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China’s plan for responding to uncertainty is strengthening its market

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Xi Jinping, China’s president, speaks during the United Nations General Assembly on September 22, 2020.

Tiffany Hagler-Geard | Bloomberg | Getty Images

BEIJING — As China’s leaders get ready to release their national development plan for the next five years, some government advisors emphasize the priority is building up China’s domestic strength. 

Chinese authorities have stepped up their efforts to shift the economy from one reliant on exports to one driven by domestic consumption. The country faces the shock of the coronavirus pandemic to global growth this year as well as tensions with the U.S. The U.S. has been China’s top trade partner.

“China’s economy needs to continue to develop. If exports decline (as a result of shrinking global demand), then they will be consumed domestically,” Justin Yifu Lin, a counsellor to China’s top executive body, the State Council, said at a briefing with reporters Tuesday. That’s according to a CNBC translation of his Mandarin-language remarks. 

In the same way, U.S. pressure on Chinese companies such as Huawei mean these businesses must also look more at the Chinese market, Lin said. He is also honorary dean of the National School of Development at Peking University, and formerly the chief economist of the World Bank.

The greater emphasis on the domestic Chinese market is part of a new term — “dual circulation” — that has emerged as leaders deliberate on the next five-year development plan set to kick off in 2021. The economic plan will be the 14th such roadmap for national priorities.

On Monday, state media announced that the Communist Party Central Committee will hold a key meeting in Beijing on the plan from Oct. 26 to 29.

That means the session will end just days before the U.S. presidential election, set for Nov. 3. 

Tensions between China and the U.S. have escalated in the last two years, beginning with trade and spilling over into technology and, to some extent, finance. Many economists predict China will surpass the U.S. as the world’s largest economy in the next several years, when the 14th five-year plan will be in place.

New economic policy terms

The exact definition of “dual circulation” remains vague, but in public discussions it is generally tied to two other terms: “internal circulation” which focuses on boosting China’s domestic market, and “external circulation” which refers to trade with other countries.

Lin and two other government advisors speaking to reporters on Tuesday emphasized how dual circulation and related policies are not a reaction to the shock of short-term factors like the coronavirus, but rather are part of China’s trajectory toward resembling developed countries that rely more on their domestic markets.

Lin said he expects that in the future, China will export more capital and tech-intensive products, versus labor-intensive factory goods, and that the countries which buy these products will benefit more than China.  

The biggest challenge is uncertainty caused by uncontrollable external factors, ranging from natural disasters to protectionism, he said.

China’s response to elevated unknowns

China also faces many challenges at home. The services sector, which the advisors on Tuesday said they expect will account for a greater portion of the economy in the future, remains among the hardest hit by the coronavirus pandemic. 

The Chinese government also made a rare decision not to announce an annual growth target for its economy this year at the National People’s Congress, which was delayed by about two months until May due to the outbreak of Covid-19.

The world’s second-largest economy grew 6.1% in 2019, the slowest pace in nearly three decades. That’s according to official data, whose accuracy is frequently doubted.

On Tuesday, Qiu Baoxing, counsellor of the State Council and a former vice minister of Housing and Urban-Rural Development, cited Nassim Taleb’s books “Black Swan” and “Antifragile” in describing the heightened uncertainty of modern times.

When the world faces more unexpected “black swan” events, China can play an important role in supporting the world, Qiu said, according to a CNBC translation of his Mandarin-language remarks. He pointed to how China’s exports have risen as a result of overseas demand for Chinese medical goods in the wake of the coronavirus pandemic. 

“(Promoting) ‘internal circulation’,” Qiu said, “is for the purpose of building up our own tenacity to respond to the challenges we might encounter.”

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Netflix stock should be avoided if lockdowns lift or a vaccine arrives

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A man watching Netflix on an Apple iPad Pro, taken on March 6, 2020.

Future Publishing | Getty Images

LONDON — Netflix shares should be avoided if there’s a coronavirus vaccine or if lockdowns lift, according to media analyst Alex DeGroote, who owns DeGroote Consulting.

Speaking to CNBC’s “Street Signs Europe” on Tuesday ahead of Netflix’s third-quarter results, DeGroote said: “I would have seen Netflix, frankly, as a stock to avoid, should there be, for example, a vaccine, or should lockdowns ease greatly.”

He added that the stricter lockdown initiatives being rolled out across Europe now “keeps people at home and that keeps them subscribing and less likely to churn.”

Competition in the streaming market has soared in recent months as other companies have launched their own offerings as part of an effort to capitalize on the pandemic. In addition to Amazon Prime, Apple TV, and YouTube Plus, there’s also new platforms like Disney+ and NBCUniversal’s Peacock service.

