Apr 1 FT China labeled by US, Expels BBC's man, H&M, Huawei, Evergrande, RMB, WHO's right? Nomura & CS questions


01 Apr

MARKETs at 2pm HK time.
AUSTRALIA
Pre Market data was mixed , ASX 200 initially rallied but then retrenched to flat before working better to close at the day high in choppy morning trading. Had eased back mid afternoon but rallied into the close. Markets will be closed Friday and Monday
Data 
Manufacturing Index Mar 59.9 vs 58.8 Feb (F/cast was 58)
Manufacturing PMI Mar 56.8 vs 56.9 Feb (F/cast was 57)
Later came
Balance of Trade Feb A$7.529b vs 9.61b Jan (F/cast was 9b)
Imports Feb +5% MoM vs -2% Jan (F/cast was -1%)
Exports Feb -1% MoM vs +6% Jan (F/cast was -3%)
Home Loans Feb -1.8% MoM vs +10.9% Jan (F/cast was +8%)
Retail Sales Feb -0.8% vs +0.3% Jan (F/cast was -1.1%)
JAPAN 
Tankan data released just before the open was better than F/cast
Nikkei 225 opened higher and worked higher to test 29,600 mid morning but then eased back into lunch at 29,500 level. PM opened lower 29,350 and traded sideways slightly better currently+250pts (+0.9%) @ 29 429
Topix opened higher but trended slight lower though the morning in choppy trading. PM opened lower and traded sideways currently +5pts (+0.3%) @ 1,959
Data
Tankan Survey
Large Manufacturers Index Q1 +5 vs -10 Q4 (F/cast was -2)
Large All Industry Capex Q1 +3% vs -1.2% Q4 (F/cast was +1.5%)
Non Manufacturing Outlook Q1 -1 vs -6 Q4 (F/cast was 0)
Large Manufacturing Outlook Q1 +4 vs -8 Q4 (F/cast was +4)
Large Non Manufacturing Outlook Q1 -1 vs -5 Q4 (F/cast was -6)
Small Manufacturers Index Q1 -13 vs -27 Q4 (F/cast was -22)
Foreigner Stock Investment Y200.7b vs 554.4 b prior revised
Foreigner Bond Investment Y -852.4b vs -79b prior revised
Manufacturing PMI Mar 52.7 vs 51.4 Fed (F/cast was 52)
10 year JGB Auction 0.123% vs 0.131% prior
Markets will be open Friday
S KOREA  
Pre market traded data was mixed but PMI out a little later was better. Investors encouraged by Biden’s Infrastructure stimulus plan with less concern about inflation. Tech and Auto’s lead.
Kosdaq opened slightly higher but dipped initially before working better through the session currently +9pts (+0.9%) @ 965
Kospi opened higher and tested3,090 in early trades, then eased back and traded sideways for the rest of the session currently +19pts (+0.7%) @ 3,082 .
Markets will be open Friday
Data
Balance of Trade March $4.17b vs $2.71b Feb revise (F/cast was 5.7b)
Exports March +16.6% MoM vs +9.5% Feb (consensus is +16.2%)
Imports March +18.8% vs14.1% Feb revised from +13.9% (consensus is +17.5%)
Manufacturing PMI Mar 55.3 vs 55.3 Feb (F/cast was 54)
TAIWAN 
Opened higher as PMI data beat and after US recovery, effectively trading sideways to close +140pts (+0.9%) @ 16,571
Data
Manufacturing PMI Mar 60.8 vs 60.4 Feb (F/cast was 60)
CHINA 
CSI 300 opened higher tick higher initially but then back to flat ahead of PMI data but then worked higher to test 5,100 but unable to break out and then drifted lower into lunch. PM opened flat 5,080 but saw some selling down to 5,070 before rallying back to teethe morning high Currently +46pts (+0.9%) @ 5,095
Data
Caixin Manufacturing PMI Mar 50.6 vs 50.9 Feb (F/cast was 51.2)
HONG KONG 
Pre market opened @ 28,595 +216pts vs +117pts ADR’s with Ecommerce names strong along with Tech.
Market worked slightly higher through the morning in choppy trading with resistance at 28,700 which was tested a couple of times. PM opened at 28,725 but sold down and currently retesting.
Ecommerce leading gains, Chinese Financials mixed, broadly market +VE.
China Evergrande weak after earnings
No Northbound trading as HK closed Friday and Monday; so overall T/O light
Market will be closed Friday and Monday
EUROPE 
Futures indicate opening lower as investors watch for European PMIs and despite the good Asian data.
FTSE is seen opening -2 points at 6,722, DAX -25 points at 15,025, CAC 40 -5 points at 6,065 according to IG.
Data
EUROZONE Manufacturing PMI
GERMANY Retail Sales, Manufacturing PMI
FRANCE Manufacturing PMI, New Car Registrations
UK Manufacturing PMI
Most markets will be closed Friday
US Futures 
Opened flat Dow +18pts, S&P flat and NDX +0.1%.
Data due Challenger Job Cuts, Initial Claims, 4 Week Average Claims, Continuing Claims, Manufacturing PMI, Construction Spending, ISM Manufacturing Data (PMI, New Orders, Prices and Employment), EIA Natural Gas Stocks, Baker Hughes Oil Rig Count, Total Vehicle Sales.
Earnings: CarMax
Markets closed Friday but Payrolls data will be released.

