Feb 22 FT HSBC pivotal change, China's CGTN seeks licence in France, China's new rules on lending,


22 Feb

MARKETs @ 2:15pm HK time
JAPAN 
Nikkei opened higher @ 30,282 after the G7 meeting which proposed greater co-operation against China. It worked higher in the morning to 30,458 before selling down into lunch. PM opened lower at 30,100 and worked back to 30,300 the opening level which became resistance Currently +231pts (+0.8%) @ 30,250
Topix opened higher but traded sideways for most of the morning but sold down into lunch. PM opened lower and trading sideways currently +15pts (+0.8%) @ 1,944
S KOREA  
Initial signs of Foreign buying in Tech but short lived.
Kosdaq opened flat but initially worked better to test 970 but failed to break above and then reversed and has sold down since; currently -8pts (-0.8%) @ 957
Kospi traded in a similar patter, morning high was 3,143, currently -17pts (-0.6%) @ 3,091.
Data
Exports for first 20 days +16.7% YoY on strong shipments of chips and autos, according to the data from the Korea Customs Service.
Tomorrow we get Consumer Confidence.
TAIWAN 
Good GDP growth data released at the weekend and good earnings continue.
Opened higher and tested to 16,580 in early trades before easing back to around 16,450 and trading sideways;  currently +69pts (+0.4%) @ 16,410 CHINA 
Left Loan Prime rates unchanged at the weekend but announced new lending rules for Ecommerce which will come into effect next year. Also the G7 statement -VE for sentiment on China. China’s foreign minister calls on the US to scrap tariff addend retractions on Chinese Tech as conditions of restoring damaged relations
CSI 300 opened flat but sold down to 5,680, bounced but then sold down again to the lows at lunchtime. PM opened lower and trading sideways Currently -116pts (-2%) @ 5,661
Tomorrow we get House Price Index
HONG KONG 
Pre market opened at 31,071 +426pts vs +65pts ADRs. With strength in Tencent, Meituan and Xiaomi (despite denying EV rumours), Financials were also strong.
But market sold down 325 pts in the first 20 minutes to 30,745. Then effectively traded sideways into lunch with Ecommerce names weak, Telcos seeing continued interest despite China Mobile announcing net additions slowing. Resources, Macau and Consumer names also +VE. Genscript Bio issued a profit warning pre market
PM market opened lower and selling down. Currently -102pts (-0.3%) @ 30,545
CLP announced earnings at lunchtime FY20 Earnings Rise 1.46x to $11.456B, Declares 4th Interim DPS $1.21
Earnings due today: Nine Dragons (2689), Parkson Retail (3368)
Earnings Tomorrow HSBC (5), Hang Seng Bank (11), Guoco (53) SmarTone (315), Top Form (333) SJM (880), and others.
EUROPE Expect market to open slightly higher after a positive G7 meeting. Earning still in focus
Data due
GERMANY Ifo Business Climate, Current Conditions and Expectations.
US Futures 
Opened Dow +50pts, S&P +0.1% and NDX +0.2% but Dow eased backing Asian time to Dow +20pts S&P +0.2% and NDX +0.2%
AHEAD Chicago Fed National Activity Index, Dallas Fed Manufacturing Index
Earnings: Dish Network, Royal Caribbean, Marathon Oil, Ingersoll-Rand, Occidental Petroleum, Transocean, Zoominfo, ONEOK.

