June 10 FT Thoughts: China; Allied threat, public opposition, WTO reform, PPI, Covid and Debt default: what else could go wrong

10 Jun

This and previous notes can be found at found at SubStack
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Free mifid compliant webinar by Daivd Scott this Today 4pm HK time; The title is The shift from an 'Early Stage Inflation Bull Market' to a 'Deflationary Boom', Fundamental Signals for Asian Equities & Global Industry Leaders.

Asian Summary at 1:30pm HK time
Market opened slight lower but worked better initially to 7,300 then eased back before pushing to the day high, 7,313 before easing back, currently +36pts (+0.5%) @ 7,306.  
Leaders Healthcare, Tech and Property (good home sales #). Laggards Energy. Flat Materials
Consumer Inflation Expectations Jun +4.4% vs +3.5% May (F/cast was +3.8%)
New Home Sales May +15.2% MoM vs -54.4% Apr (F/cast was -7%)
Nikkei opened lower but rallied, premarket PPI was higher YoY after the Apr number was revised higher.  It then trended higher with resistance at 29,000 and eased into lunch.  PM opened lower at 28,935 and trading sideways in a tight range; currently +90pts(+0.3%) @ 28,951
Topix Similar pattern with resistance at 1,962. Opened flat in the PM and trading around flat; currently -2pts (-0.1%) @ 1,955
PPI May +0.7% MoMvs +0.9% Apr revised from +0.7% MoM (F/cast was +0.6%)
PPI May +4.9% YoY vs +3.8% Apr revised from +3.6% YoY (F/cast was 4.6%)
Foreign Stock Investment ¥94.5B vs -181.4B prior revised
Foreign Bond Investment ¥665.9B vs -1089.9B
S Korea 
Kospi opened flat but worked higher in choppy trading. Resistance approaching 3,235 which has been tested serveral times. Currently +14pts (+0.4%) @ 3,230
Kosdaq opened higher and trended higher to 993 and has just started to ease; currently +13pts (+1.3%) @ 992
Taiex opened higher, initially dipped to 16,980 before rallying to 17,100 and then 17,128 before easing back to 17,100 and then 17,025 before working higher with resistance at 17,150 but pushed above in the close to end +193pts (+1.1%) @ 17,159
TSMC a board meeting held Wednesday approved US$9 billion in Capex to expand production and increase the cash dividend.
CSI 300 opened flat but worked better through the morning to 5,293 at lunch. PM the market is trending lower. Currently +38pts (+0.7%) @ 5,275.
PBOC’s Gov Yi says China 2021 inflation will be below 2%, and will maintain stability policy;
which suggests that the Govt will try to control key staples prices
Pre market opened @ 28,792 +49pts vs -74pts ADR’s and rallied to 28,954 in early trades as recent shorts covered. Then retrenched to 28,830 before rallying to 28,916 mid morning before trending down to 28,800 level before a bounce into lunch. PM initally ticked hihger but now trending lower currently +47pts (+0.2%) @ 28,780
E-commerce & Chinese Financials mixed. HK Property and Shipping +VE
Futures FTSE +8 points higher at 7,087,  DAX +9 points at 15,601, CAC 40 +5 points at 6,571 and Italy’s FTSE  MIB +4 points at 25,722, according to IG.  Expect cautioun ahead of ECB meeting and US Inflation data and Initial claims.
Earnings due from Manchester United and Ted Baker.
EUROZONE ECB Rate Decision
FRANCE Non Farm Payrolls, Industrial Production
US Futures
Opened higher Dow futures +42 points, S&P 500 +0.1%. Nasdaq 100 flat.
Core Inflation Rate, Inflation Rate, Initial Claims, 4 week Average Claims, Continuing Claims, EIA Natural Gas Report, WASDE report, Monthly Budget Statement

Front Page
Biden marshals European allies to take tougher stance on China

• Message to Xi and Putin • Scrutiny of software and apps widened • Pressure on Beijing builds 
China and investors will be watching carefully to see how Biden gets on over the next week.  I think he is likely to be successful, and whilst he may not get everything he wants he is likely to get a lot of support in unifying efforts.  For many companies in China that will have little impact but it will put the Chinese government under pressure over policy; which could be especially painful as the Communist party 100 year aniversary approaches.  

