Aug 25 Asia gives up initial gains FT China's school dilemnia, China Courts, Japan /Taiwan talks

25 Aug

This and previous notes can be found at Substack ( Asian Market Sense )
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Bloomberg reports that US Wall Street veterans and Chinese Govt executives seeking to meet to try and de-escalate the trade tensions; working out side the Biden administration. Sligth +VE but unlikely to reverse the morning trend with concerns about Chinese policy and Jackson Hole.

Market opened higher and rallied to 7,542 in the first hour, talk of shorts being squeezed but then trended lower before finding support at 7,510 and then worked slightly higher Currently +14pts (+0.2%) @ 7,517.
IT leading the market. Iron ore prices rose +VE Rio Tinto, Fortescue Metals, Mineral Resources, and BHP. Oil names also +VE. Earning in focus; Afterpay -1.2% earnings fell on higher marketing costs and investment, as it ramps up its global expansion and push ahead with Square merger. Telcos weak.
Data : Construction Work Done Q2 +0.8% QoQ vs +2.4% Q1 (F/cast was +2.5%)
Nikkei opened higher at 27,768 and ralliied to test 27,900 in early trades the morning high was 27,898 but then eased back and traded 27,808/38 for the rest of the morning before selling down to 27,700  before an uptick into lunch  +1pt  (unch) @ 27,733. PM opened lower and trading sideways.
Leaders Miner, Auto’s, Steel (Toyota pre market said would increase steel prices to suppliers and Daiken to cut copper useage by 50% and use aluminium). Re-opening names still +VE
Laggards Retail (Nitori -2.8% on weak SSS) , Pulp & Paper and Chemicals
Topix traded in a similar fashion at lunch it was flat.
S Korea 
KDCA reported 2,155 new covid cases. Some caution ahead of BoK rate decision with many expecting a hike but its likely to be a close decision.
Foreigners started as buyers but have turned sellers. Phama weak. EV Battery bounces after 2 down days.
Kospi opened higher and tested 3,161 in early trades but pulled back to flat and then traded in tight range for the next 90 minutes 3,140/50 before selling down to 3,124 and now trading sideways.
Kosdaq Opened 1,017 but initially sold down to 1,008 before a bounce to 1,014 but failed to consolidate and sold down to 1,007 and then traded sideways currently -3pts (-0.3%) @ 1010
Taiex opened higher 16,821 and worked higher through the morning before seeing resistance at 17,000 and easing back. TECH +VE with talk of a price hike from TSMC and UMC. GlobalWafers gave a +VE oulook.
Laggards Petro, Paper and Financials.
Shipping flat.
CSI 300 opened flat but bounced to 4,899 before trending lower in stepped trading, support at 4,866 and bounced into lunch -6pts (-0.1%) @ 4,883. Resource names +VE
Hong Kong
Pre market opened @ 25,930  +202pts vs +134pts ADR’s with good interest in Ecommerce; except Baba.  Traded sideways for 15 mins before trending lower, initial support at Tuesday’s close  bounced  but then sold off to 25,600 and effectively then traded sideways into lunch -94pts (-0.4%) @ 25,634
Laggards Communication, Developers, Financials and Consumer Discretionary
Leaders Shipping, Consumer Staples, IT, Industrial,
Expect a weaker open following Asia
AHEAD German Ifo Business Climate, Current Conditions and Expectations
France Unemployment Benefit Claims, Jobseekers Total
US Futures
Opened  higher DOW +30pts, S&P +0.1% and NDX+0.5%
Ahead MBA Mortgage Applications and 30yr Mortgage Rate, Durable Goods Orders data, EIA Oil data.
Earnings, Royal Bank of Canada, Snowflake, Box, Autodesk, Express, Dick’s Sporting Goods, Shoe Carnival, NetApp, Splunk, Pure Storage

