success dealing with Covid could lead to growth in its other areas—and for investors, shares look like a bargain waiting to be acquired; 3) Cautious on PFE, MRK, GSK, SNY: As Covid-19 vaccine supplies increase and the market turns private, the dominance of the big four publicly traded vaccine makers could face a challenge from upstarts such as NVAX and MRNA, which don’t yet have large sales forces and can ship doses right to government warehouses without dealing with distribution issues; 4) When buying special purpose acquisition companies, investors are paying for the reputation of the deal sponsor, which can be costly; The $106M SPAK is the only passive, index-tracking fund devoted to SPACs—it currently has 136 holdings, weighted by market value; 5) Story on the history of electric vehicles looks at early examples such as Sebring-Vanguard’s two-seat CitiCar, which in 1974 was so poorly made that it wasn’t allowed on major highways—TSLA’s arrival changed the game and paved the way for a new industry.

* European Trader: Positive on Royal Dutch Shell: The company has largely gotten past a range of problems, and shares now appear undervalued; A portion of increasing profits should go straight to stock owners in the form of increased dividends and stock buybacks, once the company hits its debt target.

* Emerging Markets: Rising US interest rates can be bad news for emerging markets, as capital flees to improving returns in the world’s biggest market—but merging-market assets “are still fairly well behaved because US rates are rising for the right reasons,” says Alejo Czerwonko, chief investment officer for Americas emerging markets at UBS Global Wealth Management.

* Streetwise: For investors who want to get into the cannabis sector, Dan Ahrens of AdvisorShares recommends the “four horsemen of the US industry,” whose shares are all rising: Curaleaf Holdings, Trulieve Cannabis, Green Thumb Industries, and Cresco Labs.

WSJ : Senate Approves Motion to Call Witness in Trump Impeachment Trial

Senate Approves Motion to Call Witness in Trump Impeachment Trial
Democrats want to subpoena GOP Rep. Herrera Beutler to testify about Trump conversation on day of Capitol attack

WASHINGTON—The Senate voted to call witnesses in the impeachment trial of former President Donald Trump, after House Democratic managers said that they wanted to subpoena a Republican lawmaker who has knowledge of a conversation between Mr. Trump and House Minority Leader Kevin McCarthy on the day the angry mob attacked the Capitol.

The request, approved in a 55 to 45 vote, with a handful of Republicans including Sen. Lindsey Graham (R., S.C.) joining all Democrats, scotched expectations that the trial could wrap up Saturday. It came amid new scrutiny of Mr. Trump’s actions as the riot was proceeding, and just as chances appeared to dim of Democrats winning over significantly more Republican votes. Early Saturday morning, Senate Minority Leader Mitch McConnell (R., Ky.) said in a letter to Senate Republicans that he would vote to acquit Mr. Trump.

Rep. Jamie Raskin (D., Md.), the lead impeachment manager, made his surprise request at the start of what had previously been expected to be a day on which both sides would present closing arguments in the impeachment trial of Mr. Trump on charges that he incited a Jan. 6 insurrection at the Capitol.

The request was made after Rep. Jaime Herrera Beutler (R., Wash.), one of 10 House Republicans who voted to impeach Mr. Trump, late Friday described a conversation she had with Mr. McCarthy, who had spoken with Mr. Trump during the riot and urged him to call it off. She said she was told Mr. Trump initially blamed the attack on antifa, referring to the loose network of far-left activists, but Mr. McCarthy told him they were Trump supporters. At that point, Mr. McCarthy told her, Mr. Trump said, “Well, Kevin, I guess these people are more upset about the election than you are.” Spokespeople for Mr. McCarthy didn’t immediately respond to a request for comment.

“We believe we’ve proven our case,” Mr. Raskin said. But he said that the conversation was “an additional critical piece of corroborating evidence, further confirming the charges before you as well as the president’s willful dereliction of duty and desertion of duty.” Mr. Raskin said that he wanted to subpoena both Ms. Herrera Beutler and any contemporaneous notes she made.

