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GBP/USD – British Pound Unchanged after Carney Testimony

The British pound is showing little movement in the Tuesday session. In North American trade, GBP/USD is trading at 1.3427, unchanged on the day. On the release front, Britain posted a deficit of GBP 6.2 billion, below the estimate of 7.2 billion. This marked the first deficit after a string of three straight surpluses. British CBI Industrial Order Expectations disappointed with a reading of -3, missing the estimate of 2 points. This was the first decline since October. In the US, the Richmond Manufacturing Index jumped to 16, well above the estimate of 9 points. On Wednesday, the UK releases a host of inflation indicators, led by CPI. The Federal Reserve will release the minutes of its May policy meeting.

Bank of England Governor Mark Carney testified earlier on Tuesday before a parliamentary committee, but his remarks have had little impact on the British pound. Carney acknowledged that growth in the first quarter was weak, blaming “temporary and idiosyncratic factors”, such as massive snowstorms which hampered economic growth. The BoE has forecast growth in Q1 of just 0.4%. As for monetary policy, Carney was subtle, saying that “interest rates are more likely to go up than not, but at a gentle rate”. The bank balked at a rate hike earlier in May, due to weakening inflation and a spate of soft economic data. BoE policymakers are unlikely to raise rates before August at the earliest.

After weeks of an escalating trade war between the US and China, there was a breakthrough of sorts on Sunday. The US dollar has posted gains after Treasury Secretary Steven Mnuchin announced that the two sides had made significant progress and the trade war was being ‘put on hold’. Just last week, the White House sounded pessimistic about a deal being reached with China. The two economic giants have imposed stiff tariffs on one another in recent weeks, worth billions in trade. These moves had raised fears of a bilateral trade war between the two largest economies in the world. The respite in tariffs means that the US can sit down with the Chinese and discuss the US trade deficit with China, which President Trump has long complained is a result of a non-level playing field with China. In addition to the trade deficit, the US wants to discuss technology transfers and cyber theft.

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ZTE tests China’s commitment to international law

ZTE, a Chinese technology firm, has been hit with US sanctions that threaten to cripple the company. Two lessons can be drawn from this experience. First, that companies disregard US laws at their peril. Second, that a global supply chain is inherently risky and every effort should be made to promote nationally developed technology. It looks as though China will focus on the second. That is the wrong approach.

ZTE is China’s second-largest manufacturer of telecommunications equipment, with a stock market value of $20 billion before its recent troubles. About 60 percent of its revenue comes from network business and 32 percent from consumer business. It is the fourth-largest seller of smartphones in the United States.

In Japan, it has partnered with Softbank and NTT Docomo, seeking to claim a 10 percent share of the SIM market. The company has about 200 employees in Japan, some of whom work at a Tokyo research and development center that is focused on 5G and other next-generation network technologies that Japan will roll out for the 2020 Summer Olympic Games in Tokyo. Reportedly, those facilities are too small and the company is planning to expand to accommodate between 500 to 600 engineers.

Those plans may now be on hold. Last year, the US Commerce Department wrapped up a two-year investigation of ZTE by concluding that it had violated US law by illegally shipping telecommunications equipment to Iran and North Korea. The company was charged with — and subsequently admitted to — violating US sanctions to obtain “hundreds of millions of dollars in contracts” with Iranian enterprises, including the government, from 2010 to 2016.

As a result, the US imposed a combined civil and criminal penalty and forfeiture of $1.19 billion on the company, the largest penalty ever levied in an export control case. In addition, ZTE agreed to a seven-year suspended denial of export privileges, which could come into effect if any aspect of the agreement was not met or if the company committed additional violations.

ZTE also said it would fire four senior employees and punish dozens of others who were involved. Earlier this month, it was discovered that ZTE had misled the US Commerce Department by making false statements, obstructing justice and “affirmatively misleading” the government in regard to those punishments. ZTE had dismissed the four senior employees as promised, but had not disciplined 35 others by either reducing their bonuses or reprimanding them.

