Aug 31Asia mixed ahead of MSCI Reweight. FT Soros on China, More Regulatory pressures.

31 Aug

This and previous notes can be found at Substack ( Asian Market Sense )
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Asia MSCI rebalance on close.  Malaysia closed for National Day.Australia
Market opened higher testing 7,524 in early trades.  It then pulled back to 7,510 before working higher and touched  7,540 around 1:30pm.  Healthcare blue chips CSL,  ResMed and Tech stocks. Earnings in focus;  Losses at stem cell treatments producer Mesoblast -11% as losses continue as it still tries to get US FDA approval for its flagship product. Harvey Norman weak after bowing to public pressure and repaid $6 million in JobKeeper subsidies to the federal government following record profits for the 2021 financial year.
The weak Chinese PMI data a slight concern.
Inflation Gauge Aug +0.5% MoM vs+0.4% Jul (F/cast was -0.3%)
Building Permits Prelim Jul -8.6% MoM vs -5.5% Jun revised (F/cast was -4.5%)
Current Accounts Q2 A$20.5b vs 18.9B Q1 (F/cast was 19b)
Private Sector Credit Jul +4% YoY vs +3.1% Jun (F/cast was +2.5%)
Private Sector Credit Jul +0.7% MoM vs +0.9% Jun (F/cast was -0.3%)
Pre market data was +VE.  Trading volumes remain light and suggest  some end of month window dressing or short covering.
Nikkei opened lower and tested 27,600 in early trades despite the good unemployment and Industrial data.  But markets worked higher despite the weak China PMI data.  PM the markets have re-opened higher currently +96pts (+0.3%) @ 27,879.
Topix trended lower to test 1,938 bounced but trended lower. PM opened higher; currently +2pts (+0.1%) @ 1,952
Softbank -0.9% broker downgrade on China Exposure.
Shippers still seeing interest Nippon Yusen +2.8%
Data out
Unemployment Rate Jul 2.8% vs 2.9% Jun (F/cast was +2.9%)
Jobs/Application Ratio Jul 1.15 vs 1.13 Jun (F/cast was 1.1)
Data due pre market
Industrial Production Jul -1.5% MoM vs +6.5% (F/cast was -3.2%)
Industrial Production Jul 11.6% YoY vs +23% Jun (F/cast was 19%)
Due later Consumer Confidence, Housing Starts, Construction Orders
S Korea 
Generally good pre market data.
Kospi opened lower as along with Japan and saw choppy trading but 3,130 providing good support and from late morning the market traded better and currently +17pts (+0.5%) @ 3,160 Local Institutions broad sellers. Foreigners small buyers Finance and Internet.
Telcos, Constructions and Phama +VE
Galaxy fold supply chain names +VE
Weakness in Gaming on China news.
Kosdaq Initially traded around flat but sold down from 10am to 1,026 before rebounding, currently +2pts (+0.2%) @ 1,034
Data out
Industrial Production Jul +7.9% YoY vs +11.9% Jun (F/cast was +7.2%)
Industrial Production Jul +0.4% MoM vs +2.2% Jun (F/cast was -0.1%)
Retail Sales Jul +7.9% YoY vs +1.6% Jun (F/cast was +2%)
Retail Sales Jul -0.6% MoM vs +1.4% Jun (F/cast was +0.3%)
Manufacturing Production Jul +7.6% YoY vs 12.1% Jun (F/cast was +7.4%)
Construction Output Jul -8.1% YoY vs -3.1% Jun (F/cast was -3.3%)
Taiex opened lower and trended down to 17,208 level mid morning before working better to 17,327 but now drifting lower. Tech seeing selling pressure after recent gains and despite news of chipmakers raising prices. Steel +VE but Textile, Paper and Cement weak.
Delta weak on news of flooding causing a production shutdown.
CSI 300 opened around flat but sold down through the morning on the weak PMI data impacted by the weak PMI data raising questions about the impact of the global and local recovery and covid clampdowns. Also further regulation clampdown in China on tech a concern.
Data due
Manufacturing PMI Aug 50.1 vs 50.4 Jul (F/cast was 50.3)
Non Manufacturing PMI Aug 47.5 vs 53.3 Jul (F/cast was 53)
Pre market opened @ 25,505 -34pts vs -35pts ADR’s
But market sold down on the weak PMI data. Earnings still in focus; Meituan +VE on good results but upside limited by regulatory threats. Cement +VE but other ecommerce names -VE
Data due After market Retail Sales
Expect a weak open following the mixed signals from Asia, of most concern will be the weak new orders element in the China PMI data
UK market reopens
Eurozone Core Inflation Rate,
Germany Unemployment Rate
Inflation Rate, GDP Growth Rate, Household Consumption, PPI  
UK  BoE Consumer Credit, Mortgage Approvals, Mortgage Lending, Net Lending to Individuals
US Futures 
Opened Dow +40pts, S&P +0.1%, NDX flat,
Ahead Redbook, Case-Shiller Home Prices, House Price Index, Chicago PMI, Consumer Confidence, API Crude Oil Stock Change 

