Feb 5 FT No CNY holiday in China? Yields not politics. But China bond holder beware. Suning issues.

05 Feb

MARKETs at 2:45pm
Nikkei 225 opened higher after Household Spending data was stronger than expected and Foreign reserves rose. Market initially traded sideways but rallied into lunch. Data at lunchtime was weak. PM continued to trade sideways Closed +437 pts (+1.5%) @ 28,779
Topix traded a similar pattern but closed at the day high +26pts (+1.4%) @ 1,891
Household spending Dec +0.9% MoM vs -1.8% Nov (F/cast was -1.1%) Household spending Dec -0.6% YoY vs +1.1% Nov (F/cast was -2.1%)
Foreign Exchange reserves Jan $1392.1b vs 1394b Dec
Leading Economic Index Prelim Dec 94.9 vs 96.1 Nov revised (F/cast was 96)
Coincident Index Prelim Dec 87.8 vs 89 Nov revised (F/cast was 88.5)
Monday pre market we get Current Account and Bank Lending, later Eco Watchers data.
Pre market Current Account was stronger than expected hitting a 2 year high due to a fall in imports and overseas trips. Tech seeing support again but Pharma mixed. Kirin announced to end beer production JVs in Myanmar due to the coup; it had already been under pressure to do so.
Kosdaq opened higher and rallied to 970 but then sold down to 960 level before rebounding to 970 mis morning. From then it drift slightly lower for the rest of the session in choppy trading to close +3pts (+0.3%) @ 967
Kospi opened higher and rallied to 3,120 level before selling down to 3,080 level. Rebounded to 3,116 level before easing back to 3,090 which is tested a couple of times before rallying to close at the day high +34pt (+1.1%) @ 3,121
Data Current Account Dec US$11.51 vs 8.97b Nov (F/cast was 9.9b)
opened higher at 15,800 and traded sideways for the first 45 minutes before rallying 15,940 level but unable to break above and sold back down to 15,840 an then traded side ways to close +96pts (+0.6%) @ 15,802
The central bank has amended foreign-exchange regulations for companies and individuals to give it more flexibility in curbing currency speculation in a timely fashion.
Data due after market Wholesale Prices & Inflation Rate

CSI 300 opened higher and worked higher to 5,550 around 11:10am before easing lower into lunch. PM saw the market open lower and trend lower currently +21pts (+0.4%) @ 5,494
No data today but on Sunday we get Foreign Exchange Reserves.
Pre market opened at 29,305 +192pts vs +28pts ADR’s
Market initially rallied to test 29,500 but hit resistance and then sold down over the next hour to 29,185 before bouncing into lunch. PM opened higher and working higher currently +204pts (+0.7%) @ 29,315
KUAISHOU-W (01024.HK) IPO saw strong demand from the start and opened 1.9 times higher but eased back in trading.
E Commerce strong except BABA which continues to see weakness. Xiaomi weak along with some tech names. Autos seeing some weakness. Financials mixed, Galaxy hit a new high,
Expect markets to open higher following the lead from Asia but may see some caution ahead of the US jobs report and Trade Balance.
EUROZONE No data due
GERMANY Factory Orders
FRANCE Balance of Trade, Current Account
UK Halifax House Price Index

US Futures 
Opened flat in Asian time but worked higher Dow +93pts , S&P and NDX both positive. May see some caution ahead of the jobs report.
AHEAD Balance of Trade, Non Farm Payrolls, Unemployment Rate, Participation Rate, Average Hourly Earnings, Average Weekly Hours, Exports, Imports, Baker Hughes Rig Data
Earnings: Cardinal Health, Sanofi, Estee Lauder, Regeneron, Illinois Toolworks, Aon, CBOE Global Markets, Lazard, Biomet

