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FWIW ...
that red line is used to represent many different types of special whitespace characters that otherwise have no visible means to show up, to help distinguish them from normal whitespace. It is applied by the syntax highlighter.
epub3 requires numeric entities, while epub2 allows either numeric or named entities. As nested named entities became famous for being used to create entity expansions attacks on web servers, numeric entities are now the only type allowed or used except for the small set basic xml recognized enties, gt, lt, etc.
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