On Line 
George Soros  Investors in Xi’s China face a rude awakening
The leader’s crackdown on private enterprise shows he does not understand the market economy.  (also in the Print Editions Opinion section)
Looks at the recent crackdowns on private enterprise and highlights that that crackdown on the property sector and with the precarious position of Evergrande could prompt a market crash.
He says that China’s birth rate is lower than the stats suggest and notes that the main reason families only want one child is because they want to make sure that child has the best opportunities. Hence the growth of on-line tutoring, Chinese companies backed with US money; which have now been banned. He also sets out the the Govt taking a seat of a ByteDance which gives it access to a trove of personal data. He expects similar moves at Alibaba.
He says Xi does not understand how markets work and hence the selloff has been allowed to gone too far. Interesting to note that historically the Prime Minister would control the economy but Xi has marginalised Li Keqiang who does actually have an degree in Economics.
He says that the recent reassurances from Chinese officials are a deception and that investors face a rude awakening with a crash; hurting both active and passive investors. Passive investors due to the fact that many funds are MSCI linked which he says forces billions of dollars into Chinese comapnies whose governance does not meet the required standard because ultimately those companies are subject to the will of President Xi. He suggest the US should pass legislation that requires asset managers to invest in companies where there is true governance that is aligned to stakeholders. That would give the SFC the powers it needs to protect US investors.
An interesting read. It would be a further weaponisation of US fund money. The MSCI doesn’t really force money into companies they provide an index which investors choose the follow, investors always have the choice.
But there is the question for the MSCI about the effectiveness of management and the level of country risk.

China limits children to 3 hours of online gaming a week
Minors only allowed to play on Fridays, Saturdays and Sundays under latest rules to hit tech groups.
The headline seems bad but the reality is that as far as actually revenue is concerned that is a relatively small part. Enforcement is going to be a key element and they are expected to use real name registration systems and login requirements. A big potential upset could be in alienating a generation who may not appreciate the new rules and then the punishment for non adherence which I would presume be levied on the parents.
For the operators it will require careful co-operation with the regulators and probably additional costs too.
The larger concern is whether in seeking to implement Presidents Xi vision for China the party loses the social contract by the restrictions it is imposing.

Meituan chief adopts Xi’s wealth redistribution rhetoric
Founder of Chinese tech company emphasises ‘common prosperity’ as regulatory crackdown gathers pace.
What is notable is how keen the leaders of Tech and other industries are keen to adopt and fall into line with President Xi vision; a stark contrast the Jack Ma outpouring last year.

Front Page 
Wrath of Ida
New Orleans struck again

US Covid surge sparks EU threat to reimpose travel restrictions

• Infections far beyond safe level • Vaccine hesitancy cited • Deaths above 1,000 a day
Nuclear watchdog sounds alarm over restarting of North Korean reactor
Concerns about what North Korea is currently up to and whether this is just a bargaining chip to get attention?

Companies &  Market
Hong Kong acts to rule out Archegos-style market chaos

• Centralised trade databases planned
• System to spot excessive risk-taking
Illustrates how careful and aware of the potential issues Hong Kong regulators have been and still are.

Evergrande woes dent confidence in Chinese debt
Looks at how the issues at Evergrande have spilled over into the wider property market which represents about 50% of China’s offshore bond market. That is one of the reasons why Beijing is keen to find a market solution for Evergrande but also to make sure other property companies are in a solid position; hence the ‘three lines’ policy.
Other pressures on the bond market has been the uncertainty over Huarong.
Those are the ones in headlines but the market is worried about others that could be out there. There have also been questions over how a default would be handled; especially for the offshore bond holders. China is seeking to demonstrate that any defaults will be dealt with in a fair and proper manner.
It demonstrates an awareness that China is still reliant on foreign capital.

LEX South Korea/Google: not playing  Looking at stopping Google and Apple from automatically charging high comms on developers.  That would be good for the app companies.  The biggest risk for Google and Apple is that other countries decide to follow suit.

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