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Risk is the price of change – if we are to see the progress promised by the Day After, we must pay for it today by taking the risks necessary to bring that progress about tomorrow. But risk may bring disaster as easily as fortune. For this week’s Day After look, we begin with an examination of another potential debt crisis brewing in northeast China. From there, we pivot to the European carbon markets before holding up a mirror to a potentially dangerous new venture capital trend. To wrap up, we zoom out to look at what 2022 is likely to hold for Africa.

Could China’s North-East be Home to its Next Banking Disaster?

The Economist

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China’s north-eastern region may be “a prime contender to host China’s next banking disaster”. The economic outlook of China’s rustbelt provinces – Heilongjiang, Jilin, and Liaoning – has been so dismal the last several years that people are leaving its cities and migrating south. The Heilongjiang province has lost about 16% of its population in ten years and its “cabbage homes” – low-income housing built by the government to alleviate poverty – have been selling for as low as $3,500 apiece. The “destitution” of the rustbelt provinces has raised concerns about the region’s banks. Bad-debts are the highest and loan-loss provisions are the lowest in the north-east than in any other part of the country. Yields paid on negotiable certificates of deposit (NCDs) issued by most banks decreased in 2021, signalling a decrease in perceived risk, but yields on NCDs increased significantly in three north-eastern provinces. This trend indicates that large banks believe the local governments of the rustbelt may struggle to bail out their financial institutions in the event of a crisis. Half of China’ major bailouts of city commercial banks since 2019 have been based in the north-east region. While regulators are making efforts to prevent a bank crisis by merging troubled banks together, regulation and corporate governance issues abound. The rustbelt’s stressed banks and economic struggles may spell disaster.

Record EU Carbon Price Boosts Clean Fuel Economics

Camilla Hodgson and Neil Hume, Financial Times

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As the price of one ton of carbon dioxide emissions under the EU’s Emissions Trading System (ETS) recently surpassed 90 euros, analysts see the global carbon markets as continuing to accelerate. Even below this price level, incentive structures for polluters begin to shift, with each additional ton of pollutant produced adding new marginal costs. As the cost of dirty projects rises, investment in renewable energy becomes more attractive. Prices below 80 euros/ton already justify carbon capture and sequestration technologies (that is, processes which remove carbon dioxide from the atmosphere and store it in an inert form); prices below the 120 euro mark make investments in hydrogen technology viable. Even as carbon prices rise, a natural gas shortage across Europe has sent the price of gas skyrocketing, pushing many utilities to burn carbon-intensive coal. More emissions means more demand for carbon allowances (i.e. emission permits), pushing the price higher. As prices move upwards, bullish investors purchase call options, and the writers of these options (typically banks) purchase the underlying carbon credits to cover their risk, amplifying the upward price movement. While the fundamentals of the carbon markets are still being determined, many outside forces seem to indicate a bullish case for the new commodity even as it blows past all-time highs.

Capital is Not a Strategy

William H. Janeway, Project Syndicate

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As the loose fiscal policies implemented in the respective aftermaths of the 2008 financial crisis and “Covid crash” of 2020 have decreased real yields on sovereign debt, investors have scurried to higher-risk assets in search of returns. As demand for venture capital has risen, supply has risen to meet it, resulting in the proliferation of “capital-as-a-strategy” startups – firms looking to leverage their access to cheap money to outspend their competition and buy market share in the low-friction Internet marketplace. While such a strategy may be effective to quickly increase turnover or advertising revenue or subscriptions, if the core product offered by a business is not profitable on its own, the business will not survive. While the losses incurred on capital from series A may be bought out later by series B, and B’s losses by series C, the buck must stop somewhere. In addition, with such easy access to capital, entrepreneurs can be pickier with terms – why would a founder give up a controlling stake of their company to Venture Company X when Venture Company Y is willing to write the same check without requiring control? The incentives in such a structure – where the investor holds an asset that is bleeding cash yet in high demand – ultimately encourage exploitative behavior, as demonstrated in the high-profile Theranos scandal. The game is to pass the bag, and you win so long as you’re not the one holding it when the music stops. But the music will stop – growth will decelerate, interest rates will rise, and capital streams will dry up. When this happens, the companies that survive will be those who pursued resilience, focusing on their core competencies to deliver value both to customers and shareholders.

For Africa, 2022 Offers Reasons for Cautious Optimism

Chris Olaoluwa Ogunmodede, World Politics Review

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Africa is gearing up for several elections this year which could very well reshape African politics. Kenya will be electing a successor to President Uhuru Kenyatta, Angolan President Joao Lourenco will seek reelection for a second term, and in Nigeria, presidential candidates will soon be nominated for the February 2023 race to succeed President Muhammadu Buhari. In South Africa, President Cyril Ramaphosa is facing a strained political climate following losses of his African National Congress (ANC) in last year’s local elections, the passing of anti-apartheid icon Archbiship Desmond Tutu, a fire at the national parliamentary complex in Cape Town, and a report investigating allegations of state capture and fraud in the public sector. Several conflict hot spots to watch in 2022 are Libya, South Sudan, the Sahel, Central African Republic, Mozambique, Ethiopia, and Cameroon. The African Union will play a large role in effectively addressing these conflicts and the ineffective governance and violent extremism that has brought them to the forefront. In terms of international affairs, the author of this article believes Europe and the US are unlikely to give African affairs more attention in 2022 due to the urgent priorities at home and abroad. On the other hand, relations with China are expected to continue to be “robust” as Beijing is reportedly planning to appoint a special envoy to the Horn of Africa. 2022 is expected to build on last year’s achievements of African creative talents in literature, music, artistry, and even business. In 2021, African tech startups raised nearly $5 billion, which is double the sum of 2020s investment and nine times that of 2017, demonstrating impressive growth. Finally, 2022 will undoubtedly be a big year for African sports. Despite the ongoing civil conflicts and domestic strife of several participating countries, the Africa Cup of Nations kicked off last weekend and many African athletes are getting ready for the Beijing Winter Olympics next month. Other major sporting events to look forward to this year are the African Youth Games, African Championships in Athletics, African Women Cup of Nations, and the FIFA World Cup which five yet-to-be-determined African nations will participate in.