Apr 12 FT Chinese Vaccine Concerns, Wolf diplomacy to continue, Chinese Tech worries, Toshiba & more

12 Apr

MARKETs @ 4:30pm Hong Kong time
Asia sold down as Powell said the main threat to the US recovery was covid; ignoring his comment that 'economy at an inflection point’ and about to grow much quicker.Indicates the concerns with markets trading at highs
AUSTRALIA Opened lower but then traded sideways to close -21pts (-0.3%) @ 6.974
JAPANNikkei opened higher but sold down initially to flat but then started selling down about an hour before lunch.  PM opened slightly lower and drifted lower to close -229pts (-0.8%) @ 29,539
Topix traded in a similar pattern to close -5pts (-0.3%) @ 1,955
DataPre Market
Bank Lending Mar +6.3% vs +6.2% Feb (F/Cast was +6.3%)
PPI Mar +1% MoM vs -0.7% Feb (F/cast was +0.4%)
PPI Mar +0.8% YoY vs +0.4% Feb (F/cast was +0.3%)
Later Machine Tool Orders Mar +65% YoY vs 36.7% Feb (F/cast was +40%)
S KOREA  Kospi opened higher saw initial choppy trading but tested 3,145 in the first hour but then trended lower hitting 3,127 around midday and then bounced and traded sideways in tight range  to close +4pts (+0.1%) @ 3,136, earnings ahead.
Kosdaq opened higher and after an initial drop worked better through the day to close at the day high +11pts (+1.1%) @ 1,000, a new high
TAIWAN Opened higher and tested 16,980 in early trades but then sold down to 16,795  before an small bounce back to 16,900 and then drifted to close +6pts (flat) @ 16,860
CHINA CSI 300 opened lower and dipped, bounced to test Friday’s close but then sold down dropping through 5,000 level to find support 4,950 and saw a small uptick into lunch.  PM traded around the 4,950 and closed -88pts (-1.7%) @ 4,948After market released new loans data which was higher than expected, outstanding loans dropped MoM along with total social financing and M2 Money supply.Tomorrow we get trade data and GDP on Friday
HONG KONG Pre mareket opened @ 28,792 +93pts  vs +23pts ADR’s But sold down 500pts in the first hour to the day low, 28,274  before bounce into lunch. PM traded with support at the 28,400 level to close -246pts (-0.9%) @ 28,453
EUROPE Markets opened flat but trending lower, following the mixed handover from Asia. India was especially weak as covid cases surge and largely ignoring the positive comments from Powell about growth and keeping interest rates low.US Futures Opened flat in Asian time currently Dow -90pts S&P and NDX slight -VE after the record close on Friday. Expect some caution ahead of earnings starting this week with the banks on Wednesday

Front Page
Freedom nigh for England. Non essential businesses will be allowed to re-open in England today'Economists are expecting a surge in spending. Britons are on course to have amassed an extra £180bn in their bank accounts during the pandemic.’See also page 2 England starts to reopen after stringent lockdown

China to mix and match jabs after worries over homegrown vaccines
• Efficacy doubts spur doses rethink • Impact on global deals • Phase 3 data unpublished
Follows comments at the weekend from Gao Fu, head of China’s Center for Disease Control and Prevention (CDC). He said Chinese vaccines “don’t have very high protection rates,” He later said he comments were ‘very misunderstood’. They were also quickly removed from social media
But they are considering mixing vaccines and changing the number of doses and amending the interval between them.This is a huge revelation and puts Sinovac and Sinopharm under pressure along with the whole of China’s vaccine diplomacy efforts. Especially as the Chinese firms have not published their phase 3 trial results; which has surprised many people and lead to concerns about transparency and efficacy.I would quess that even more worrying for Beijing is the risk of public outcry at the government misleading the people. One more pressure for President Xi to deal with.