Army of Reddit investors homes in on Clover Health to send stock soaring
Looks at the impact of retail investors on some US stocks; focusing most recently on Clover Health, but recently includes GameStop, Black-Berry, AMC Entertainment and others.
It makes the point that at the beginning of the year it could takes weeks of talk in chat boxes before action but now it can be hours.
Not mentioned but worth noting that many larger broker firms are dropping their coverage on the basis that the stocks are no longer reacting to fundamentals. It raises the question of what is more fundamental than public opinion on a company. Worth remembering that CLSA was started by journalists giving their view on stocks and people followed their advice.

Public backlash against Chinese campus gives Orban pause for thought
An interesting read which shows how out of touch some leaders are from their people. In Hungary the PM Viktor Orban has been building links with China in recent years. ‘China is building a railway between Budapest and Belgrade financed through another loan (the tems of which are a state secret). Hungary hosts telecoms group Huawei’s largest supply centre outside China. And Hungary has recently given Beijing a helping hand by vetoing EU statements condemning democratic backsliding in Hong Kong. But the Fudan campus was probably the most powerful symbol of the Hungarian premier’s embrace of communist China. Two years ago, Orban shrugged off criticism from the west and pushed central European University, a liberal institution endowed by financier George Soros, out of Budapest.’
But the people are not behind him it would seem from the recent protests. One concern seems to be the loans that China offers for these projects. Hungarians are worried the cost of the campus would be; ‘€1.5bn, more than Hungary’s entire higher education budget for 2019. Much of it would be financed by a Chinese loan.’ The terms were not revealed but a concern would be because ‘Montenegro, which has appealed to the EU for help in repaying a Chinese loan for a road project that, per kilometre, was one of the most expensive in the world.’
Another concern was that the site had been earmarked for it ‘a new quarter planned for low-income students from outside the capital.’
It notes that a number of other eastern European states are also cooling in their attitude to China with many deciding not to attend the recent 17+1 group meeting. It would seem that China’s wolf warrior diplomacy is less effective on ordinary people who have free access to the internet and can source the information and draw their own conclusions.
For Orban the result could be worse with an presdiential election due next year; his political future could be in the balance. There will be a significant wind change if association with China is seen as a relection hindrance; not just for Orban but others too.

Biden corporate tax overhaul faces opposition in Congress
Republicans warn that nascent accord will undermine American companies.
Worth a read underlines why the other G7 members want to see the US enact legislation on the global tax treaty before they adopt it because they are aware of the difficult issues ahead. There are also likely to be issues in other countries, including other G7 members.

El Salvador approves bitcoin as legal tender
First adopter but not without issues. An interesting move. The article outlines the pro’s and con’s.
Worth noting ‘Venezuela in 2018 unveiled plans for an oil-backed cryptocurrency, the petro, to skirt US sanctions, but it has flopped.’
It concludes ‘Siobhan Morden, head of Latin America fixed income strategy at Amherst Pierpont Securities, said it was in keeping with Bukele’s “tendency for flashy announcements that seem to contradict or at least question the plan from the economic team”. It could also imperil an IMF programme that has been in the works for more than a year, she added.’
I think it is another step in the process of bitcoin becoming more established as an asset class.

Australia urges G7 support for WTO reform
Key is that Australia wants it reformed in order to try and curb China’s ‘use’ of the system for its own benefit rather than the ‘spirit’ of what the WTO should be used for.
Trump had blocked the appointment of new judicial appointment it is hoped that Biden will adopt a new approach.
PM Morrison said ‘“The most practical way to address economic coercion is the restoration of the global trading body’s binding dispute settlement system. Where there are no consequences for coercive behaviour, there is little incentive for restraint,” said Morrison.
He said like-minded countries should draw inspiration from the years immediately following the second world war and work together to maintain an open, rules-based system that enables liberal democracies to flourish.’
The article says ‘“G7 leaders know that if they don’t work collectively on the China challenge, they will all be coerced separately by Xi’s China and they’ll fail to curb Beijing’s increasingly aggressive international conduct — on trade, territory, security, technology and key values like human rights,” said Michael Shoebridge, analyst at the Australian Strategic Policy Institute.’
That is really the key, working together is the western nations best chance of getting China to change. But it will not be easy because of the way President Xi has presented his recent policies to the people of China. Changing policies is not a option for Xi, it is worth remembering that the change in policy on children in China has not been linked to Xi at all.