US Commerce Secretary Wilbur Ross was blunt: “ZTE misled the Department of Commerce. Instead of reprimanding ZTE staff and senior management, ZTE rewarded them. This egregious behavior cannot be ignored.”

This breach triggered the seven-year ban, along with a ruling that prohibits US companies from selling to ZTE for the same period of time. That, some analysts have concluded, could put the company out of business, since it is estimated that as much as 30 percent of the components in ZTE equipment originates in the U.S. Not only companies but financial institutions — in and out of the US — are going to consider ZTE to be radioactive and avoid doing business with the firm.

The US penalty is not ZTE’s only problem. Also this month, the head of Britain’s national cyber security center sent a letter to that country’s telecommunications organisations warning that “the national security risks arising from the use of ZTE equipment or services within the context of the existing UK telecommunications infrastructure cannot be mitigated.” Other governments should be similarly concerned.

ZTE called the US decision “unacceptable” and has sought to provide additional information to modify the US Commerce Department ruling.

The Chinese government also criticised US penalties against its companies, saying that it will protect the interests of Chinese firms and urged Washington to deal with the issue in accordance with the law.

That is the issue. ZTE agreed to accept a penalty and then lied about its implementation. Beijing should be worried that its companies disregard not only the law, but their promises to national legal authorities. Beijing agreed to sanctions against Iran and North Korea and ZTE’s actions undercut them. Beijing should have been pressing the company to comply with the trade restrictions, rather than outsourcing enforcement of its international obligations to Washington. This is a worrying indicator of Beijing’s thinking about the rule of law and how it will promote international peace and security.

China’s seeming indifference to those obligations is troubling, but more disturbing is the conclusion that the best course of action is to develop a high-tech industry that would make the country’s technology independent. China has plans to develop a national semiconductor industry to reduce foreign vulnerability. This is part of a larger plan to not only develop Chinese national champions across a range of cutting-edge technologies, but to insulate its economy from foreign pressure.

That is worrisome for many reasons, not least being the balkanisation of national communications markets, with competing standards and reduced interoperability. For Japanese companies whose supply chains span the Asia-Pacific, the prospect is harrowing.

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China could target broad range of US businesses if trade spat worsens

China could target a broad range of U.S. businesses from agriculture to aircraft, autos, semiconductors and even services if the trade conflict with the United States escalates, the China Daily newspaper said in an editorial on Thursday.

Trade tension has been growing between the world’s top two economies after U.S. President Donald Trump last Friday moved to impose up to $60 billion in tariffs on some Chinese imports, promoting warnings from Beijing it will retaliate with duties of up to $3 billion of U.S. imports even as it urged Washington to “pull back from the brink.”

On Wednesday, Trump’s top trade envoy said he would give China a 60-day window before tariffs on Chinese goods take effect, but added that it would take years to bring the two countries’ trading relationship “to a good place.”

The China Daily on Thursday quoted Chinese Premier Li Keqiang as telling a U.S. Congressional delegation this week that China was open to dialogue but “fully prepared with countermeasures”.

It warned that if the conflict continued to escalate “China could consider taking reciprocal measures against U.S. imports of agricultural products besides soybeans, as well as aircraft, automobiles and semiconductors.”

“And should the Trump administration further obstruct Chinese investments in the U.S., even tougher measures such as restrictions on imports of U.S. services and similar investment reviews would likely be on the table,” it said.

Separately, Hong Kong’s South China Morning Post reported on Thursday that U.S. and Chinese officials had been holding talks to shield American soybeans and other agricultural products from trade sanctions.

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Crypto BANNED? Is cryptocurrency legal in India?

Bitcoin and other cryptocurrencies are facing a crackdown from governments around the world, including India and China, in a bid to tighten up regulations and protect consumers. But are cryptocurrencies legal in India?

Since the start of 2018, Bitcoin has suffered a massive price crash after its stratospheric growth last year sparked concern among central bankers.

International Monetary Fund (IMF) chief Christine Lagarde is the latest economic chief to wade into the argument, saying cryptocurrency regulation is “inevitable”.

And bitcoin’s price fall – slumping more than 55 percent since its December high of $19,982 – has been partly blamed on countries that are beginning to introduce cryptocurrency regulations.

