FT Weekend Regulation, Freedom and buying the dip?


01 Aug

This and previous notes can be found at asianmarketsense.com  and Substack ( Asian Market Sense )
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Online
Hong Kong’s Olympics success exposes deep political fissures
Police probe fans who shouted down Chinese national anthem during medal ceremony.
The sporting success has become politicised; as the Chinese National anthem was played when Hong Kong’s team won medals. The reaction in HK by booing and the waving of a colonial era flag is being investigated by the police as being ‘insulting the national anthem’ which is an offence.
Despite the imposition of the security law has not resolved the issues but mere pushed them below the surface. Carrie Lam said this week that ‘that arts and culture in the city were “booming” and there had been no weakening of people’s freedoms.’ Unfortunately that is not wholly true, tensions run below the surface and that I think ultimately will hurt Hong Kong’s development as an international finance centre.



The Front Page.
SEC cracks down on China listings
• Didi fiasco spurs regulator • More transparency on IPOs • Disclosure of risks from Beijing
Firms will be required to provide more information before being allowed to list in resposnse to the Beijing announcing stricter measures on overseas listings. One now key question will be whether they have permission from Beijing to list.

Towns on edge amid US fires
Looks at the wild fires in the US, followed with serveral more articles inside.

Swiss central bank’s reserves pass $1tn on back of big gains from US equities
An interesting read, the central bank has an investment portfolio, bigger than some soverign wealth funds and unusually it invests aound 25% of the portfolio in equities along with gold and bonds.  Those equities have seen good returns recently and has allowed the bank to increase its payout to the government but the governors are being cautious with the payouts aware that markets can go down as well as up.

US criticises China over treatment of foreign journalists
“The PRC government claims to welcome foreign media and support their work, but its actions tell a different story,” said Ned Price, state department spokesman.
More pressure on China over how it treats journalists both from the US and elsewhere. The focus this time being related to the floods in Henan. It comes as Beijing is preparing for the the winter olympics next year.
It seems the latest incident has arisen from inaccurate subtitles attached to a BBC report. Which prompted nationalists commentators to launch a campaign to find the reporter. That resulted in a number of reporters being ‘manhandled’.
‘Zhao Lijian, a Chinese foreign ministry spokesman, on Thursday rejected a statement from the Foreign Correspondents’ Club in Beijing that criticised the “harassment”. Zhao said the comments included “groundless accusations about the reporting environment in China”.’
Another example of how China’s relations with both the US and other countries and organisations are at a low point. China is taking an uncompromising position on a large number of issues in the light of President Xi declaration that China is looking to its rightful position in the world order. That uncompromising stance is likely to find China increasingly isolated as Biden continues to build alliances of like minded countries in position to China.
It also makes it increasingly difficult for President Xi to alter his position on key areas which in time is going to make Taiwan an increasing tinter point for conflict. Expecially as Taiwan gets more promince and recognition as the independent country it is.

Chinese nuclear reactor shuts after fuel rod investigation.
The Taishan power plant being closed for maintenance, it was reported to have had a issue with its fuel rods last month the Chinese authorities ruled out any danger. But yesterday it was decided to shut the reactor at the centre of the issue to find the cause of the problem. It is worth noting that had the reactor been in France the Government there would have shut the reactor down immediately.
The delay in shutting the reactor may be an indicator of the fact that China’a need for power.

Scientists warn as pandemic enters dangerous new phase
Experts say Sars-Cov-2 may already have developed into more threatening forms.
A worrying read about how the virus is mutating and becoming more virulent. Scientists still don’t fully understand the virus which would suggest that there should be a more detailed investigation into the origin in case that could shed light on the virus to help in dealing with it goign forward. It makes China’s resistance to allowing the WHO access to Wuhan expecially as China itself isnow seeing a resurgence in cases.

