Nov 5 Asia mixed. FT 'Yukos' moment in China China Pension problems and AI risks to US/China

05 Nov

This and previous notes can be found at Substack ( Asian Market Sense )
Check out  for your research needs  
Free Mifid compliant Webinar with Russell Napier today Friday
Topic: 'Why The Growing Deflationary Risk From China Sets The Scene for Higher Global Inflation'
Session 1 :  9am London 4pm HKT Click to register
Session 2: 3pm London 10am EST Click to register

The President of China, in pursuit of common prosperity, is attempting to re-orientate his financial system to redistribute wealth. This re-distribution will be largely effected through redirecting the credit of the state-run financial system.
This shift comes at a time when China is already running too tight a monetary policy and with a large residential property market overhang. These are the ingredients to push the cost of credit higher, the price of property lower and raise questions as to the solvency of the private sector credit system.
The Solid Ground has long accepted such a disinflationary/ deflationary outcome for China even as the developed world shifted decisively to inflationary policies in early 2020.
So how do the deflationary forces emanating from China interact with the policy of monetary largesse in the developed world? Is there one last deflationary shock to come? How should investors position for the major structural transition already underway in China?

Market to opened higher and testing 7,460 in early trades and then worked higher but resistance approaching 7,480 level and failed to break above and then drifted lower to close; +29pts (+0.4%) @ 7,457.  Energy sector closed in the red after the OPEC decision other sectors were positive; Gold Miners helped by the BoE rate decision.  Re-opening names in focus. Energy names -VE as OPEC+ maintains production levels.
Westpac Ex Div today. News Corp +7% on good results and buyback. REA Group +8% after results. Lin Admin +8.5% off earlier highs after Carlyle increased its offer. Afterpay -5.5% after poor results from Square.
Data out
Services Index Oct 47.6 vs 45.7 Sept (F/cast was 52)
Pre market Household Spending beat estimates and overnight Tech was positive. Reaction to Earnings moving some stocks  Repositioning  regarding bond yields follow the BoE leaving rates unchanged.  Also caution ahead of US jobs numbers and China Trade data on Sunday; prompting some locking in of gains
Nikkei opened slightly higher but trended lower but found support around 29,600 level andclosed there at lunch.  PM market dipped lower and tested 29,500 before working higher currently -190pts (-0.6%) @ 29,604
Topix opened lower but followed a similar pattern. PM low was 2,033 and currently -17pts (-0.8%) @ 2,039
Leaders Metal Products, Miners, Rubber and Retail
Laggards Shippers, Iron/Steel, Warehouses.
Household Spending Sept -1.9% YoY vs -3% Aug (F/cast was -4%)
Household Spending Sept +5% MoM vs -3.9% Aug (F/cast was +2.5%)
due Monday
BoJ Summary of options, Foreign Exchange Reserves, Leading Economic Index and Coincident Index
S Korea 
Local Institutions broad sellers, Foreigners sidelined and Retail quiet.
Steel weak, Financials weak following bond weakness after the BoE rate decision (Kakao Bank -3.5%). Apparel stocks +VE. Auto flat but seeing interest.
Kospi opened higher at 3,003 but trended lower to find support around 2,960 level after the first hour and then traded sideways around there; currently -19pts (-0.7%) @ 2,964
Kosdaq opened 1,006 but trended lower to test 995 in the first hour but then rebounded back into the green and traded around yesterday’s closing level. Currently -0.6pt (flat) @ 1,001
Data out
Current Account Sept $10.07b vs 7.51b Aug (F/cast was 8b)
Taiex opened higher rallied to 17,180 in early trades and then eased back before working better through the day to close at the day high +219pts (+1.3%) @ 17,297 Tech in focus with strong buying of TSMC following the QualComm numbers.
CSI 300 opened lower; concerns over Kaisa/Chinese developers and bond market. Also President Xi’s comments about ending/reducing subsidues to SOE’s and digital companies (connected to application to CPATPP to which Taiwan has also applied). CSI 300 dipped to 4,850 before rebounding strongly to 4,890 but failed to hold and eased back to 4,877 at lunch. PM has trended lower, currently -4pts (0.1%) @ 4,865
Cement weak as producers slash prices as inventories rise but demand reduces. EV/Battery weak after the SES on Thursday unveiled the world’s largest lithium-metal battery that is big enough to power an electric vehicle that supports quick charging. The +VE news was that Saudi Arabia’s Soveign wealth fund might invest more in Chinese companies.
Hong Kong
Pre market opened @ 24,951 +275pts vs -250pts ADR’s but dropped lower after Kaisa Group and Units suspended without reason (PM announced to sell 18 projects in Shenzhen to ease cashflow issues). Market sold down to 24,800 before finding some support and rebounding to the opening level and then tested to 25,050 but saw resistance and traded sideways into lunch. PM seeing the market trend lower with caution ahead of the China Data on Sunday. HSBC and Standard Chartered sold off as BoE failed to raise rates and ECommerce remains weak. HK developers slight +VE from BoE move and Henderson +VE on winning harbour site. Retail still +VE on re-opening hopes. Macau names also +VE.
Expect markets to see a cautious open ahead of US jobs data and mixed reaction in Asia.  Tech should see interest.
Data due
Eurozone Construction PMI, Retail Sales
Germany Industrial Production, Construction PMI
France Industrial Production, Private Non Farm Payrolls, Construction PMI, Retail Sales
UK Halifax House Price Index, Mortgage Rate.
US Futures
Opened Dow -8pts, S&P and NDX flat but have eased back to -24pts but S&P and NDX still flat.
Data due 
Total Vehicle Sales, LMI Logistics Managers Index Current, Non Farm Payrolls, Unemployment Rate, Government Payrolls, Non Farm Payrolls, Average Hourly Earnings, Average Weekly Hours, Manufacturing Payrolls, Participation Rate, Average Hourly Earnings, Baker Hughes Oil Rig Data and Consumer Credit Charge.
Earnings: DraftKings, AMC Networks, Canopy Growth, Gannett, Johnson Controls, Sempra Energy, Groupon, Elanco Animal Health, Goodyear Tire, Cinemark, Embraer, Berkshire Hathaway.