FRONT PAGE
Djokovic wins in front of fans. Demostrates that with care large events can be hosted successfully.  Important for Japan ahead of the Olympics
HSBC steps up pivot to Asia with Hong Kong job moves and US exit
London loses trio of top staff • Strategic update imminent • Bank navigates China tensions.News comes a day ahead of HSBC is who is due to announce earnings tomorrow.
FT reports Executives relocating to Hong Kong are likely to include Greg Guyett, co-head of global banking and markets, Nuno Matos, chief executive of wealth and personal banking and Barry O’Byrne, chief executive of global commercial banking, according to people familiar with the matter. Meaning that the business divisions responsible for most of HSBC’s global revenue would be run out of HK. The moves are subject to regulatory approval.
Clearly demonstrating that they feel Asia is where they have the best opportunity to make money. It notes an intention to focus on China, Singapore and India
At the same time it is expected to announce a withdrawal from consumer banking in the US; ending 40 years of trying to gain traction there. Interesting to note that comes as Citi is looking to sell its retail banking operations in Asia/Pacific.
Other changes expected tomorrow are more cost cutting, simplifying its management structure and an update on selling its French operations.
China TV network seeks French licence after UK spat wrecks Europe hub plan. 
Applying to be able to broadcast in Europe after the UK revoked its licence. At this stage the French media watchdog said it was considering if it fell under its jurisdiction and would need to analyse the reason the UK revoked its licence. France does not have rules banning state-controlled broadcasters.
Key is that if it can get a licence it will be able to broadcast into the whole of Europe; which means it could broadcast back into the UK. The article notes The network can still broadcast over the internet, and a lack of broadcasting rights would not curtail the network’s ability to keep reporters and a headquarters in Europe.
It will be interesting to watch the reaction coming after the G7 agreed more co-operation on pushing back against China’s economic 'abuses and coercion’; everyone must play by the same rules.

INSIDE
Biden under pressure on corporate tax (Page 2)
Business groups warn rate rise would put spending ambitions in jeopardy.It’s going to be a tough call as with most things businesses are happy to accept cuts but reluctant to see increases. The fact that there is opposition even to tax increases to pay for the upgrading of US infrastructure is a concern. Business is suggest the government look at other ways of funding infrastructure; like the federal gas tax but that would hit poorer rural communities who are less likely to see the benefits.Businesses are saying that tax increases now would make them less competitive just when they need to be at their most competitive. Finding a ‘fair’ way to pay for infrastructure is extremely difficult. Quantifying who benefits from new roads and other services and by how much has never been done. As ever compromise will be needed.

Calls for Hong Kong legal reforms stoke fears (page 4) 
Pro Beijing parties are cling for changes which include 'forcing judges to consult a new council made up of members of the community before handing down sentences’.
So far the impact on Hong Kong’s legal system has been minimal but the pressure is rising and that is a concern.It notes that Paul Harris the new head of the city’s Bar Association has come under increased criticism from China’s state media and government after he suggested some aspects of the new security law be changed. Like allowing some suspects be taken to the mainland for trial.
CY Leung a former Hong Kong Chief executive accused Harris of colluding with foreign forces. Which under the new security law means he can be investigated.
The article notes that some barristers think Beijing is trying to divide the bar and get Harris removed, not doubt in the hope that his replacement will be more pro-Beijing.
Harris has said he is keen to engage with Beijing but that there were some issues on which the Bar could not compromise. So far the response to dialog from Beijing has not been encouraging. It also mentioned about British barrister David Perry backing out of representing the HK administration at the trial of senior pro-democracy figures after pressure from the UK government.
Also that some UK MP’s have called on the UK Supreme Court to stop a practice of allowing British judges to serve on Hong Kong’s Court of Final Appeal; which Harris said would be a mistake.
For investors the legal system, its independence and reliance on precedence is key and it what makes Hong Kong important for investors.
Tampering with it, even at the edges, could result in unforeseen consequences for the attractiveness of Hong Kong and China as an investment destination.

Companies and Markets section
China’s alternative lenders fill gaps left by Ant
Regulatory clampdown allows challengers to flourish but borrowers are paying more.
Adds to Friday’s China’s clampdown on Jack Ma’s Ant boosts rivals
That noted High-interest lenders fill market vacated by fintech group, increasing fears of rising defaults. Limiting Ant has forced consumer to other sources which charge higher rates and have less sophisticated systems to identify and manage risk.
So whilst the official line was to protect borrowers (from an unfair monopoly) and the system is seems to be failing. Ant’s economies of scale and use to tech actually gave consumers a better deal.
It adds the comment of the CBIRC’s tightening of regulations on online lending over the weekend. The addition of a requirement that 'online lending platforms will have to contribute 30 per cent of the funding for loans they offer in partnership with banks. The CBIRC will also cap how much capital commercial banks can commit to online lending in co-operation with tech platforms. The new rules will come into force next year.
'Before Ant an others used the banks lending rather than its own balance sheet. It was also able to use its data base of consumer spending combined with 'high-tech algorithms to match borrowers with banking partners’.
Its knowledge of consumer spending meant it could accurately price risk and so keep its rates low. That combination allowed for explosive growth of the business. The article also mentions how the growth in small lenders is a reflection of how the large state Banks don’t focus on the needs of ordinary people but corporate clients