One of Mr. Trump’s lawyers opposed the request, saying that House managers had only themselves to blame for failing to conduct a through investigation before Mr. Trump was impeached. “They didn’t put the work in that was necessary to impeach,” said Michael van der Veen, a defense lawyer. “If they want to have witnesses, I’m going to need at least over 100 depositions, not just one.”

Some senators of both parties had said they didn’t need to hear from witnesses, which would require lengthy depositions, prolonging a trial that both Republicans and Democrats have said they want to wrap up.

The call for witnesses came as the trial appeared to be winding down, with just closing statements set to go had no witnesses been called. Mr. McConnell said that he viewed the verdict handed down by senators at the end of the trial as a vote of conscience, according to text reviewed by The Wall Street Journal.

“I have been asked directly by a number of you how I intend to vote, so thought it right to make that known prior to the final vote,” Mr. McConnell wrote. “While a close call, I am persuaded that impeachments are a tool primarily of removal and we therefore lack jurisdiction.” In a vote earlier this week, he and most Republicans had voted that the Senate lacked constitutional authority to move ahead with the trial.

Mr. McConnell had harshly criticized the president’s actions on Jan. 6, saying rioters “were provoked by the president and other powerful people.”

Many Republican and Democratic senators sitting as jurors have said they have largely made up their minds, seen as likely ensuring Mr. Trump’s acquittal in his second impeachment trial and the fourth presidential impeachment trial in American history. In a vote Tuesday on the constitutionality of trying a former president on impeachment charges, only six Republicans sided with the chamber’s 50 Democrats. It would take 67 votes to convict Mr. Trump.

With the outcome not in doubt, the question will be how many Republicans join Democrats in voting to convict. Much of the focus was on Sen. Bill Cassidy (R., La.), who on Friday was photographed studying notes that said “the House managers did not connect the dots” between Mr. Trump’s Jan. 6 speech and his supporters’ attack on the Capitol, resulting in the deaths of five people including a Capitol Police officer. Mr. Cassidy later said that was one of two news releases his staff had prepared—one for each position—and that he still hasn’t made up his mind.

Democrats in their closing are expected to repeat allegations that Mr. Trump primed his angry supporters for weeks by falsely claiming the election had been stolen, and then lighted a match by encouraging a mob to “take back your country” at a protest he set for the day Congress was tallying votes from the Electoral College and certifying President Biden’s victory.

They are expected to repeat that Mr. Trump knew the situation was combustible, and that instead of showing remorse and immediately calling in the National Guard, he said Congress got what it deserved, as reflected by a tweet he posted that night after the attack had been quelled. In the tweet, Mr. Trump said, “These are the things and events that happen when a sacred landslide election victory is so unceremoniously & viciously stripped away.”

Mr. Trump’s lawyers again will try to paint the Democrats as having a double standard on fiery political rhetoric, using it themselves but condemning its use by Republicans. They are also expected to point once more to the quick House impeachment proceedings as evidence that Mr. Trump was denied a fair process, to repeat that the trial was unconstitutional on the grounds that the Constitution is silent on impeachment trials for former presidents and to say the proceedings have divided the country.

Friday’s proceedings ended after a testy question-and-answer period in which Democratic managers and Mr. Trump’s lawyers clashed over whether Mr. Trump knew that Mike Pence had just been ushered out of the chamber when he sent out a tweet at 2:24 p.m. on Jan. 6 criticizing the then-vice president for not having “the courage to do what should have been done.”

Democrats said that Mr. Trump did know and that the tweet points his intention to do Mr. Pence harm. Mr. van der Veen, Mr. Trump’s lawyer, said that the president hadn’t known, and questioned an account from Sen. Tommy Tuberville (R., Ala.), who has told reporters that during the riot he was on the phone with Mr. Trump and told him Mr. Pence had just been escorted from the chamber. Mr. Pence was out by 2:13 p.m., a Wall Street Journal timeline shows.