“The rule of thumb is the average household will take about three subscription services, but at the moment we have potentially up to eight services on offer,” said DeGroote. “There are just too many services for the budgets that most households have.”

DeGroote believes some streaming services may merge or get acquired next year, while others may shut down completely.

“I think probably into next year, things will start to get tough, and that’s when you might see M&A, or you might see some of the bigger operators, frankly pull their streaming services,” he said.

Discounts keep customers subscribed

Netflix recently changed its discounting policy from a one-month free trial in the U.S. and the U.K. to a 50% discount for the first two months.

DeGroote believes this was part of an effort to retain subscribers. “I would expect all the platform companies to be far more creative with their discounting over the next 12 to 18 months, as they try and strike a balance between critical mass, in terms of the subscriber base, and also frankly losing money,” he said.

“The reality is that for most streamers, these businesses are not yet profitable,” DeGroote added. “They won’t be profitable until they have subscriber bases of a certain size, paying a reliable monthly subscription. That’s probably a year down the line.”

Netflix shares have risen by more than 75% since March, which is when the coronavirus pandemic started to spread significantly in the West.

The company’s story has largely been about new subscriber growth but that may no longer be the case.

“In terms of Q3, the company has really quite skilfully guided down expectations,” said DeGroote. “The expectations over net new subs in Q3 are relatively low at about two and a half million so it is more about whether they can beat that number. For what it’s worth, I think they probably will.”

Patrick Armstrong, CIO of Plurimi Investment Managers, told CNBC’s “Squawk Box Europe” Tuesday that technology companies “are going to be winners in this environment.”

Disclosure: Peacock is the streaming service of NBCUniversal, parent company of CNBC.

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Covid likely to become as ‘endemic’ as flu

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Health workers are dressing with protective suits and face maks. The collection of swab samples by medical staff in the drive-in testing center of San Filippo Neri hospital in Roma, Italy on October 19, 2020.

NurPhoto | NurPhoto | Getty Images

LONDON — Covid-19 is likely to become as “endemic” as the annual flu virus, according to the U.K.’s chief scientific advisor.

Some potential vaccines are in late–stage clinical trials, but Patrick Vallance said none is not likely to eradicate the virus.

“The notion of eliminating Covid from anywhere is not right, because it will come back,” he said, noting there had only been one human disease “truly eradicated” thanks to a highly effective vaccine and that was smallpox.

“We can’t be certain, but I think it’s unlikely we will end up with a truly sterilizing vaccine, (that is) something that completely stops infection, and it’s likely this disease will circulate and be endemic, that’s my best assessment,” Vallance told the National Security Strategy Committee in London on Monday.

“Clearly as management becomes better, as you get vaccination which would decrease the chance of infection and the severity of disease … this then starts to look more like annual flu than anything else, and that may be the direction we end up going,” he said.

Biotech companies and academic bodies around the world have joined forces to try to create a vaccine against the coronavirus at breakneck speed given its ferocity. On Monday, the grim milestone of 40 million confirmed coronavirus cases worldwide was reached, and the virus has caused 1.1 million deaths, according to data from Johns Hopkins University.

Historically, creating a vaccine from scratch had taken 10 years on average, Vallance said, and it had never taken under five years.

“We’re now in the extraordinary situation where there are at least eight vaccines which are in quite large clinical studies around the world. … We will know over the next few months whether we have any vaccines that really do protect and how long they protect for,” he said.

He added that a number of vaccines created an immune response and antibody response, but only the Phase 3 clinical trials would prove whether they “actually stop people getting infected.” The safety profile of such vaccines would also become clearer and from then on, a “sensible vaccination strategy” could be looked at, Vallance said.

Vallance concluded he didn’t believe there would be any vaccine available for widespread use in the community until at least spring.

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UBS earnings: q3 2020

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The logo of Swiss banking giant UBS engraved on the wall is seen on its headquarters on May 8, 2019 in Zurich.

Fabrice Coffrini | AFP | Getty Images

LONDON — The world’s largest wealth manager, UBS, reported a net income of $2.1 billion for the third quarter on Tuesday, up 99% from the same period last year.

Analysts had forecast reported net income of $1.5 billion for the quarter, according to data from Refinitiv Eikon. Last year, the bank reported net income of $1.049 billion for the same period.

It comes after the Swiss bank and asset manager posted an 11% drop in profits in the second quarter, as the global banking industry felt the full effect of the coronavirus pandemic.

Tuesday results will be UBS’ last under the leadership of CEO Sergio Ermotti, who is due to leave the bank this month. Ralph Hamers will become the new head on November 1.

This is a breaking news story and is being updated.

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