Front Page
Shaky IPO hits London hopes 
Deliveroo’s share price closed down 26 per cent in its stock market debut. One banker not involved in the listing called the IPO “completely embarrassing”, saying it was “disastrous” for London’s tech hub hopes. The move will also fuel growing doubts among large UK institutional investors over the wisdom of loosening London’s listing rules.
Lex Deliveroo: hop scotched. Deliveroo or Deliver oops; basically that 'Traditional long funds have delivered a painful rebuke to City reformists, as well as to Deliveroo and its investment banks.'

Boom in blank-cheque deals fuels bumper season for global M&A
• Strongest first quarter since 1980 • $1.3tn spent on deals • Bulk of activity US basedSpac’s accounted for over 25% of all deals.

Share of black employees in senior US finance roles falls despite diversity push
Black employees held a lower share of top US financial services jobs in 2018 than they did more than a decade earlier, according to research by the Financial Times, underlining the shortcomings of Wall Street’s long-running efforts to improve racial diversity.

Page 2
Europe faces further lockdowns as third Covid wave hits hard
France announces strict new lock down rules, Italy may extend restiction, Ukraine shut down some of Kyiv’s public transport system and Sweden halted easing of restrictions. Poland reported its highest daily death toll.All of which will probably mean delays to the European recovery and the potential for more business failures in the meantime.

Eurozone inflation at highest rate since start of pandemic
But driven by one-off factors that are expected to fade and is still below the EU’s target, core inflation fell. There are few signs of wage inflation.

Italy expels two Russian diplomats in spying claim
An Italian naval frigate captain has been arrested by Italian police after allegedly being caught passing classified documents to a Russian diplomat in exchange for cash during a clandestine encounter in Rome on Tuesday night. NATO documents were amongst those being exchanged.
Old fashioned spying at it’s best. Caught in car park in what is described as a clandestine meeting. Embarrassing for Russia which has been trying to improve ties with Europe and recently signed an accord with Former deputy premier Matteo Salvini’s League party.

Page 3
US labels China’s treatment of Muslim Uyghurs ‘genocide’
US released its annual human rights report and called 'China an “authoritarian state” that was detaining more than 1m Uyghurs and other Muslims in Xinjiang region and engaging in rape, forced sterilisation, coerced abortions, torture and forced labour.’
Blinkin said “We’re not trying to . . . contain China or keep it down. What we are about is standing up for basic principles, basic rights, and a rules-based international order,”
It also referred to ' “extreme repression of and discrimination” against the Muslim Rohingya minority in Myanmar, and alleged torture and sexual violence by security forces. It also condemned actions in Venezuela and Saudi Arabia.’

Biden to unveil $2tn projects and corporate tax rise
Bold initiative emphasises jobs bonus from infrastructure work but rattles private sector
Key points
• Put $621 billion into transportation infrastructure (bridges, roads, public transit, ports, airports and electric vehicle development)
• Direct $400 billion to care for elderly and disabled Americans
• Inject more than $300 billion into improving drinking-water infrastructure, expanding broadband access and upgrading electric grids
• Put more than $300 billion into building and retrofitting affordable housing, along with constructing and upgrading schools
• Invest $580 billion in American manufacturing, research and development and job training efforts
Payment for the plan would involve raising corporation tax to 28% with measures designed to stop offshoring profits theoretically would fund the plan over 15 years.
But many expressed various concerns 'Neil Bradley of the US Chamber of Commerce said a “big and bold” infrastructure package was to be favoured but the corporate levies were “dangerously misguided”, would “slow the economic recovery and make the US less competitive — the exact opposite of the goals of the infrastructure plan”.’
The article also says that Biden will ‘complete its investment plan with an additional set of spending measures on “childcare, healthcare [and] education” that is likely to top $1tn, bringing the total to more than $3tn. The second package is expected to be paired with tax increases on the wealthy, including on income, capital gains and estates.’
For most the concern seems to be on the raising of taxes, something that many were worried about during the election. But so far the proposals seem reasonable and in-line with pre-election statements.
Key is that the US really does need to upgrade its infrastructure, something that no recent President was been able to achieve on a large-scale. The improving of the broad band and upgrading of electricity grids will be essential if the US wants to remain competitive.