Nikkei Asia  China’s pension reserves have fallen below a key government threshold in a majority of provinces ( Nikkei Asia )
Warns about the worsening pension situation; which has been exacerbated by Covid and the government waiving contributions from from SME’s. It suggests that China may have to raise contributions or the retirement date but with the push to common prosperity that it unlikely to be received well (as it wasn’t in Russia). The other alternative could be to pressure some profitable companies to make ‘donations’. But it is just another pressure on President Xi as he seeks to justify being given another 5 year term as President.

FT Front Page
Ethiopia rebels gain ground
  A reminder of the conflict taking place

Climate goals at risk after US and China shun coal pact, IEA warns
• Setback for COP26 • Hope of hitting Paris target ‘close to zero’ • More time for poor nations.
Highlights the fact that until we have a clear alternative cheap energy source big users of coal and not going give up using it. +VE for the coal producers but not good for the world in terms of emissions unless technology can find a way of cleaning up the way coal is burnt. Whilst it is true that modern power stations are more efficient there is still a long way to go.
Countries that did not sign China, India, Australia and US. Indonesia another large producer only signed parts.

Bank of England unnerves investors by holding back from interest rate rise
Defying widely held expectations, the BoE kept rates unchanged and left a lot of institutions wrongly positioned.  Sterling fell and UK gilt yields sank.  The move surprised considering the inflation forecast they issued.  But they did say rates would need to rise in the coming months.  They are still trying to balance wage inflation and jobs.  It would appear that they would prefer to see the facts rather than reacting the rumours and fears.

Opec risks hindering economic recovery, says White House
It says it will use all its tools to lower fuel prices. The question being asked is whether they really would open the strategic reserves; having said that was one of the tools available.
It notes that OPEC made reference to rising coal and gas prices and the fact that the US had not sought to address those sectors. The key difference being they do not have a representative trade group that can be lobbied.
The article also raises the point of the poor relations between Biden and Crown Prince Mohammed bin Salman. It concludes by saying ‘Prince Abdulaziz, the energy minister, is the half brother of the crown prince and is seen as frustrated by the push by western countries to cut their reliance on fossil fuels while also asking the kingdom to raise oil production.’
That is a question that the west should ask itself.

Powell urges patient approach to rate rises
Dovish central bank turns focus to a gradual easing of its massive stimulus programme
Looks at the comments and actions from the FOMC. Makes the point that Powell’s comments underline the fact that the committee is not on autopilot and remains data dependent.