Front Page

Biden refuses to extend Afghan airlift as Taliban tightens grip

• US president defies G7 allies • Airport road blocked • CIA chief meets Islamist leader.
An interesting stance to take with his allies, especially considering the obstacles the Taliban is putting in the way of ‘at risk’ people getting to the airport.
It suggests that the US is keen to maintain links to the Taliban going forward. That could be linked to Afghanistan’s reserves of copper, lithium and rare earths; which some in China have already expressed interest in. It could also be because the US believes that the Taliban will have to keep its pledge on the amnesty and treatment of women as the World Bank, IMF and Federal Reserve Bank of New York withhold funds.
But it is still strange especially considering the fact that the Taliban did not show good faith to the original talks. They have already held talks with China and could see support from there; reducing their need for US dollars and increasing the internationalisation of the RMB.
It will be interesting to see if the fact the US has more than enough fire power to undermine the Taliban’s strength should it decide to use it may be one of the contingency plans.
The downside to the US will be if there are atrocities committed if it leaves vunerable Afghans behind.

OnlyFans founder says ‘unfair’ banks gave him no choice but to ban porn
An interesting read about how the banks are discrinimating against ‘sex workers’. One wonders about the morality of the banks stance when they finance so many other questionable activities. It will be interesting to see if the ESG movement takes this into account in the future.
Mt Stokely says banks are citing ‘reputational risk’ that could be a slippery slope, considering the scandals that they have been involved in. There is unease over child pornography and non consensual content and illegal content but those are already covered by the law and something that all social media platforms deal with. The targeting of any section of society that is trying to make an honest living should not be condoned. To quote the bible John chapter 8 verse 7 ‘let him that is without sin cast the first stone’.

Inside on page 2 an Obituary to Charlie Watts the Rolling Stones drummer; a unique member of the band. Drummer Watts, the steady influence on Rolling Stones, dies.

Property. Inequality
Private schools distort China housing prices
Xi’s egalitarian campaign frustrated by developers who fund academic excellence.
Looks at how good schools funded by property developers are helping to boost local property prices especially where local governments impose rules such as linking school places to property ownership as seen in Hengshui.
It highlights the difficulties that President Xi's plan of ‘common prosperity’ equalising education and ensuring egalitarianism is facing.
The three main factors:
1. the willingness of parents to spend money on their chikdren’s education; either directly or indirectly.
2. the fact that China does not have the budget to build, equip and staff all the schools that it would need to meet that goal and
3. the fact that even with good teachers not all students can achieve good enough grades to get into the best universities. The fact that there are key exams is an admission that there cannot truely be an egalitarian system.
There is also the benefit to the local economy. Higher prices mean developers can afford to pay for a better school and staff. Of course those whose children still do not make the required grades are left disappointed and worried.
What it does make increasingly likely is the imposition of a property tax in order that the government can build and staff schools. The problem; as highlighted a couple of weeks ago; is that generally state run schools do not achieve the same results as government run when. Probably because the salaries and incentives are different.
An interesting read but probably a conundrum that will remain unsolved.
For investors it means that being wary on Chinese developers is probably a wise move although I doubt Beijing will introduce a property until it is sure the developers are in good enough shape to bear the burden.
Read also opinion East Asia’s education arms race has to end By Robin Harding.  An interesting read, makes the key point
‘In China, every student sits for a citywide high school entrance exam at age 15. Half will be accepted; the rest will have no choice but to go to a trade school. Then at age 18, the high school students compete in national entrance exams, where the acceptance rate at top-tier universities — which are gatekeepers to the best jobs — is about 2 per cent, and sometimes much lower. A retake restricts your university options. Given such incentives, what parent would not pay for a tutor?’

Japan and Taiwan to open talks over China
On Friday the two will hold bilateral security talks as they ‘strengthen their ties to counter an increasingly belligerent China.’
They are looking at both economic and security factors; coming after US Vice President Harris’ speech which ‘castigated China for its threatening behaviour towards its neighbours.’
Key being that Japan and Taiwan do not have existing diplomatic relations but talks like these lead to such an outcome. Japan has already cited China moves against Taiwan as impacting its military security.
China has warned Japan about the talks saying “The Chinese side firmly opposes all forms of official interactions between Taiwan and countries having diplomatic ties with China,” as it tries to give credence to its claims of soverignty over Taiwan, which few really believe.