For me I think a big concern is the potential back lash of public opinion. People still need to borrow but now they are going to be charged more.
Many investors had been looking forward to Ant's listing as a way to make money. That didn’t happen and now many of those people, the poorer members of Chinese society, are now going to pay more for loans and may be granted loans they can’t afford. A society that is already seeing young Chinese are using social media platforms like Bilibili to voice despair over rising house prices, widening inequality and the price of everyday goods. The growing frustration about social mobility highlights a ‘serious divergence’ between China’s fast-growing economy and the life satisfaction of citizens.
I am sure Beijing will be monitoring the situation carefully, and Jack Ma has been keeping his head down but the worry must be that many start to agree with what he said. President Xi moved quickly to shut down what he and others considered a threat to him and the party, but they may have only succeeded in lighting another fire that will need to be put out.

Little goes large US small-cap stocks outpace bigger blue-chip peers on vaccine optimism. 
Looks at how the Russell 2000 has been outpacing the S&P 500 since last November. Effectively since there was a vaccine answer to the pandemic. Notes that the Russell 2000 has a heavy weighing in Financials at 14% vs S&P at 10%. Also to regional banks and traditional lending vs the big blue chip banks with exposure to trading and investment banking. That rotation is likely to continue with a trimming of tech or at least no new additional flows into tech in my view.

Schindler chief foresees a healthy lift in earnings
Notes that sales in China are already back to pre pandemic levels but doesn’t expect such a strong rebound in Europe.Interestingly last year launched with ‘clean mobility’ options.
'Controllers can be used to set specific limits on the number of passengers per lift. Air purification systems that can filter out viruses are available as upgrades to lifts. And calling elevators can be made hands-free using apps on users’ phones or buttons that do not need to be pressed to be activated.’
Many companies are going to be introducing ‘clean’ features on their products, but a big thing is air conditioning or purification and that is likely to be good for the likes of Daikin in Japan.

Solvay boss seeks the right formula for sustainable future
Chemicals group chief calls for clarity on tax reform, China and regulation from Biden.I think everyone would like clarity on those issues but its early days for the administration and it will take time for policies to be made clear.

Nikkei 30,000 brings back memories of 1980s mania. Leo Lewis reminds us of the cautionary tale of what happened to Nui Onoue just over 31 years ago when the Nikkei was last approaching it peak.  She 'claimed a divine destiny for her stockpicking, hosted share-tipping seances and channelled the advice of a magical toad statue, was Japan’s most successful and influential individual investor.’
That was before her fraud conviction.
But he says 'Japan remains dented by a living memory of what true, nostril-flared investment mania looks like when it grips a country.’
So with the Nikkei back at 30,000 he says that assumptions about Japanese retail investors that have formed over the past 30 years may not be right anymore.
Notes the Nikkei focuses on a handful companies and whilst scorned by some it has a role in defining market narratives says Peter Tasker.
Currently the Nikkei is trading at a much smaller price to earnings ratio than the last time it was at this level. Until very recently people thought the Nikkei at 30,000 was a long way off but the past 8 weeks have been remarkable.
It is now prompting questioning of the BoJ’s policy of buying ETF’s and other measures. It notes that trading desk explain the move in terms of a strong earning season and low liquidity during Chinese New Year. But some think it could be just froth and are worried that the market is 'in the grip of something irrational, foreign in origin and inherently fragile.’
Notes about a third of Tokyo stocks are foreign owned.Key is that the mentality of investors in 2021 is very different from 1989. Historically Japanese retail investors were contrarians of prevailing market direction; giving them a stabilising effect on market swings. But no more. Todays investors, are predominantly on-line and younger in age and trade more frequently.
Retail now follows the momentum, which could see increased swings both up and down in the future. Key is that is what drove the Nikkei through 30,000 this time.
He concludes 'That gives the passing of the 30,000 line on the Nikkei its greatest significance: retail investors have continued buying, where for the past 30 years they would dependably have taken the moment as a clear sign to sell. If the theory continues to operate, Japan strategists may need to reconsider the market: not as one that has lost its head, but one that might, at least, have lost its collective memory of Onoue.’