US and China must heed Kissinger’s stark warnings over AI
Read this article. It notes that ‘Instead of negotiating threat reduction, as the US and USSR did after the 1962 Cuban missile crisis, America and China are steadily becoming more ignorant of each other’s capabilities and intentions — the opposite to how the first cold war evolved. “The [US-China] relationship has moved from partnership, to co-operation, to uncertainty to near or actual confrontation,” said Kissinger in an interview with the Financial Times. “In the absence of dialogue, to expect that wise decisions will be made on all sides is an act of faith in the future that I don’t accept.”’
It’s key point is that we don’t where China is in terms of AI and more importantly we don’t what the implications of them being ahead might mean. With nuclear warheads it is possible to work out the potential damage and hence implication. With AI we don’t know. Does it give them a greater ability to undermine operating and defence systems? It plays both ways; is the US ahead and what does that imply?
Well worth a read.

K-pop label joins crypto group to sell digital tokens
An interesting read about how the music business is trying to use the block-chain to protect their interests and copyright. But its more than NFT its also looking at the wider opportunities like web cartoons and novels which would be released via Naver Webtoon’s platform and a game.
An interesting read, whilst not hugely scalable it will be highly repeatable with each new successful band!

EMs miss out on 2021 rally enjoyed by developed world
MSCI’s emerging nation gauge trails by biggest margin since ‘taper tantrum’ eight years ago.
Based on the premise that when key central banks start raising rates there will a flow of money leaving; although yesterday’s move by the BoE may have put that in abeyance. However rising fuel costs and a slowing Chinese economy are likely to have a negative impact too.

Amundi hit by €16bn outflows from joint venture with Chinese bank ‘underlined the risks to asset managers doing business in the country and stifled gains from buoyant financial markets.’  From its JV with Agricultural Bank of China ; who ‘decided to reallocate the money away from the joint venture and run it internally, he added, reflecting how banks in China had been encouraged to finance more of the national economy and “reinternalise” their proprietary assets and cash flow.’
The key is probably that the Chinese banks initially lacked the skills and infrastructure but they learn very quickly and as soon as they can look to do it themselves.

China miners to cut coal prices amid power crunch 
‘Chinese authorities have said the country’s coal miners pledged to sell at a discount after Beijing intervened in the energy markets to ease a domestic power crunch.’
The ability of the government to influence prices is a key risk for investors; going forward under ‘common prosperity’ the government is likely to have a greater influence on levels of profitable and investors will need a better understanding of the government policies and tolerances.
In some sectors China’s actions will also impact the global markets too, so a watchful eye on China will be necessary.

Markets Insight
A ‘Yukos moment’ in China can’t be totally ruled out  By Mohamed El-Erian.  
A “Yukos moment” is what happened almost 20 years ago when the Russian market reel in shock from the government seizure of the oil company before a rebound. In China’s case it’s the clamp down of previous policies that gave companies a wide freedom in how they operated.
‘The resulting repricing of Chinese financial assets has gone through three stages: an initial sharp drop in the valuation of the targeted sector, then a more generalised repricing on concerns of spreading government intervention and, most recently, a modest yet notable relief rally as the interventions suddenly stopped. That upturn has also been spurred by the avoidance so far of a financial catastrophe triggered by the woes of property developer Evergrande.’ (and you can now add Kaisa).
He notes that some see this as an opportunity for others it is the calm before the storm.
Which investors choose requires a difficult political assessment. Some think the intervention is complete, others that is just beginning ‘part of a bigger realignment of the Chinese economic and financial system fuelled by both internal and external considerations.
Internally, it is about reasserting the authority of the state and restraining the power of the super-rich, both as a standalone objective and as part of the common prosperity drive.
Externally, it is about a generally less accommodating geopolitical operating environment, particularly as President Joe Biden shows little interest in deviating from the more forceful posture towards Beijing.’
He feels unable to decide which moment it is but concludes ‘This does not mean abandoning Chinese investments altogether. But since we do not know if, when and how the next Chinese Yukos may be targeted, it calls for very cautious sizing, extremely careful company selection and constant geopolitical reassessments.’
That I agree with but that should always be case when investing in China

LEX Nintendo: Mario jump  Looks at the results and concludes ‘Console gaming remains a resilient market. Nintendo now needs to build up its live services and mobile games offerings, which account for just 4 per cent of its total sales. This would give it additional income when chip supplies are healthy and a hedge when they are constrained.’  Which makes a lot of sense.

For interest
Wind power gains force in oil-rich Gulf of Mexico
Range of offshore skills gives Texas and Louisiana an edge, but political barriers remain.
An interesting read about alternative energy options

Microsoft and Meta compete to pull workers deep inside the digital office
Control of the metaverse is up for grabs but many people are fed up with virtual encounters

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