Companies & Markets
Maersk goes green with order for eight new vessels

• Container line chases net-zero goal
• Ships can be powered with methanol
An interesting read because the shipping sector is divided about what type of engines to put into new vessels. That may be one reaon why despite the rise in shipping costs we have not seen the usual cyclical increase in new ship ordering.
What is interesting is that green fuel is about twice the cost of bunker fuel but Maresk believes some clients, it mentions Amazon and H&M are willing to pay the extra to ensure ‘green credentials’.
The additional factor for Maersk an others is having enough green fuel and it being in the right places. The article notes that not everyone agrees with Maersk’s move and that highlights the problem, that despite facing significant emissions liability shippers are not yet agreed on the way forward regarding fuel type.
See Editorial Maersk points the way to a lower-carbon future
Global shipping industry risks being a laggard in cutting emissions.
Also Lex Maersk/green shipping: a hero for zero. Concludes
‘Transitional fuels have their own perils. Ships have a lifespan of at least 25 years. There is a risk of being left with stranded assets as regulations tighten. The safest bet is to aim for carbon neutrality by leapfrogging fossil fuels, as Maersk is doing.’1

China courts take centre stage as defaults shake bonds landscape
An interesting read about how commercial courts in China are gaining prominance and acting in more commercial ways. Their action suggests China is setting out a structure and precedent that allows investors a clear road map of what will happen when companies fail. A key item seen recently was that all creditors are treated equally. Now the question
will be how off-shore instruments, like ‘keepwell deeds’ are treated.
All this comes at a time when China still needs foreign investment and has underlined in recent speeches that foreign companies are an important part of the economy.
Worth a read, China may not like the West’s rules based systems but it knows that if it wants foreign investment it will have to play by those rules. spurs gains for China tech stocks
Ecommerce group’s strong sales help banish fears over Beijing curbs.
Looks at how some investors are revisiting the Chinese tech stocks. JD.Com’s good results came after its special sales day in the quarter.
The key point I think is that China doesn’t want to kill these companies; they are world leaders and a demonstration of China’s ability to innovate. After heavy falls a lot of preceived risk is now factored in but for many policy is still far from clear. We are still seeing them re-orientate themselves to new policy and ‘common prosperity’ with Pinduoduo donating profits to agricultural projects and Alibaba making donations to community charities. So investors may still see road bumps ahead for the sector but the potential for good returns remain.

Odds lengthen on Yokohama casino resort
One impact of Takeharu Yamanaka, a former professor at Yokohama City University becoming mayor is that he has said they will not be joining the bidding process to host a casino. That is bad news for Genting and Melco who submitted bids.
The other implication concerns PM Suga’s career as leader of the party and country in the forthcoming elections.

Iron ore and crude buoyed by brighter China outlook
Commodities rallied over night as investors became more confident about demand from China as it appears to have got the delta variant under control. It does rather highlight the fickle nature of investors at present largely I think because many markets are trading at highs.
Worth a read; I think we will see more volatility in the coming weeks until we see a significant retrenchment.

For Interest
Top fund manager Giroux calls time on ‘rich’ stocks
T Rowe Price investor known for making prescient moves points to expensive valuations. Worth a read as he has a goodtrack record. The question then becomes if you pull your money out of US stocks where do you put it?

Crypto traders reap rich rewards for now at least
Recent gains for the crypto exchanges come just as regulators look to impose more scrutiny and regulation. An interesting read.

Losing the generation game

Hit hard by the pandemic, young adults feeling marginalised by mainstream politics are mobilising around issues such as climate change. Will these economic setbacks radicalise a generation?

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