China factory prices rise at fastest in 13 years
Producers’ rising demand for commodities drives index 9% higher in May.
Much higher than had been expected, although a low effect was a contributor which will ease through the year. At this stage the price rises have not impacted on CPI but they are hurting business.
The PPI rise driven by the recovery in China and it’s demand for raw materials. Beijing has already warned against excessive speculation in commodities. This morning PBOC Gov Yi said he exepcted CPI to remain below 2% this year which is likely to mean profit margins will be squeezed.
China is in a difficult position and that is being compounded the recent virus outbreak that is impacting the ports in southern China.
The PBOC has already said it will maintain its existing policies but it may find its options restricted if inflation in the US and globally rises.

Covid cases in Chinese province spark fears of trade delays
‘More than 100 cases have been reported since late May in Guangdong province, one of China’s most important manufacturing hubs, prompting strict countermeasures from the government.’
That is having an impact on the Yantian container terminal in Shenzhen (one of the largest in the world) which suspended exports for a week last month. That has had an impact on the ports of Nansha and Shekou and will no doubt impact China’s June Trade data and add to already elevated shipping costs.
It adds more pressure on the PBOC and the government and underlines why China’s goal of trying to control prices may be doomed to fail.

Call for cleaner energy in emerging nations
Looks at the recent IEA report
Some useful quotes ‘“Officials from these nations are not climate deniers,” she added. “It is just that energy poverty is an urgent challenge which some western policymakers do not always seem to acknowledge when addressing net zero goals.”’
Along with ‘“Countries are not starting on this journey from the same place, many do not have access to the funds they need to rapidly transition,” said Birol. “There is no shortage of money worldwide, but it is not finding its way to the countries, sectors and projects where it is most needed.”
He argued that wealthier nations had a “moral responsibility” to help developing countries shift to cleaner fuels given most historical emissions come from industrialised economies.’
KEY is that historical element, which is often forgotten by the developed nations when calling on others to reform.

Leading light at distressed debt manager Great Wall under probe
China is investigating Hu Xiaogang, vice-president of China Great Wall Asset Management, by the anti-corruption watchdog, for suspected “severe” violations, according to a statement published by the China Banking and Insurance Regulatory Commission.
An interesting read; suggests that they are investigating him over events whilst he was at his previous position at China Orient Asset Management. It follows ‘Lai Xiaomin, the 58-year-old former head of Huarong, was executed in January after being found guilty of taking bribes worth $280m and other crimes.’
The four bad debt managers were supposed to reduce the risk to the banking system by taking over bad debts but became a problem when they raised debt ($100bn) and expanded their remits. The bigger issue for Beijing is the fact that Huarong and Cinda are listed in Hong Kong and therefore more open to public scrutiny and international sentiment. Great Wall and Orient are private.
How these companies work out their debt issues will have a big impact on international attitudes to investing in China at a time when foreign investment into China is more important than ever.
‘Huarong, China’s biggest distressed debt investor, owes about $22bn of dollar-denominated debt and is facing intense market pressure over delays in publishing its annual results. The company’s Hong Kong-listed shares were suspended in April while the prices of its bonds have been volatile.’
The article mentions the political element ‘The crackdown is a sign of the endurance of Xi Jinping’s anti-corruption drive. The campaign has been viewed by experts outside China as a means of targeting deeply ingrained graft while threatening potential challengers to Xi.’
I see this as less of a crackdown and more a matter that China is facing severe default problems. Everyone was relaxed when the economy looked strong but covid undermined that and considering that these companies were already dealing with distressed assets makes you realise how bad their position could really be.
See LEX Huarong/Great Wall: danger, falling masonry
Starts ‘The irony is painful. Huarong, China’s largest state-owned bad debt manager, is on the brink of becoming a delinquent debtor.’ Links the debt managers and Evergrande and concludes ‘Foreign investors need to be on their toes. If the government is really cutting bad debt managers loose, they would struggle to absorb the non-performing exposures of groups such as Evergrande. Contagion across a swath of Chinese business is a real risk.’