Some of the most outspoken countries are India, South Korea and China.

Is the cryptocurrency legal in India?

Bitcoin and other cryptocurrencies have a complicated relationship in India because although they are not technically banned, they are not considered to be legal tender by financial institutions.

This was outlined by Finance Minister Arun Jaitley during a budget speech on February 1.

Mr Jaitley said: “The government does not consider cryptocurrencies as legal tender or coin and will take all measures to eliminate the use of these crypto assets in financing illegitimate activities.”

Last August he told the Indian Parliament that the government had no authority to regulate cryptocurrencies.

Bitcoin trading is hugely popular among Indians and has surged in recent months across the country.

According to one estimate by bitcoin platform Unocoin, its website saw a steep rise in users towards the end of last year.

Company founder Sathvik Vishwanth told the Financial Times in January: “Early last year we were gaining about 10,000 new users each month.

“In December it was about 7,000 to 8,000 each day.”

Is cryptocurrency legislation on its way in India?

While India is not outlawing cryptocurrency just yet, it does seem to be making things very difficult for investors.

In recent days, India’s Income Tax Department announced it had issued notices to 100,000 cryptocurrency investors suspected of concealing profits.

Sushil Chandra, chairman of the Central Board of Direct Taxes, said: “We found out that there is no clarity on investments made by many people, which means that they have not declared it properly,”

“People who have made investments in cryptocurrency and have not paid tax on the profit earned by investing, we are sending them notices as we feel that it is all taxable.”

On Saturday, the Securities and Exchange Board of India chairman Ajay Tyagi said regulations on cryptocurrencies was being finalised, along with the individual roles of regulators, according to the New Indian Express newspaper.

No further information was given but investors will now be nervously waiting to hear what happens in the coming days and weeks ahead.

How one small company’s first Chinese order offers inspiration for Brexit

Gary Stevens has bought his first robot. It grinds and polishes brass switches twice as fast as human workers, and more consistently too.

The machine is not replacing people – he is hiring more of them as well, because he has just landed his first order from China and needs to ramp up production.

Companies building upmarket apartments and smart hotels in the world’s second-largest economy want to show off the finest interiors, and that includes the high-end light switches and electrical fittings designed and manufactured in Hastings by Focus SB, where Stevens works.

“We had to design a range from scratch, which is quite an investment. But the reason we did it is because China is a huge market,” he says.

More than 400 hotels are being built in the country, he says, including the MGM Cotai in Macau, an award-winning casino project which is using Focus SB fittings in its ultra-high luxury suites.

Exporting to China is not simple – the firm had to host inspectors from the country to check they met local standards. But now it has the seal of approval, the potential market is open to the company.

Now the biggest challenge is increasing production quickly enough to meet the new demand. Stevens hired five more workers and took on one new site this year, taking his total to more than 60 workers in three locations across the coastal town.

Another five staff will come on board in 2018. Its turnover of £4.5m a year should double over the next three years on the company’s forecasts, which it believes are relatively conservative. This is a big step. More than 90pc of its output historically has gone to the UK market.

Exporting to Europe has always been difficult as different countries have different standards across the EU. A few overseas markets such as UAE and Hong Kong use UK standards for historical reasons and so buy some of the supply.

But, despite this lack of EU sales, it was Brexit that prompted Focus SB to make this difficult new drive into China. “It was sparked off by the spectre of the Brexit vote. Although it wouldn’t directly impact us, we were fearful that the UK construction industry could be affected by Brexit in terms of access to labour,” Stevens says.

“If the UK construction industry slows down, then the market we predominantly supply into becomes more difficult. So that started the whole process.”

This East Sussex success story is a microcosm of the challenges facing the wider British economy. Businesses have spent the past 40 years growing in the knowledge that the UK is part of the EU, and now that is coming to an end on uncertain terms.

Initially, analysts and economists focused on the sectors that would be most badly affected by Brexit, analysing the depth of that impact depending on the type of deal negotiated and implemented over the coming years.