Bavarian PM rocks CDU with bid to succeed Merkel as German chancellor
'Markus Söder, prime minister of Bavaria, has declared his intention to succeed Angela Merkel as German chancellor, in a move that sets the stage for a showdown with Armin Laschet, the CDU leader and presumed heir to the top job.’
Unusual for there to be competition for the top job; but reveals the changes that could be in store as Merkel steps down.

Page 2
Montenegro asks Brussels for help with China loan for road project
The nearly finished project has put the country’s finances at risk; it wants assistance to repay a $1bn loan from China. It is potentially -VE for China as another project that did more for the Chinese companies and economy than that of Montenegro.
It says 'Montenegro raised eyebrows in 2014 when it signed a deal with China’s ExIm Bank to finance 85 per cent of the cost of a road with a dollar-denominated loan worth almost $1bn. The first 41km section cost €20m per km, making it one of the most expensive highways per km in the world, said Spajic.’'
The EU has indicated a willingness to help but a commission official said it would be hard to find the proper financial instruments, a task made harder because the project is almost complete.’ And because the loan size is out of proportion with the project by EU standards.
China holds 25% of Montenegro’s debt and has been successful in gaining traction in the Balkans with infrastructure and energy projects and more recently vaccines. Previously Russia had been a big supporter until Montenegro joined the EU and applied to join NATO.

Page 3
Xi wolf warriors bare fangs in support of foreign policy
Stakes are high but Beijing believes an assertive stance will yield results
Looks at the various recent examples of the activity. The policy which stated whilst Trump was president and seems mimic his style of assertive claims often without substance or reason.Beijing defends it on the basis that they believe they are in the ascendancy and it would appear that might is right. The article suggests that China feels it has been bullied in the past and it will not let that happen again. 'The country’s “century of humiliation”, according to the Chinese Communist party, ended only after its revolutionary victory in 1949. “China today is not the China of 1840,” Xu Guixiang, a senior party official in Xinjiang, said last week. “The days of Chinese people being bullied by the west have passed. We are not an easy target any more . . . We will fight tooth for tooth until the end.”’
'“Heated nationalism is good for strengthening the legitimacy and authority of the central government and [Xi],” said Yun Sun, a Chinese foreign policy expert at the Stimson Center in Washington.’
At present we can be sure that the policy will continue until President Xi decides other wise and like so many other issues currently facing China, having assumed the narrative, changing course is not an option. That would involved admitting the policy was wrong or that circumstances have changed significantly. President Xi is holding himself out as a great leader of China, if not the greatest. Admitting 'a mistake’ does not fall into that mantle. But that means the risk to China is that is becomes increasingly isolated. Together with the risk that the people of China realise that the policy is a mistake and lose confidence in President Xi and the party.
In the meantime some of China’s diplomats get to enjoy the limelight

India tightens curbs in effort to cope with coronavirus wave
Failure to do so risks a further surge in covid cases. Doing so risks the economic recovery.
It notes that 'Many migrant labourers, traumatised after being stranded in cities by last year’s lockdown, have begun leaving cities such as Mumbai and Delhi again.’ That could be bad news for the economy and worse further spread covid.

Page 4
Top Democrats back Biden global tax plansRepublicans say proposals could cut revenues and disadvantage US business

Michigan struggles with Covid surge among young
State health officials reveal 345 cases per 100,000 in those waiting for a vaccine

Iran blames ‘nuclear terrorism’ for incident at Natanz plant

Rising inflation adds to Brazil’s woes as it grapples with health crisis
Growth in price of staple foods fuels silent epidemic of hunger among millions of people

Companies & Markets 
China tech giants on alert after $2.8bn Alibaba fine
Raises questions about who might be fined next and by how much! Alibaba -7.2%, Tencent is -1.8%, Meituan -6.2%; at the time of writing. Others at risk are Pinduoduo and Didi. All were fined in March over discount grocery practices.
Tencent could be more complicated because of the range of businesses that it is involved in and its habit of taking small stakes companies that use its platform; especially start ups. Also its WeChat platform is regarded by many as a public utility. Also key is that Pony Ma has been in contact with the regulators which might suggest some co-operation and changes have already been agreed which could mitigate any fines.
I think the fine against Alibaba was unique as it wasn’t just a fine but a retribution to Jack Ma for both speaking out against the establishment and because of his national popularity. For the others I think any fines will be symbolic warnings and where executives have already shown commitment to the party minimal.