Page 4
BBC reporter leaves China following ‘pressure and threats’
A veteran correspondent moving from Beijing to Taiwan after months of pressure from the Chinese government and state media and another signal of deteriorating international relations. The delays in granting visa’s and making them shorter a sign from China.
There is an irony that this is reported the day after Carrie Lam announced she was implementing measures in HK to prevent ‘doxing’ and the removal of what used to be public information.
The correspondant John Sudworth said 'that he and his family had left “in a hurry, followed by plain clothes police all the way to the airport and through the check-in hall”, after concluding it was “too risky to carry on”.’
It reports that 'Sudworth’s relocation was announced after the Global Times, an offshoot of the Chinese Communist party’s flagship newspaper, said he was “believed to be hiding in Taiwan island” because of threats from Chinese nationals to sue the BBC for broadcasting “fake news”.’
It added 'Sudworth “became infamous in China for his many biased stories” on Xinjiang, the western region where the Chinese government has detained more than 1m Uyghurs and other Muslim minorities, and on Beijing’s response to the Covid-19 pandemic.’
Again ironic as the BBC has never been allowed to broadcast into domestic homes in China; so how the people know him?
Quite a number of journalists that covered China are now based in Taiwan, before last year’s changes some news organisations would have relocated to Hong Kong but the curtailment of freedoms and increased in Beijing’s control means that is less possible.
The BBC said “John’s work has exposed truths the Chinese authorities did not want the world to know,”.
Whilst it reveals what the west already knew the sad part is that the majority of the people in China are unaware of the truth and accept what they are told by the state, even if they don’t believe it.

WHO report on origin of virus rules out lab theory, claims Beijing
This is Beijing’s view and promulgated mainly for domestic Chinese consumption. They had Liang Wannian, the most senior Chinese scientist in the WHO-led team that visited the city of Wuhan in January on the media rebutting the WHO claims. But revealingly he said “There was some data that according to Chinese law could not be taken away or photographed but analysis in Wuhan was done together,”
One wonders what could be so important to China’s security, that scientists, searching for the origin of the worst pandemic since the Spanish flu couldnt take copies?
If China was honestly concerned about finding the source surely then full transparency and total data sharing should have been the starting point.
The key I think is as the article points out, the party is maintaining the outbreak originated outside China and was transported to China on frozen packaging that only in Wuhan triggered the pandemic.
So any narrative that could expose the party line as being wrong must be rebutted.
In time, following that sort of absolutism will cause China problems. In some areas it already has; like the one child policy.
For years it indoctrinated the population that that was the one policy; now faced with a declining population it is trying to promote larger families but people are unconvinced; if it was wrong yesterday how can it be right today. The party's reliance on absolutes means the risk of losing credibility is high. As more and more issues arise it will find it increasingly difficult to maintain its position of dominating the narrative. If it loses that then a revolution could occur.

Companies & Markets
Deliveroo shares plunge in ‘car crash’ opening day
• Market value drops $2bn in minutes
• Blow to hopes of more UK tech IPOs
Basic points seem to be mis pricing by its bankers as they failed to acknowledge the concerns from large institutional investors about corporate governance; specifically the dual share class structure.
It is also a disaster for retail investors because they are unable to trade until next Wednesday.