Just this month, Standard and Poor’s, the credit ratings agency, published a report looking at 16 industries and identifying the top three Brexit risks for each sector. Of those 48 risks, just one was positive – that a weaker pound would boost the leisure and hotels industry.

Growth opportunities are gaining more attention as companies seek ways to expand even as the political and regulatory ground beneath them threatens to shift. Financial services is one sector that is typically cited as a big potential loser from Brexit.

Banks, insurers, fund managers and others have come to rely on flows of business, people and capital across borders in the EU. The state of play afterwards is not yet clear and so firms are starting to implement plans to move staff to other EU cities including Dublin, Frankfurt and Paris.

Yet companies are adjusting their plans in a reminder that financial firms have always been flexible, adapting to the environment around them. It is what helped make Britain the world’s pre-eminent financial centre, and the giants of the City do not expect to simply skip the country the moment things change.

Take the London Stock Exchange as an example. It had 106 flotations in 2017, the highest since 2014. That does not give the impression of a firm struggling with Brexit, nor does it look like investors want to leave the UK.

Nikhil Rathi, the LSE’s UK chief executive, says the group is targeting a global audience, noting that British financiers have always adapted to the economic and political environment. His recent travels include India, China and Indonesia, winning business to make sure funds are raised in rupee, renminbi and rupiah in London.

“A big question for us is how to integrate the global emerging markets that are going to be the major source of capital flow and capital stock for the next 30 to 40 years,” Rathi says. “We have always been a global market. We have been building our business in China for years, but the noise around the UK and Brexit certainly means we are even more determined to continue to develop our global footprint.”

He does not expect to lose out even in European business post-Brexit, as investors from across the Channel still need to access Britain’s markets. EU firms need that capital too.

“Why would a European investor who thinks they can make money by investing in the UK market not do that? These are global investors who may also invest in the US, Hong Kong and other global markets as well,” he adds. “You need British, European, American, Asian, Middle Eastern capital – you look at the UK and European economies, the ageing populations, huge investment needs for infrastructure, where is that going to come from? I cannot see a situation where it would make sense for investors who can see attractive opportunities to somehow prevent their capital from flowing to take advantage of those opportunities.”

It is working. Recent listings in London include firms from Ireland, Cyprus and Austria. Beyond the EU, Israeli companies, in particular, appear increasingly keen on the British market – the number setting up in the UK rose by 28pc in 2017, according to think-tank BICOM, and 28 Israeli firms are now listed on the LSE with a market value of £11.5bn.

Certain domestic sectors other than finance are also performing strongly, particularly when serving global growth markets. “We are bullish on the UK aerospace sector,” says Jeremy Leonard at Oxford Economics. “Global demand for air travel is strong. Most of the demand is coming from Asia.”

As a high-value sector requiring specialised skills and kit and benefiting from economies of scale, it is hard to shift overseas too. Leonard anticipates growth of 2pc to 3pc per year over the next five years, which is twice as fast as the wider manufacturing sector. He also cites the creative services sectors as a crucial advantage for Britain, including advertising and marketing, as well as legal and accounting services.

As emerging markets become more advanced, businesses are demanding more of these specialised services. As Britain is a leader, companies here are among the best placed to make the most of this global growth. PwC’s Darren Jukes agrees, adding that services are often “borderagnostic”. He also believes the UK could have an edge in the latest hi-tech sectors where no rival country has yet built a lead.

“The government announced its industrial strategy and the sector deals that are looking to drive investment in artificial intelligence. If you’ve got organisations that can benefit from the use of those applications then potentially the next few years could see growth in opportunities,” he says.

It could even cover the automotive sector, which is largely worried that Brexit will ruin its supply chains by adding tariffs to cross-border trade. “The opportunity lies in organisations that are more focused on the emerging technologies in automotive, whether that is around connectivity, electrification, those types of applications,” Jukes says.

For anyone seeking advice on how to go global, Stevens has a happy story to tell about Chinese buyers. “They look at Britain as a flagship in terms of quality, and they seem to be very British-brand hungry.” he says. “I’m sure there are many opportunities for British manufacturers similar to us in different fields to take advantage of that.”