US executives enjoy extended corporate jet use in pandemic
• Companies approve personal trips
• Median spending on aviation up 9%
Nice quote 'Though executives’ private jet travel has drawn public ire in the past, the pandemic “is the one time that it probably makes sense to have done this”, given the lack of commercial flights in 2020, said David Yermack, a professor at the Stern School of Business at New York University. However, the jet expenses raise questions over the extent to which jets were being used for vacations, he said. “It is not the plane, it is the vacation trip itself that I find interesting,” he said. “Why are they going on vacation at all?”

Gilt trip Bank of England overtakes private investors as biggest holder of sovereign debt
The Bank of England’s holding of UK government debt has surpassed the two largest groups of private investors after policymakers accelerated debt purchases to bolster the economy against the blow from the pandemic.
'“The speed of [the BoE’s gilt] build-up is pretty striking, to put it mildly,” said John Wraith, head of UK rates strategy at UBS.
’'However, analysts warned that the BoE’s rising UK bonds share could put gilt prices under downward pressure when the bank’s support was withdrawn once the pandemic’s threat to the UK economy had eased.’

Russia’s Ozon spreads into banking services
Chief to ramp up fintech offerings, including loans to merchants selling on platform.Following the lead from other countries. Established banks globally are going to come under more and more pressure.
It is interesting that they will focus on SME’s which is what Ant was/is doing. I think that whilst China’s SOE banks didn’t like what Jack Ma said; it doesn’t mean he was wrong! China having lead in Fintech for so long could find itself overtaken by others.

CVC’s $20bn offer highlights Toshiba turmoil
Questions raised over private equity group’s ‘deal of the century’ for Japanese group torn by conflict in the boardroom.
It quotes a large investor '“I have no doubt that CVC’s interest is genuine: there isn’t a private equity house that wouldn’t like to do a deal like this,” said one of the company’s large investors. “The real issue is whether we are hearing about it now because there is a civil war within Toshiba and this is being used by one of the sides as a weapon.”’
An interesting read and insight into Japanese management tactics.
Key I would think is that Kurumatani is ex CVC and his closest ally on the Toshiba board Yoshiaki Fujimori is a CVC adviser. So to an extent they know what to expect and how such a deal could be very good for Kurumatani as it would rid him of the activists that have been critical of his management and probably pay him well too.
It notes that how profitable such deals can be due to the 'availability of cheap funding and the generally high cash flow of Japanese companies,’ .
But other board members are not necessarily on side or so pro the move.
There are also signs of a change in attitude to foreign ownership quotes; Jesper Koll who says ‘there had been a distinct change since the 2019 departure from Japan’s ministry of economy, trade and industry of Hiroshige Seko, a minister known for a highly protective attitude to “national treasure” companies such as Toshiba. “With him no longer there, it is possible that private equity firms will think that some barriers have fallen,” ‘
But the reaction of some at Toshiba suggests the board is divided. 'In an indication of the turmoil, Satoshi Tsunakawa, the former chief executive, returned to an executive officer position on Wednesday to handle shareholder engagement. Within four days of receiving the CVC proposal, the board’s chair Osamu Nagayama criticised the offer as lacking a “detailed review” of the group’s business.
While the board would carefully study the proposal, he said, it was “completely unsolicited and not initiated by Toshiba”. Scrutinising the financial details would take time, he added.’
The key being that many of the board like prestige of being part of a listed entity.
Other aspects of the deal raise issues; government scrutiny because of its involvement in Nuclear power, but those worries are likely to be eased with the inclusion of a government-backed fund in the CVC consortium.
Together with the fate of Kioxia which pulled its IPO and now maybe in talks to form a 'three-way alliance with US chipmakers Western Digital and Micron to compete against industry leader SK Hynix, which last year agreed to buy Intel’s NAND memory business for $9bn. The US-Japan chip tie-up is unlikely to be a full merger, one of the people said, citing the risk of the deal being blocked by Chinese antitrust regulators. Kioxia said there was no change to its IPO plans. Western Digital and Micron declined to comment.’
It would also be a first for CVC which tends to focus on firms up to o €5bn, and in Asia up to $1.5bn, it also doesn't normally enter club deals as this one could turn out to be.
All of which takes us back to '‘The real issue is whether we are hearing about it now because there is a civil war within Toshiba’'