Nomura and Credit Suisse prospects dim
Rating agencies Moody’s and Fitch lower outlooks after Archegos troubles
Moodys, with regard to Nomura have 'pointed to the willingness of Japan’s biggest investment bank to take on large exposure to clients without sufficiently offsetting the risk.’
It will be interesting to see how CEO Kentaro deals with the situation. There can be little doubt it was part of his turnaround plan for the company, which until this happened, was going very well, with the US being a big driver for the company and now we know why.
It is a shame because I think Nomura is a good way to play the Japanese recovery but this may have hurt its reputation, however, having dropped around 17% since last Friday’s close it may still offer value, even if dividends are scaled down and share buybacks shelved.
From my experience of having worked at Daiwa the management is often too set in its ways and systems and often reluctant to accept change. They often fail to grasp changes that are taking place in markets because the management is too far removed and they rely on their own experience rather than being open to outside advice, even from those they have hired to do a job. In someways they are similar to Barings; hitting on a lucrative income stream without really understanding what is involved.
Also Doubts grow over Credit Suisse risk culture
Archegos losses, Greensill debacle, York blow and MBS litigation put spotlight on bank’s strategic decision-making.
It notes Tidjane Thiam had said in March 2016 the bank had “an attitude to risk that has to change . . . there has to be consequences”. He was speaking after uncovering large and costly hidden bets made by the bank’s traders. It seems little has changed. In fact under Thomas Gottstein more instances have been revealed. The fact that like Nomura the top management was unaware as to how it could happen suggest some within its ranks are driven by profit and willing to skirt the rules in order to make money. It will also raise questions, as with Greensill about over cross selling products to clients.
See also Opinion Archegos makes for a trio of debacles at Credit Suisse

‘Digital laggard’ H&M hurt as curbs force store closures
Swedish fashion retailer Hennes & Mauritz fell to a loss in the three months to the end of February as the latest restrictions to limit the spread of Covid-19 forced more than a third of its stores to close. It is accelerating its investment in digital platforms, something it had been slow in doing.It also noted that China was one of its top 10 markets to record sales growth and so the backlash over its statement regrading Xinjiang was ‘deeply concerning’.
See also Editorial China forces brands to make a cotton choice
Action against H&M and Nike shows intolerance of Xinjiang scrutiny.
Notes how China is in a 'powerful position, given the growing importance of its consumer market to global brands and retailers’. It also quotes Chinese media 'CCTV, the broadcaster, last week called “unruly companies” with “no basic business ethics” that seek to “earn a huge profit in China”.’ Ironically in my view these companies are actually demonstrating good business ethics.
But the editorial focuses on how supply chains are more transparent now due to technology. Equally brand image is also now international. These factors have helped improve supply chain standards. China it says in now seeking to exploit this; those that don’t kowtow to China face a consumer boycott and Chinese firms pick up the slack. The hope being that companies put pressure on western governments to back down.
Worth noting that Boeing yesterday urged the US Govt to keep disputes over human rights and other topics separate from trade relations with Beijing, and warned that European rival Airbus would gain if the US plane maker were locked out of China.
The editorial concludes
'The immediate predicament may not be as stark as it seems: state media campaigns against offending global brands have faded in the past, and China will not want to lose H&M and Nike entirely. H&M may be able to regain visibility for its Chinese outlets with conciliatory noises.
But the outlook is clear: China runs its economy as it wishes and will not tolerate attention being drawn to human rights infringements. It is forcing brands into choosing between social responsibility and sales to one of the world’s biggest consumer markets. The silent treatment it has given to H&M is only the start of that test.’

What it doesn’t talk about is the Chinese brands that are trying to expand into international markets and the backlash they could face in overseas markets on issues like this in the future. As that happens China may realise that public opinion can be a two edged sword.

US sanctions halve Huawei operating cash flow
The power and impact of US sanctions here is clearly demonstrated. Fortunately for Huawei is that its domestic market is able to support the company; it now has a 65% share reversing it previously international exposure.

LEX Hitachi/GlobalLogic: digital data drop 'Hitachi’s largest acquisition is part of a plan to prove its future lies in software and automation. The Japanese industrial conglomerate is buying US digital transformation specialist GlobalLogic for $9.5bn. Investors need further convincing. Hitachi shares fell 7 per cent after the deal was announced.’
Concludes 'Greater technology profits could lift the multiple. But investors need proof GlobalLogic is not another example of the expansive dealmaking that made Hitachi so unwieldy in the first place.'

