March 22 FT Europe Lockdown, Chips fires in Japan and default in China, HK taxes & Judges no change


22 Mar

MARKETs As at 1pm HK time 
JAPAN 
Nikkei opened lower following the mixed performance in the US on Friday. It trended lower until late morning hitting a low of 29,107 before a small bounce into lunch. PM opened around the 29,200 level and traded sideways Currently -511pts (-1.7%) @ 29,281
Topix traded in a similar fashion but seeing a PM rally; currently -16pts (-0.8%) @ 1,996
Data out at 1pm
Coincident Index final Jan 90.3 vs 88.2 Dec (F/cast was 91.7)Leading Economic Index final Jan 98.5 vs 97.7 Dec (F/cast was 99.1)
S KOREA  
Kosdaq only slightly higher but initially sold down to 950 level which it tested a couple of times before working higher to 958 around midday and now trading sideways currently +4pts (+0.4%)@956
Kospi opened flat traded down to 3,020 but the worked back to +5pts around midday. Then eased back into the red before popping again, currently +6pts (+0.2%) @ 3.045.
TAIWAN Opened just in the red, sold down for the first 20 minutes but then rallied to 16,176 and then traded sideways around 16,150 until 12:20pm when it rallied to test 16,200 but failed to break out and trended lower into the close; currently +116pts (+0.7%) @ 16,191
Due after market
Unemployment Feb (Jan was 3.75% F/cast is 3.8%)
Export Orders Feb (Jan was 49.3% YoY F/cast is 46%)
CHINA 
On the open Loan Prime rates were announced unchanged; 5 yr 4.65% and 1 yr 3.85%; the eleventh month of unchanged.
CSI 300 opened flat and rallied to 5,071 before selling back down to the opening level and then working higher into lunch. Currently +36pts (+0.7%) @ 5,042 Team China looks to be in play to try and reassure investors that US/China relations will not be a -VE impact on the market. But bond default and property in lower tier cities remain a concern.
HONG KONG 
Pre market opened @ 28,80, -190pts vs +177pts ADR’s
Market initially rallied to 29,100 in the first 20 minutes but then reversed back to 28,860 level before working slightly better into lunch.
Data After market
Current Account Q4 (Q3 was HK$96.5b F/cast is HK$25b)
Inflation Rate Feb (Jan was +1.9% YoY F/cast is 0.2%)
EUROPE 
Expect markets to open lower and investors watch the weakening to the Turkish lira following the changes at its Central Bank.
US Futures 
Opened Dow -78pts, S&P -0.3% and NDX -0.4% but have turned more positive through the morning Dow -42pts, S&P flat and NDX slightly + VE

FRONT PAGE
US migrant crisis deepens The growing crisis of migrants crossing from Mexico.  Inside the story Migrants place faith in Biden.  Whilst there is pressure on the US border it is worth noting that it is because of the 'crime and corruption-plagued Northern Triangle — Honduras, Guatemala and El Salvador — where hurricanes last November have increased poverty and desperation.’  Resolving some of those issues, with international co-operation could alleviate a lot of the suffering currently being seen on the US border.

Virus surge and new lockdowns cast shadow on Europe’s economy
• Third wave prompts growth downgrades • Restrictions for Italy, France and Germany.The reintroduction of lockdowns is prompting economist to reduce forecasts and citizens to take to protests about government’s handling of the situation. The expectation is that a lot of the summer vacation spending will now not happen and that the gradual recovery that had been expected will not now happen. A negative for Asian exporters to Europe.
See also How resilient is the eurozone economy against new Covid curbs?  Highlights that this weeks flash PMI data for Europe is likely to give an indication.

Carmakers face fresh supply blow after Japan factory blaze hits chip output 
'Renesas Electronics, one of the world’s largest makers of semiconductors for the car industry, has warned that a fire at one of its factories could have “a massive impact” on already squeezed global supplies of chips.’
The situation was already bad and it just got worse. The FT weekend carried a piece about how the cold weather in Texas has hit the petrochemical sector and hence the plastics required for seats, airbags and dashboards etc. and there was already a shortages of auto chips anyway.
Whilst the fire was bad it does note that since the events of 2011 Renesas has diversified its production so around 66% of the chips affected by the fire can be produced elsewhere. But there will still be shortages.
It’s a negative for the Auto makers and the whole of their supply chains. As production is halted those suppliers who can continue to operate will see push backs as the manufacturers halt production.