Biden welcomes end of S Korea battery dispute
He managed to dodge a bullet as the companies agreed a last minute settlement, which might reflect the view that he wasn’t go use his veto over the ITC ruling. If he has that would have opened him up to some bigger issues about over-riding court rulings. A distraction the Democrats can well do without at present.

Maersk warns of weeks-long Suez backlog
Supply chain disruption set to continue until late May after canal blockage.Makes the point that supply chains are not just about ships getting to the port; there is a whole lot more involved. Berthing slots, missing the next leg schedule, shortage of space at ports to unload containers and to stores the ones for export, road hauliers trucks, clearing customs etc etc. I think it also illustrates why the sector is prime for blockchain; at least that would streamline the paperwork.

Week ahead. Market questions
US retail investors expect consumer spending pick-up.  Thursdays data hopefully shows a rebound after February’s disappointing numbers put down to bad weather and delays in stimulus cheques.
Is the outlook for Germany’s economy set to brighten?  ZEW data this week
How strongly will China rebound?  Actually there is a lot of China this week this article looks at Fridays GDP data prospects but before that on Tuesday we get Balance of Trade, Exports and Imports and we could get New Loans data, Total Social Financing, M2 and FDI at anytime.  Also on Friday we get House Price Index, Industrial Production & Capacity Utilisation, Retail Sales and Unemployment.   So an important week for China and investors;  especially as the PBOC has started tightening and the Govt is worried about house prices rising.

Millennium expands risk management division
Millennium Management, one of the biggest hedge fund winners from last year’s coronavirus-driven market turmoil, has further beefed up its risk management by hiring three former Goldman Sachs partners.Interesting timing as these hires would have been started long before the recent Archegos incident. It notes 'Multi-strategy hedge funds rely on tough risk management in order to navigate choppy markets’
More so now after the Archegoes and especially with markets trading at highs.

Kirin’s flawed exit from Myanmar tests the bounds of ESG
A good read it makes the point that Kirin had for too long known about the issues and was already under pressure from shareholders so the coup just accelerated the announcement. BUT if goes on to note that Kirin isn’t really looking to leave the country but to find a new non-military partner!
It is unlikely the generals would let that happen.
It concludes 'The risk, given this evidence, is in holding up Kirin’s deeply flawed approach as an example for others to follow on Myanmar. A swift break from anything involving MEHL (and other military-linked companies like it) is clearly vital.
But Kirin should not steer the considerable momentum of ESG-themed investment to a thesis that an exit from Myanmar is the only “right” option, while remaining in place and generating economic activity is questionable.
Among the Japanese companies in Myanmar are many that are not remotely linked with any military companies. They can argue that their presence has not only significantly improved the lives of ordinary people, but is critical to the country’s chances of emerging from the deep economic hole into which it is descending post-coup.
The test of ESG is whether it yet has the maturity to distinguish the corporate actions that are best for Myanmar.’
It will not be long before ESG will be applied to Xinjiang too in my view.