For interest Derivatives. Synthetic financing.
Archegos debacle spotlights hidden danger of bank swaps  
Instruments that blew up Hwang’s family office have been lucrative for Wall Street. Explains how the business works and why banks and hedge funds like it so much.
It says '“Since most swaps are executed on large notional amounts . . . this could put the total return payer (typically a commercial or investment bank) at risk of a hedge fund’s default if the fund is not sufficiently capitalised,” according to Deloitte.’
Which is what happened but was made worse by Archegos having similar positions with multiple banks.
Because they are “over the counter” (OTC) they are not reported and there is no requirement to report them to the SFC. A quote summarises it nicely “If there are five different banks providing financing to a single client, each bank may not know it, and may instead think . . . it can sell its exposure to another bank if they run into trouble — but they can’t, because those banks are already exposed,” said Tyler Gellasch, a former SEC official and executive director of Healthy Markets, an advocacy group.
For the banks, providing synthetic equity exposure is an attractive business because when clients’ positions are consolidated against one another, it requires less regulatory capital than traditional margin lending.
“Capital ratios, liquidity ratios and the ability to net down trades can make total return swaps more advantageous” than other forms of equity finance.
The main reason though is that as the regulators have tightened up on the banks ability to make money in traditional ways; the banks have looked for alternatives that do not break the rules. As long as bankers are paid more than regulators they will have the incentive to find and exploit new ways to generate fees.

Renminbi set for worst month since US trade war
China’s currency is set for its worst month against the dollar in more than a year and a half as investors fret that a clampdown on borrowing could slow the country’s swift economic recovery from Covid-19. Just as foreign investors were becoming more comfortable with Chinese bonds and attracted by the attractive relative yields, although some recent defaults had already started raising some concerns. Those are made worse if Beijing decides to withdraw its stimulus as the recovery seems to be established; reflected in its 'over 6%’ growth target.
Personally I’m not convinced; only certain sectors have shown real recovery, other, traditional areas remain subdued. Another issue is that as the outlook for the rest of the world’s recovery improves then the attractiveness of China recedes. That is likely to be most pronounced just when China will need the money most.
One recent +VE was that 'On Tuesday, FTSE Russell confirmed that it would add Chinese debt to its benchmark World’.
I think the ESG and Xinjiang could also impact the Chinese Bond market, as investors weigh up political and social factors.

Evergrande cuts debt pile by 23% under pressure from China’s lending crackdown
Looks at the company results, key being that it is being forced to cut debt by Beijing and with core business profit -26% YoY, and gross margin falling to 24.3% the lowest since 2004 you can understand why the government is concerned.
Although at 24.3% gross margin you can see why Chinese developers are attractive. Margins in Europe and the US are much thinner.
Makes the good point 'Anxieties over Evergrande’s towering obligations have been eased by its early repayment in January of a $2bn bond.
Chinese groups have $574bn of offshore dollar-denominated debt, according to Dealogic data, with $33bn maturing this year in the property sector.’
So there is good reason for continued concern too; as 'China Fortune Land Development, which specialises in industrial parks, this month defaulted on a $530m bond.’
Whilst reducing debt is a good thing, it will do so by slow new land acquisitions and that could have an impact on local government finances which often rely on land sales to make up the shortfall from Central Govt allocations.
The article doesn’t mention Evergrande New Energy Vehicle Group, but considering the number of shares Evergrande has been buying it would be interesting to understand why.

For interest BMW and Google reject use of deep sea metals
Key being that we don’t understand the environmental impact of deep sea mining and the oceans play a crucial part in climate change. Consequently companies including SamsungSDI, BMW, Google and I expect others are saying understanding the risks must be fully understood and all alternatives explored.
It also notes that whilst exploration contracts for deep sea mining have been granted to 21companies nothing can start until the regulations have been agreed and the 167 Country members of the UN backed International Seabed Authority have yet to agreed them.

For interest VW forced to apologise for ‘Voltswagen’ rebrand stunt
Volkswagen has been forced to apologise for misleading consumers and investors after releasing an apparent April fool’s joke during March. It has often been said the German’s don’t understand humour and this might be a case in point.
'The company said earlier this week it was rebranding its US arm “Voltswagen”, in an effort to promote its new slew of electric vehicles.The report was treated as authentic by several international media outlets, board members at rival companies, and even by financial analysts at Wedbush, who wrote the name change “underscores VW’s clear commitment to its EV brand and massive EV endeavours over the coming years”.’
It’s ADR’s were +16% on the released and then fell 5% when it admitted the ‘joke’.
FT notes 'It was an unusual strategy for a business that spent the past five years trying to scrub a reputation for corporate dishonesty caused by the Dieselgate affair, where VW not only sold millions of cars that cheated emissions tests, but also attempted to cover up its wrongdoing when questioned by regulators.' That I guess is the difference between advertising executives and the rest of business?

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