Page 2
Hong Kong reassures on ‘tax haven’ status
Pandemic and political turmoil have stirred fears city needs to raise revenue
Michael Cheung, Carrie Lam’s number 2, said three key things;
1. Judges will not have to swear a new oath to China; but all other government civil servants have too.
2. Hong Kong has no intention of rising taxes, or changing the current tax regime (no capital gains, dividends or sales taxes).
3. Beijing has told Hong Kong to sort out the housing issue.
That third one is likely to be bad news for the Hong Kong residential developers. He described it as “[Beijing] made it quite clear we have to crack the hard nut . . . We will crack the hard nut — the hard nut is housing, land, the wealth gap and so forth,” Cheung said. “In the new landscape . . . some vested interests may have to compromise.”
He is right but there are a lot of simple measures they can implement to help:
A. Removing the pre-sale option for developers, that would increase the pressure on them to complete developments.
B. Implement not only a start date on development of land bought from the government but also a 'complete by’ date; that would stop developers buying land, doing some ground works and then waiting for prices to increase before getting on with the development.
C. Allow more brownfield sites to be redeveloped and speed up the time it takes for planning permissions, alterations etc to be dealt with. That may mean increasing the Land’s Department staff but it would clearly be in the public interest, and maybe bring in some new commercial surveyors rather than rely of the governments in-house ones. That might make the department a more commercial enterprise.

Japan uses toilet humour in bid to help children learn about money
Looks at how Japan’s Financial Services Agency has turned to a scatological cartoon character to teach children about money. 'The regulator wants to leverage the popularity of Unko Doriru, a bestselling series of workbooks that transmit their educational message through defecation-themed sentences, imagery and puns.’Whatever works to get the message over has got to be worth a try.

Page 3
US stimulus promises to set global economy back on track
Package of $1.9tn expected to boost China and have a trickle-down effect
Looks at how Biden's stimulus package will be good news for global exporters who supplier the US; especially as activities like eating out are restricted so the expectation is that the money will be spent on consumer goods; many of which come from China. Consequently it expects the US and China to do well and that should help Europe too. But within China they are seeing rising costs both for raw materials but also wages as factories try to attract staff. Many are worried that the current high demand will be offset by the rising costs.
It is also likely to raise concerns about trade unbalance between the US and China again and bring up the trade deal that Trump’s team negotiated. Which after the Alaskan meeting could result in complications.
It concludes 'The OECD said in its latest economic outlook that the US stimulus would raise the global growth rate by 1 percentage point in 2021. If followed by other countries, it offered a route towards a much better recovery than that after the 2008-09 global financial crisis, the OECD added. “It is potentially a blueprint for others,” Ward said. “The ambition alone sets an example to governments around the world.”’

For investors it means monitoring the state of US/China relations but also looking at which companies have diversified their production out of China. They are likely to benefit from cheaper costs than are being seen China and potential less ‘conflict’ when it comes to exporting to the US.
For example shoe makers; like Yue Yuen, now produce a lot of their shoes outside China, and in China they use a large amount of automation. They still have R&D in China and tend to produce the highest value shoes in China, because of the better skilled work force but for ’ordinary’ production they manufacturer in a number of Asian countries and have introduced R&D facilities in other countries too, at clients request.
Investors should look to companies that have done that or have the ability and are planning to do it.

State of emergency in Miami Beach after crowds descend
It’s spring break and a lot of young Americans are keen to party regardless of covid it would appear. It will be interesting to see it that results in a spike of new covid cases. If it doesn’t then that might call into question the policies being adopted by a lot of administrations regarding social distancing.

Companies & Markets.
On the boil US leads the way as investors inject $168bn into global stocks in a month
Latest EPFR report shows that funds that buy shares recorded $68.3bn in net inflows in the week to last Wednesday, the largest amount on record; with US stocks being a prime recipient. It comments that some of the inflows are probably due to the stimulus cheques being received; which would raise the question that if people are using the stimulus money to increase their investment portfolio did they need the money and is it going to help stimulate the economy?

Lawyers start claims process on Greensill supply funds
• Investors try to cut potential losses
• More than $10bn of trapped assetsAn embarrassment no doubt for CS and likely to lead to loss of clients and AUM.

Light gas deployed to turn heavy industry green
Its backers see hydrogen as a way to cut emissions in steel and cement production, but the investment required is huge.An interesting read, notes 'While most European steel groups are considering hydrogen as a route to making so-called low-carbon steel, Chinese rivals have focused more on combining traditional steelmaking with carbon capture and storage technology.’
Another key point is that the emissions issue of steel is also an issue to cement production, which underscores why finding solutions is key.
Nice quote to put it in perspective “..We need to be realistic — we are where the wind industry was 20-30 years ago in terms of deployment.” Any solution is likely to need state support to get started.
Also worth reading on Oil & gas SEC backs shareholder votes on emissions  ConocoPhillips and Occidental face tougher stance from regulator.  A change stance from the new administration; rolling back some of the latitude the Trump administration has allowed. For investors it means that the companies are likely to face tougher hurdles, good for ESG and emissions but likely to hurt profits.