WSJ : If Tesla Bubble Bursts, Catastrophe Won’t Follow

If Tesla Bubble Bursts, Catastrophe Won’t Follow
Not all bubbles are equal. Britain’s bicycle-stock bubble of the 1890s holds lessons for today’s electric-vehicle mania.

Recent experience and financial lore have created the impression that the bursting of market bubbles brings economic destruction. But it isn’t always so. The excess in today’s story stocks—electric cars, clean power and cannabis in particular—surely poses a threat to the wealth of their shareholders. Even if there is a wider bubble, it might not be a catastrophe for the country.

The experience of the past few decades suggests the opposite. Japan is still scarred by the 1980s property and stock bubble, the dot-com bubble led to massive losses and the subprime crash created a global crisis.


But not all bubbles are equal. The economic dangers of a stock bubble come from people taking on debt to buy shares and from companies overinvesting. When the bubble pops, overextended shareholders have to cut spending or go bankrupt. Companies suddenly faced with investors demanding a return have to lay off workers and slash investment.

None of this is an issue for the obvious bubbles under way in the fashionable stocks of the moment. Tesla TSLA 0.55% is valued so highly it is now the U.S.’s fifth-biggest company by market capitalization. Even if the electric-car maker vanished tomorrow, it would have an insignificant effect on the economy, as Tesla’s operations are tiny. It is mostly equity-financed, so its failure wouldn’t start a domino line of bank failures. And while shareholders would be hurt, there’s no reason to think that would lead to a collapse in spending across the country.

The closest parallel is not the dot-com bubble, for all the similarities, but the British bicycle mania of the 1890s. Bicycles were the electric cars of their day: breakthroughs in tire and gear technology made them into convenient and environmentally friendly transport, albeit still expensive. Investors rushed in and stock promoters spotted the opportunity to float any company with a connection to the industry, mostly in Birmingham. Heavy investment led to further breakthroughs; and, at the peak, bicycle-related patents made up 15% of all the patents issued.

Bicycle stocks were helped by what was then the lowest yield ever on U.K. government bonds, which encouraged further mini-bubbles in Australian mining and breweries.

In their book “Boom and Bust,” academics William Quinn and John Turner from Queen’s University, Belfast, document 671 new bicycle companies, raising £27 million in 1896 alone—equivalent to 1.6% of British gross domestic product that year. By comparison, the fast-growing IPO alternative of SPACs raised about 0.4% of U.S. GDP last year and are running at an annual rate of about 1.3% so far this year.

Half the bicycle companies that joined the market failed by the end of the decade. The speculators who held when the bubble burst were hit by a 71% fall in bicycle stocks from their peak in just 18 months.

The regional economy suffered when the stocks collapsed, but Britain as a whole barely noticed, and the rest of the market wasn’t much affected.

What if today’s excesses aren’t just in the speculative story stocks like Tesla, but across the market? I don’t think Big Tech—including Apple, AAPL 0.18% Amazon, AMZN 0.48% Microsoft MSFT 0.20% and Facebook FB 0.04% —is a bubble, because high valuations can be broadly justified by very low Treasury yields. But if I’m wrong and shares in the highly valued technology and associated sectors did crash, it probably wouldn’t be that bad.

Sure, investors—that’s you and me—would lose money. But with a few exceptions these companies aren’t borrowing or issuing new stock to fund new investments, and their investors aren’t all that leveraged. If Apple’s share price halved, it would make no difference to the underlying business. That is different from the dot-coms, which were forced to slash spending when the market crashed, and they lost the ability to issue expensive new shares.

“The historical lesson is that stock market crashes don’t really cause that much damage,” Mr. Quinn says. “Bubbles funded by banks were the really really destructive ones.”

Black Monday in 1987 is a classic example: harrowing for shareholders, but irrelevant to the economy.

Of course, we shouldn’t be too confident that everything will be fine. So let’s go through the risks.