For investors that change I think makes the Japanese Brokers and Mega Banks a good option as a means of playing the moves; both up and down. Nomura is currently trading just off its 12 month high, but still around 17% off its 5 year high. Mizuho is nearly 40% off its 5 year high.But there are a host of other attractive companies in Japan that are seeing good interest; the like of Nintendo, Sony, Daikin, Faunc; exposed to tech, robotics and other key sectors. Also the likes of Komatsu, benefiting from increased spending on construction and infrastructure. The current Yen level also helps.

For Interest Opinion 
Why once successful countries get left behind. By Martin Wolf
Looks at 'Windows of Opportunity' by David Sainsbury, whose views are 'rooted in those of earlier influential thinkers such as Alexander Hamilton and Joseph Schumpeter.’It focuses on the UK who’s growth has slowed to crawl, only Italy in the G7, trails it.
'As Sainsbury states, neoclassical economics does not have a theory of growth, because it does not have a theory of innovation. He does: it is driven by innovative businesses. This he calls the “capability/market-opportunity dynamic”. There are four conditions for success: demand for new products and services; activity-specific technological opportunities; firms capable of exploiting those opportunities; and institutions able to support those firms.Growth then is an evolutionary process characterised by trial and error, uncertainty, economies of scale and scope, network externalities, temporary monopolies and cumulative advantage. Historical experience confirms that growth is a race to the top. It means exploiting new opportunities that generate enduring advantages in high-productivity sectors and so high wages.’
Key to success is the development of new things rather than the reliance of historically successful things. If an economy loses the ability to innovate it starts to stagnate.
Sainsbury puts forward 'our possible strategies towards innovation:
1. leave it to the market;
2. support the supply of relevant factors of production (science and skilled people);
3. support key industries and technologies;
4. pick specific firms/technologies/products.
He argues that governments should do the second and third, but not the last. But governments can and must fund science and the development of scientific and other skills and should promote a few broad industries and technologies.
Mainly because it is in the semi-public good. For example 'the knowledge a business develops will be embedded in people who may leave to work for a rival business. Again, developing something fundamentally new is often costly and risky. This, too, justifies some support.’
He concludes 'The UK economy has an innovation — and so growth — crisis. Government must consider what to do about this. Why, for example, does UK business invest so little? Why does the UK have a relatively weak position in high-technology manufacturing? What industries and technologies offer the best opportunities for the future? How should university research be linked to business? The country is falling behind. These questions must be answered.’

I think a lot of it comes down to investment which has always been lacking in the UK. Historically the UK filed more patents but rarely had the capital to put them into production. Part of that probably comes down to the structure of the stock market which lacks a Nasdaq like culture. As an aside its interesting that China has sought to replicate that Nasdaq like structure via the Chi Next and now Star Board.
Also historically the cost involved due to employment laws, not to mention European health and safety costs and red tape.
The UK does still innovate think of Dyson, and look at why they moved to Asia. But it did miss out in part on Tech although the university’s have a good track record; Look at ARM in Cambridge.
What the UK is bad at is developing and manufacturing and a lot of that is down to cost. Either the UK needs to address the costs of building plants that are stable or it needs to find a way to nurture innovation at home but produce it overseas where the costs are cheaper; the key will be retaining the IP.

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