SoftBank pays dear for dallying with Greensill
Investment fund spent big behind scenes to shore up Australian entrepreneur’s failing supply-chain finance business.
An interesting read, it never fails to amaze that some of banking’s smartest people get fooled and seem to forget the rule that most of us were told when starting in the industry ‘don’t assume anything .. check’.

Investors rethink China stocks strategy after regulatory shock
Reassurances ring hollow after education crackdown triggers nerves over foreign holdings.
Looks at the past week since Chinese authorities took aim at the Chinese Education sector. Their initial move followed the crackdown on Ecommerce companies but was poorly explained and sparked widespread selling. The meeting with finance professionals to try and explain the thinking did little to reassure investors. In saying that the action was supposed to have just targeted education only seerved to highlight that authorities could target any sector in the future. It has increased the risk premium for investing in China across the board. It highlighted the party is not bound by what investors in other countries consider to be normal conventions.
It is worth noting that whilst foreign investors have been hurt, espcially US ones but a lot of Chinese ones too.
To mean it seems that the leadership is less worried about the damage to domestic investors and the fact that it is now attributing the social discord to education is a concern.
I think it puts the historic social contract at risk. That contract being that the majority of people allow the party to control politics on the basis that will benefit the majority. Communist party members make up less than 10% of the population, its an exclusive membership and entry is closely monitored and increasingly made up of educated people rather than workers; somewhat ironicly in the light of the recent move.
Morevoer the majority of Chinese people I know want their children to have a better life and hence are keen on education. No surprise that the term ‘Tiger Mums’ are normally thought of being Chinese. Also worth noting that Predient Xi’s daughter went to Harvard, a costly place to be educated when you consider that the President of China is offically paid US$22,000pa.
The clamp down though is in line with trying to make Chinese investors more aware of the risks of investing.
But whether it is likely to encourage couples to have more kids I doubt, especially having been told for years that one child was the right policy. Which again underlines the short comings of the policy of uncompromising doctine.
It is interesting to note the rise in pet ownship in China, rather that family size, together with the rise in single women pursuing careers rather than families. Maybe a sign of increased female independence, having been better educated?
The key point being that investors will in future pay closer attention to government policy and whether the sector/company they are investing in is in line with that. There are good companies that are but policy can change. The curtailing of being able to make a profit is a worrying change; if that were to be applied to other sectors then capital could quickly exit.
Another sector that remains on the radar for policy is property but regulation there is much more fraught considering the number of people who own property.
It is worth remembering that a few years ago President Xi exhorted cadres to earn, from the people, the right to lead them. The social contract in China remains key.

Lex Chinese hot pot stocks: overcooked  Looks at the pressure that Haidilao been under due to covid and the impact on profit margins.  It concludes ‘Sales from Haidilao’s delivery business also increased  by 60 per cent last year. It helps that the hot pot restaurant market  in China, where Haidilao gets 96 per cent of its sales, is fragmented.  Although it is the country’s biggest chain, it accounts for less than 3  per cent of the market, leaving room for expansion.
The Chinese catering industry has historically carried low regulatory risk. Amid changing government policy, this is rapidly becoming one of its greatest selling points.’
I would question whether it will exempt; the delivery business is under secutiny to ensure delivery workers get better pay.

When supply chain gets its ducks in a row, the world faces an inventory recession  by John Dizard
An interesting read. The lack of accurate data on the inventory that is between the factory and the final outlet causes supply issues. Better data would be good for everyone. In the meantime shipping companies and container leasing companies are benefitting.

The Long View
China ructions raise prospect of a buy-the-dip test by Katie Martin.
2021 has been a year, so far, when buying the dip has made sense. But will be recent sell off in China be the exception? An interesting read; Morgan Stanley are of the view that its too early for bottom fishing. Pictet are of the view that ensuring alignment with government policy. The problem is, as this week has shown is that policy can change at short notice. I note that some are saying that this recent was outlined some time ago but whilst China often gives broad guidence, details are much harder to find.
Key I think is the ability to remain nimble; increasingly funds are looking at daily volumes are as a key to being able exit a position quickly.

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