Chinese technology funds battle to offload stakes and hit profit targets
Beijing-backed technology funds with almost $900bn under management are struggling to hit their profit targets, according to executives who say their capital is stuck in companies that cannot launch initial public offerings and are unattractive to investors.
“Traditional exit strategies for private equity funds do not work well for us,” an executive at Zhongyuan Science Innovation Venture Capital, a state-backed investment fund in central Henan province, told the Financial Times.’
Key being that they are tied to government policy rather than market principles.
An interesting read, there are 1,877 government guidance funds (GGF’s) that were started since 2014, many of whom will be unable to meet their 6 year targets. They are big players in the Chinese private equity industry. A noteable success is Nio who received Rmb 7bn from 3 GGF’s and whose shares have surged but most have not.
I would guess that the programme dateline will be extended but it illustrates the problems of a command economy trying to develop a capitalist market.

US food delivery app DoorDash launches in Japan
First overseas expansion and to Japan. It says ‘the move would give it access to one of the most “restaurant-dense countries in the world”.’
Interestingly its adopting the same strategy that it has used to expand in the US; of starting in small cities. Notes that ‘Japan’s restaurant culture means people tend to stop and eat on the way home, rather than ordering food for delivery, but entrants see an opportunity in the growing population of retirees and dual-income families.’
Key is that it will face stiff competition ‘Uber Eats launched in the country in 2016, followed in 2020 by Delivery Hero and China’s Didi Chuxing. Tokyo-based Demae-can has almost 60,000 merchants as partners and has 5.82m active users. “It’s crawl, walk, run,” said Xu. “We’re going to have to build a very Japanese product.”’
I still remain sceptical that these businesses are able to make money but interesting to watch.

For interest
Web shopping ‘magic’ lifts Amazon’s landlord
Prologis chief Moghadam says the owner of international industrial real estate has found renewed success in pandemic
Puts the case for warehousing in an age of online buying.

Linus from Peanuts has risk lessons for high-yield investors
By Ellen Carr a bond portfolio manager at Barksdale Investment Management.
Provides a good explanation of the pricing of secured and unsecured bonds. ‘Investors who took unsecured risk a year ago were handsomely rewarded. For example, RCL unsecured 2028 bonds returned 90 per cent in the year after the rescue financing first lien issue, versus 30 per cent for that bond.
But it does appear the unsecured ship has sailed. Towards the end of Peanuts’ long run, Linus decides he’s old enough to give up his security blanket. As high-yield investors do the same, this looks like late-cycle behaviour.’

The security risks of ‘smart cities’
Scores of municipal bodies have installed surveillance kit from Chinese companies. But critics say the equipment is a tool for ‘digital authoritarianism’ and leaves countries vulnerable to cyber attack.
A good read, notes ‘The distinction between “safe” and “smart” cities is blurred. “Safe” cities are mainly concerned with automating the policing of society using video cameras and other digital technologies to monitor and diagnose suspicious behaviour. “Smart” city technology often includes video surveillance but is primarily devoted to automating municipal functions such as traffic control, garbage collection and power distribution.’
But the thrust of the article is that these sytems are open to risks.
‘Beijing stands to shape global standards, gain intelligence and build coercive capabilities as countries become digitally dependent’

Chip shortage reveals the pitfalls of ‘just in time’
To avoid future disruptions, companies need to invest in supply chains
A good read; in companies greed for profit they have sacrificed the insurance of stock. It makes the point that it is companies are the ones that should be ensuring their supply chains.

Covid lab-leak theory shows the ‘fact wars’ are still raging
A good read about conspiracy theories. The possibility that covid originated in a lab now being entertained is not because of new evidence but more because the previous debunking of the original idea is being questioned.
Interestingly it says ‘It wasn’t just journalists and social commentators who conflated the two hypotheses; some scientists did too. The Lancet published a statement in February 2020 signed by 27 scientists who said they “(stood) together to strongly condemn conspiracy theories suggesting that Covid-19 does not have a natural origin”. By using the words “condemn”, and “conspiracy theories”, these scientists — who, it has emerged, had been brought together by a man whose organisation has funded research at the WIV — managed to make even questioning the idea that the virus had passed from an animal into humans appear unethical.’
It concludes ‘The Biden administration may be less enthusiastic about “alternative facts” than the previous one, but what we might call “fact wars” have outlived Trump’s presidency. “Facts” are being used as weapons selected to push narratives, rather than to guide us to the truth. We need to stop policing the discourse if we are to avoid living in an alternative reality.’

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