Global investors seek freeze on foreign assets of China’s chip champion
Default on domestically issued bond triggers concerns over offshore notes worth $2.4bn
'International bondholders owed tens of millions of dollars by a Beijing-backed semiconductor group are seeking to freeze its overseas assets, as corporate debt problems complicate President Xi Jinping’s attempts to unshackle China from foreign-made chips.’
The legal action has been started in Hong Kong to prevent offshore assets being sold to pay for mainland debts. At this stage the true extent of the company’s debts not known.
It also gives an insight into how many Chinese firms operate. 'Zhao Weiguo, Tsinghua chair. The aggressive dealmaker, who journeyed from life as a shepherd in western China’s Xinjiang region to studying at Tsinghua University, made his fortune in property and has forged ties with senior members of the Chinese government. Under Zhao, whose Beijing Jiankun group owns a large stake in Tsinghua, the chip group embarked on a deal spree that included the purchase of French chipmaker Linxens as well as a majority stake in data-networking business H3C from Hewlett-Packard.’
At the time those were inline with Beijing’s wider policy and it 2017 it raised $22bn in new funds from state investors but it is currently unclear whether Beijing will help again.
Part of the issue is that 'Zhao benefited from state backing during the administration of Hu Jintao and he continues to have a close personal relationship with the former president’s son, Hu Haifeng. But there are tensions between Hu Jintao and current president Xi, clouding the picture.’
It quotes Douglas Fuller, 'an expert on China’s industrial policy in the chip sector at the City University of Hong Kong, said Tsinghua was ultimately “a bad choice as the vehicle through which to build China's chip industry”. Fuller believes the group “overpaid” for two chip design groups, Spreadtrum and RDA Microelectronics. The pair were eventually merged into one “underperforming” unit, he added.
ChangXing Memory Technologies and Yangtze Memory Technologies, two important chip affiliates of Tsinghua, “should prove viable . . . but they will not displace any of the big global players . . . any time soon”, Fuller added.’
But that really identifies the problem China does not have a natural national champion to use as the foundation to build its dream.
The case is also interesting because it illustrates the problems foreign investors have in pursuing debts from Chinese companies and it will be interesting to see if the Hong Kong courts are allowed to act with legal freedom; that is a key to Hong Kong remaining a secure financial centre; especially with questions being asked about other Chinese bonds that have been issues offshore. It concludes 'Chinese companies owe $574bn in offshore dollar-denominated debt, with $72bn maturing this year, Dealogic data shows.
A large proportion of the borrowing is by the property sector, which has $33bn of bonds maturing in 2021. China Fortune Land Development, which specialises in industrial parks, this month defaulted on a $530m bond that counted BlackRock and HSBC funds among its investors.’

The chip business remains a key weakness for China in its aspirations to become a true world leader. I think that is the main reason it is interested in Taiwan; for the technology. An analyst wrote 'Foreign governments would have to invest US$30 billion per year for five years to catch up with TSMC and its main competitor, Samsung.' That illustrates the size of the issue China has as it seeks to build its own chipmaking sector.

The other interesting point to note is the amount of money that Chinese companies raised off-shore; much of that was because it wasn’t available onshore. Illustrating the dependence of China on foreign investment and something that Trump was aware of and Biden will be too.

For Interest
How to Lead. Tony Douglas, chief executive, Etihad Airways
Let the storm take its natural course
The airline boss is taking a phlegmatic approach to the crisis hitting the sector. “You know what? It is actually OK to have no idea exactly how this is going to pan out,” says the British chief executive of Etihad, Abu Dhabi’s national airline. “The trick to it is to be able to embrace ambiguity.” Worth a read
Book review
A tense thriller revisits Japan’s Fukushima
'Meltdown is a meticulous attempt by Yoichi Funabashi, one of Japan’s most distinguished journalists, to recreate what happened. He describes his technique as “seizing the truth while it’s hot”, which means, in this case, conducting interviews with more than 300 protagonists before their memories fade.’He concludes the review'The most interesting character is perhaps Yoshida himself, who died in 2013 of a (probably) unrelated cancer. A devout Buddhist, he led the workers who stayed behind, known as the “Fukushima 50”.
Yet even a man of Yoshida’s qualities proved no match for the forces of nature and physics or the flaws of a system in which — despite his defiance — he was ultimately a cog. At one point, Yoshida calls the prime minister’s office to explain he has run out of options. “I’m sorry,” he says. “We may be finished.”’Sounds like an interesting book to read.I’m just finishing 'The Book Smugglers of Timbuktu’ by Charlie English. Combines the early attempts to find Timbuktu with the invasion of Jihadists in 2012 who threatened to destroy its libraries that contained thousands of ancient manuscripts. Meltdown sounds like a good book to follow.

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