Unlike past episodes, the Federal Reserve can’t help out so easily now. Rates are already on the floor. After the broader market fell six months after the dot-com bubble burst the Fed rapidly cut rates from 6.5% to 1.75%, and eventually 1%, helping protect the economy from the market decline.

Corporate debt is also exceptionally high. Weaker companies have borrowed to survive the pandemic lockdowns, while stronger companies have borrowed to buy back stock. Lower rates mean debt is more affordable than ever before, but if markets lose confidence it could be harder and more expensive to refinance.

Big falls in stocks can feed through to the economy by making people feel poorer—and so spend less.

Finally, sentiment is vital. Most workers wouldn’t be affected directly by a big fall in stocks, because relatively few people own shares, even after last year’s boom in trading. But with stock prices closely followed in the media and by companies, a crash could create a mood of national gloom, with knock-on effects on corporate and consumer confidence that in turn hit spending.

I’m not too worried about these risks because I think there’s only a relatively small set of bubble stocks, and they can burst without serious damage. If I’m wrong and it turns out there’s a bigger bubble—after all, almost everything is very expensive compared with the past—then I would be more worried. But the economy would probably still be fine, and surely better off than when banks were financing a housing bubble.

FT : Vivendi to spin out Universal Music Group

Vivendi to spin out Universal Music Group
French media conglomerate will own only 20 per cent of its biggest business after the operation

Vivendi plans to spin out Universal Music Group, its biggest business, and distribute 60 per cent of the group’s share capital to its investors by year end as it moves to capitalise on the rising value of music assets.

If approved by shareholders at a vote in late March, the divestment will lead to the world’s biggest music company, which is home to pop stars including Lady Gaga and Kanye West, to be an independent company in which Vivendi would only own a 20 per cent stake.

It would also give the French media group controlled by billionaire Vincent Bolloré more firepower to make acquisitions in other areas such as publishing, television, and communications.

Once Vivendi spins out UMG, its remaining businesses will be much smaller and largely focused on France with pay-TV operator Canal Plus, communication agency Havas, mobile games publisher Gameloft, and book publisher Editis. In 2019, UMG accounted for 45 per cent of Vivendi’s €15.9bn in sales, and 73 per cent of its operating profit of €1.5bn.

Vivendi laid out the plan in a statement on Saturday, and said the board had set a “minimum target of €30bn” of valuation for UMG. Chinese group Tencent had in late January exercised its option to buy a further 10 per cent of UMG at that valuation, taking its total stake to 20 per cent.

“The transaction completed in recent days on that basis . . . as well as interests expressed by other investors at potentially higher prices, have now enabled the management board to consider a distribution of 60 per cent of UMG’s share capital to Vivendi shareholders,” said Vivendi.

Vivendi shareholders would get an “exceptional distribution” in the form of the new UMG shares, which would then be listed in Amsterdam where the company would be incorporated.

The announcement looks likely to end years of speculation over what Bolloré would do with Universal. The billionaire rebuffed an offer from SoftBank for UMG worth €6.5bn back in 2013. After having considered listing UMG on public markets in 2017, Vivendi ruled it out in 2018 and said it would look to sell up to half the company, paving the way for the Tencent deal. 

When smaller rival Warner Music went public last June at an almost $16bn valuation, it showed that public market investors had appetite for music labels. Since then, Warner’s market capitalisation has risen to $19.2bn.

The value of music companies has soared in recent years as streaming services like Spotify revived the industry, reaping billions in royalty payments to music labels. The industry’s “big three” labels — market leader Universal, Sony Music and Warner Music — control nearly 80 per cent of the market, which is forecast to more than double by 2030 to reach $45bn, according to Goldman Sachs. 

In a message to employees, board chairman Yannick Bolloré and Vivendi chief executive Arnaud de Puyfontaine, said the plan would “mark a new phase” for both Vivendi and UMG.

“UMG would be in a position to take advantage of greatly increased financial flexibility to pursue its dynamic growth and its pioneering role in the music and entertainment industry, to the benefit of artists and fans everywhere,” they wrote.