Issue 22- On 5G tussles, Jet Airways, and China's recovery

In today’s Finshots brief, we will discuss

The US’ latest drive against Chinese 5G
The Jet Airways buyout
China’s relatively strong economic recovery

Policy

Turning the 5G tide

China is the undisputed leader in 5G - the wireless technology that promises to download feature films in no time, enable machines to talk to other machines, and make smart cities a reality. Through heavy investments and an early start, the Red Dragon had built a veritable advantage in deploying 5G networks across the globe. Unfortunately, their network coverage was muffled by the United States.

The US started raising concerns about China’s dominance in the sector. They claimed that Chinese manufacturers like Huawei could install hidden backdoors in their telecom equipment, and use it to transfer sensitive data back to the Chinese government. And to be fair, it’s not like their fears were completely unfounded.

The thing is, companies like Huawei and ZTE do have very murky ownership structures, with close ties to the communist government. Then there’s China’s notorious National Intelligence Law, which clearly states that Chinese organisations must “support, co-operate with and collaborate in national intelligence work.” So there’s no doubt that the Chinese government has a pretty uncomfortable grip on these companies. And considering 5G might soon become ubiquitous, it is pretty worrisome.

So the US decided to nip any potential problems in the bud. They banned Huawei and ZTE from selling their equipment in the country, and prohibited US companies from doing business with them. They even called on their allies to do the same leading to a boycott of Chinese companies in Japan, Australia, Vietnam, some parts of Europe, and even India.

But the US is still not satisfied. They won’t rest until other developing countries shun Huawei and ZTE as well. However, convincing certain nations to drop them won’t be easy.

Consider Africa. The market there is extremely price-sensitive, causing carriers to turn to Huawei and ZTE without a second thought. They are also influenced by Chinese financial agencies that offer African carriers cheap loans and flexible repayment periods for using these networks. Consequently, Huawei and ZTE now account for 50-60% of sales there.

But the US is ready for a fight. The US Agency for International Development (USAID) has a plan to convince policymakers and regulators in developing countries why they shouldn’t use telecom equipment from these Chinese giants. They’re prepared to offer these nations loans worth billions of dollars if they choose to buy from democratic countries instead.

USAID has tied up with the Federal Communications Commission for this effort, and wants to communicate two things to developing countries. One, Chinese equipment can be used to spy on them. And two, Chinese financing agencies that offer them cheap loans can very easily ensnare them in a debt trap with the communist government.

Since the US doesn’t have a major 5G equipment maker of its own, they’ll primarily work with international companies like Nokia, Ericsson, and Samsung to finance the deals. As for China, they'll most definitely hit back at these measures. But we will have to see how.

Business

The Salvation of Jet Airways

Over a year after shutting down operations, it looks like the insolvent Jet Airways has finally found a buyer. UK based financial advisory firm Kalrock Capital and private investor Murari Lal Jalan are forming a consortium to buy out the beleaguered carrier. And though this is good news for its investors, the lenders to the company have much to despair about.

You see, over the years, Jet Airways had accumulated debt worth a whopping ₹7460 Crores. This debt eventually became unmanageable, leading to the carrier’s downfall. And now, it’s becoming clear that lenders will be unable to recover all their dues from the entity. They’ll have to take a haircut i.e. accept some money and let go of the rest. So even though financial creditors have made claims of ₹11,344 crores, the consortium has only offered to pay ₹380 crore to them, with another ₹391 crores in the form of non-convertible debentures. And that means, these lenders are facing a haircut of almost 90%! But it’s not like they have a better option. Selling the airline’s existing assets would fetch them an even lower amount.

Besides, a portion of the debt will also be converted into equity, so banks may be able to gain there. However, this equity stake will only become valuable if the new owners are able to turn the company around. And that’ll probably take years, if it happens at all. Considering the condition of the industry right now, it seems like a long shot.

Economy

China Recovers

When the coronavirus first made landfall, China was one of the first countries to shut down most of its economic activity. Its nationwide lockdown, which started in January, lasted till the end of March. By early April, the country was ready to get back to business. Factories raised their shutters, production got back on track, and China resumed its role as the world’s exporter. And since people now needed more things like medical equipment and work-from-home gadgets, China did quite well on that front.

So now, it seems the country is on track for one of the strongest recoveries in the world. In the third quarter of the year, China’s GDP expanded to 4.9% - a far cry from economies in US, Europe, and India, which are facing painful contractions. But this wasn’t the only positive indicator. In September, retail sales ramped up by 3.3% from a year ago, while industrial production increased by 6.9%, and joblessness fell. Disposable income for the third quarter, too, rose by 0.6% compared to last year.

According to the International Monetary Fund, the proportion of worldwide growth coming from China will rise from 26.8% in 2021 to 27.7% in 2025. In fact, the country is virtually the only reason global output by the end of 2021 is set to be 0.6% higher than that in the end of 2019!

What else happened?

IPO Upcoming

Kalyan Jewellers has received SEBI’s approval to go ahead with raising around ₹1,750 crore through an initial public offering. Know more.

Drafting Error

A Reddit user unveiled the wide scope of data collected by Bharti Airtel as per its privacy policy. It enabled the carrier to collect sensitive personal data ranging from users’ ethnicity, race, political opinions, religious beliefs and even their sex life. Airtel responded by saying it was a drafting error. Learn more.

PayTM Credit Cards

PayTM has announced that it will be partnering with various card issuers to introduce co-branded credit cards. It plans to issue two million cards to customers in the next 12-18 months! Read more.

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-Written by Vedika Agarwal and Akshay Tater