Myanmar acts to stifle protest.  A heavy police present on the street and the blocking of Facebook.
Nvidia’s $40bn Arm purchase at risk from Europe antitrust probes • UK and EU to launch investigations • Rivals want deal blocked • Worries over future neutrality.    It is also likely that the deal will be scrutiny in the US and China as well.
Hong Kong to warn 6-year-olds against ‘subversion’ in education crackdown. It will force teachers to warn primary students as young as six years old against “subversion”  and '‘foreign influence" and to throw out library books considered dangerous to the Chinese state. It indicates Beijing does not trust HK schools or teachers.  Schools will be required to set up working groups and submit proposals and reports to the bureau.  Liberal studies will now focus on fostering patriotism and biology will include texts on how the Chinese Govt protected China from covid.  
I wonder if that includes denying it in the first place?
Chinese bosses push staff to work through new year festivities. Companies offer bonuses in bid to meet booming global demandI wrote a couple of weeks ago that with the new covid restrictions I wondered if forms would work through Chinese New Year, it seems like some will.  It makes sense considering the travel restrictions and mandatory testing.  Many people in Asia did the same at Christmas this year; staying put rather than travelling home to see family.  
In China its slightly different because this is their one big holiday but this has been 12 months of unusual situations.
The implications are that production numbers should be higher for China but retail spending is likely to be less. Companies mentioned in the article are Apple suppliers including Foxconn, Pegatron and Luxshare who is says are offering bonuses and overtime. Two things that really appeal to Chinese workers. The other issue mentioned; being worries over travelling back and if there were unforeseen delays losing your job. That I think explains why consumer spending remains weak; workers are not convinced about the strength of the recovery and the associated job security. Other sectors having good order flows are electronics and household goods. It also has positive knock on for shipping companies. The scale of interest is indicated by the Transport ministry who forecast 1.15bn trips over the Chinese New Year vs 3b in 2019.
For investors it should be positive but obviously be aware that this is just bringing forward some orders rather than a new wave of demand. The new demand is likely to emerge as vaccinations show covid under control and a return to some of the old ways returns. But that is also likely to mean a drop off in covid medical supplies and probably a change in the demand for tech along with an increase in demand for China’s historic export.

Investors undaunted by US-Sino spats Geopolitical frictions have not curbed market appetite for increased financial integration.
Looks at the Hong Kong IPO of Kuaishou; and concludes that when it comes to making money or getting involved in politics; investors prefer money. Goes further to look at the amount of money US investors have invested in China. Cites research from Rhodium Group showing the extent of US investment is greater than the official US data by abut 5x. Because many Chinese companies with shares listed in the US are domicile in the Cayman Islands.
It notes that Trump’s policies (black list etc) added to the risks but didn’t stop the practice. Equities in particular saw strong demand and a strong response from Trump. The fact that Biden has delayed the implementation is seen by some as possibly a change of approach although I doubt it. President Xi is worried about the situation and warned in recent speeches about pushing the world to decouple which would lead to divisions and confrontation. Although in those speeches he called for talk and respect which China’s actions have not demonstrated. But the signing of the Comprehensive Agreement on Investment with the EU and the Regional Comprehensive Economic Partnership trade deal in Asia show that China wants secure trading and the foreign direct investment that accompanies it.
So whist the governments may be at odds; capitalist remain focused on returns and whilst those are attractive in China they will continue to pursue them.
The key being that capitalist will continue to pursue returns if they are legally allowed and equally Chinese companies will continue to list on foreign bourses if they are allowed.
For investors it means investing in China and Chinese companies has taken on an elevated element of political risk which wasn’t present before. In most cases though the risk is minimal as the US government has given time for investors to unwind positions. If that were to change an investor were ‘forced sellers’ the situation could be very different. Equally at the moment the slack created in Hong Kong by the US action is easily being absorbed by Mainland money but that might not always be the case. As noted above the key word is ‘allowed’ but it comes with a risk which investors will need to factor into their thinking and expectations.

China valuation limits underprice IPOs by $200bn. Beijing faces challenge to reform system that has led companies to list abroad.  Looks at research which shows the practice in China of putting limits on IPO valuations has cost companies.  It also sets out the challenge that Beijing has going forward to make its domestic markets more appeal to its companies to float, especially in the light of US/China tensions regarding Wall Street listings of Chinese companies.  For decades China has oscillated between market driven pricing and regulatory control.
In the past retail investors expected the first day IPO pop when the system changed in 2009 retail investors had to rethink their approach. By there was criticism that the new system gave money to wealthy entrepreneurs; which resulted in a valuation cap. That incentivised Chinese companies to list outside China.
Recently China has begun experimenting again with more market driven pricing. The ChiNext was supposed to mirror the Nasdaq but never really achieved that. More recently the Star Board has been introduced to try and mimic the Nasdaq, which has seen some success but still some very wild swings and there are limitations. Sponsors for the Star board must invest in the company they are bringing to market, with a two year lockup. Aimed at stopping book runners selling overpriced shares in bad companies but incentivising them to price the IPO at a level they make a good return. Still presenting a conflict of interest.
The key is that there is no sure fire way of pricing an IPO.
Obviously if it does achieve the goal of making domestic listing more attractive to companies then retail and other investors are probably going to lose their historic windfalls. That will then prompt a rethink from retail and other investors. The rise in mutual funds via institutional fund mangers could also have a big impact on the pricing of IPO’s too.
Chinese bonds: default setting. Buckle up bondholders, you could be in for a bumpy ride