Technology will save sluggish emerging markets. By Ruchir Sharma. Morgan Stanley Investment Management’s chief global strategist, is author of ‘The Ten Rules of Successful Nations’
Starts 'Emerging economies struggled to grow through the 2010s and pessimism shrouds them now. People wonder how they will pay debts rung up during the pandemic and how they can grow rapidly as they did in the past — by exporting their way to prosperity — in an era of deglobalisation.’
He focuses on the adoption of technology and benefiting from the fact that others have already spent the money developing it.
'From Bangladesh to Egypt, it is easy to find entrepreneurs who worked for Google, Facebook or other US giants before coming home to start their own companies.
As well as the so-called Amazon of China, there are Amazons of Russia, Poland, Latin America and south-east Asia. Local firms dominate the market for search in Russia, ride-hailing in Indonesia and digital payments in Kenya.’
The key is the revenue from digital services; 'Among the top 30 nations by revenue from digital services as a share of gross domestic product, 16 are in the emerging world. Indonesia, for example, is further advanced by this measure than France or Canada.’
Their ability to benefit is from the fact 'In countries where people have difficulty even finding a bank or a doctor, they will jump at the first digital option that comes along
.’'Though only 5 per cent of Kenyans carry credit cards, more than 70 per cent have access to digital banking.’
He also makes the point that governments are putting their services online to avoid corruption, which helps everyone … except the criminals.
Also the costs of starting a business are falling; much of it can now be done from a smartphone.
He concludes 'It’s early days, too. As economist Carlota Perez has shown, tech revolutions last a long time. Innovations like the car and the steam engine were still transforming economies half a century later. Now, the fading era of globalisation will limit the number of emerging economies that can prosper on exports alone, but the era of rapid digitisation has only just begun. This offers many developing economies a revolutionary new path to catching up with the living standards of the developed world.’

Manufacturing matters to superpowers. By Rana Foroohar
Starts 'Manufacturing matters. While it has become increasingly automated and globalised over the past several decades, it still holds a special place in the national psyche in the US and other big exporting nations, such as Germany, China and Japan.’
Basically because it is such key part of their economies. Focuses on human rights and the textile trade especially the Xinjiang issues but notes that the textile trade has changed significantly; in 2005 China exported 71% of finished good, in 2018 it was just 29%.
It also notes that an MGI report to be released shortly 'examines 30 main manufacturing sectors in the US. It finds that 16 of them stand out for their economic and strategic value, as measured by their contribution to national productivity and economic growth, job and income creation, innovation and national resilience. Apparel is not on the list. But semiconductors, medical devices, communications equipment, electronics, autos and auto parts, and precision tools are.’
Key in part is demand and whether there is enough domestic demand to underwrite domestic production. Biden is currently looking at supply chain vulnerabilities as well as pushing Buy America which is raising a number of issues for US/China supply chains.
She concludes'Where would this leave Europe? Sitting very uncomfortably between two economic superpowers. It does not matter much at a national competitiveness level what fast fashion purveyors and luxury retailers do about Xinjiang, though the moral questions involved may well have brand value implications.But it does matter what governments do to support domestic demand or control supply chains. I suspect that those decisions will start to revolve less around simple cost and efficiency calculations, and more around a broad discussion of national competitiveness.’
I think she is right increasingly national issues will become more important and for some sectors though it will be less about competitiveness and more about self-reliance. As covid has shown the ability to manufacture drugs is important; the question is what other sectors are also important.

Lex {Cash: hoarding and hiding}. Looks at how despite people moving to digital transactions the demand for notes has increased. The main reason seems to be 'as a store of value and to fuel the shadow economy.Kenneth Rogoff, a Harvard economics professor, said more than half the currency in most countries is used to hide transactions.
Scrapping big denomination notes might blunt the use of cash for illicit purposes. Sweden’s effort to crack down on the informal sector is one reason for the rapid decline in its use of cash.
But a sustained rise in prices would erode cash’s role as a store of value and have a bigger effect. A move away from rock-bottom interest rates will be the only real incentive to shift cash out from under the mattress.'

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