Looks at the threat of more defaults for China’s $4tn bond market. Notes that last year saw a record number of defaults but this year is likely to be even higher. It says 'Beijing wants to reform the market, reducing leverage at the same time.’
It estimates that more than $100bn of off-shore bonds will mature this year
On-shore bonds are facing record defaults too; last year was $30 bn this year that number of expected to rise as many Fitch estimates that at least 20% of the companies have weakened balance shorts due to the pandemic.
All this against the backdrop of refinancing becoming more difficult. Key being that previously the market saw bailouts many from the local governments. So the recent defaults by SOE companies reflects the extent of the change in China. Government is either unable or unwilling to bailout companies. That is new.
At the same time the PBoC is also looking to crack down on the use of leverage; it is aware of possible ‘bubbles’ in the economy and the mis-allocation of money and is seeking to rectify that.
Unusually in the run up to Chinese New Year the PBoC has been draining money from the system.
It concludes 'Debt maturity cliffs have a habit of proving surmountable. China is adept at avoiding wholesale credit crises. But markets are still shaping up for an unprecedented surge in defaults. Buckle up bondholders. You could be in for a bumpy ride.’

The fact that this is happening at a time when US/China relations are at a low and the US has demonstrated it is willing to restrict investment into China is worrying. Chinese bonds have been seen as attractive because of the yield but that reflected risk; a risk that many under estimated because of the historic willingness of local governments to bail out local companies; especially the SOE’s. Things have changed significantly. It will be interesting to see whether the rates being offered; especially for those needing to refinance start to reflect the real risks.
Inter Milan owner seeks $200m in emergency cash The Chinese owners Suning Holding is seeking cash to prop up the football club.  Suning, backed by Alibaba, is also facing questions over its debt levels in China.  Talks evidently took place with BC Partners but ended as they couldn’t agree on valuation.  Other possibly interested parties mentioned include Ares Management, Fortress Investment (Softbank owned), EQT and Arctos.  It seems at this stage all options are being considered with Goldmans advising Suning.
It notes that regrading valuation, Suning estimates the club is worth Euro 900m but BC Partners putting it at Euro 750m. Reflects how buyers are looking to acquire assets at knock down prices. They know the club needs the money or it risks not being able to continue next season. Suning is obviously under scrutiny with the rest of Alibaba and China currently has a dislike of money going overseas.
The club is run by the son of Suning’s billionaire founder. Suning bought the club for Euro 270m in 2016 and has spent millions of Euro’s buying players but the pandemic has crushed its finances.  For investors the fact that Chinese companies are now restricted on funding overseas projects is a concern. Getting money out of China is increasingly difficult. Domestically Suning’s share price has been declining since its peak in July 2020 (CNY 12.95) and is currently CNY 6.74.  It operates a chain of franchised retail shops selling electrical goods in China.  It set its sell-out as a smart O2O retail operator.  The decline in the share price reflects I think the fact that covid has hurt Chinese consumers and they remain cautious about spending still. (Link to company web page https://www.suningholdings.com/cms/companyProfile/index.htm)

Reddit rebels will return if lessons go unheeded. By Mohamed El-Erian
Notes that the initial attack caught markets by surprise but the moves were not sustainable.
Goes onto highlight areas he thinks need attention:
it revealed the persistent asymmetry between the establishment and the “little guys” who carry considerable personal and national debt and are rightly worried about their economic future.
Their concerns are unlikely to get material relief anytime soon. Their sense of marginalisation and alienation will grow.
It exposed a number of regulatory and supervisory gaps.
The authorities were caught asleep at the wheel — again. They now need to resolve a series of difficult and, in some cases, competing issues that range from investor protection to market collusion.
It uncovered systemic risk.
Judging from the billions of dollars raised by Robinhood, the system came close to an accident that could have triggered a disruptive de-grossing (simultaneous deleveraging of balance sheet). Moreover, it played out amid excessive risk-taking and a broad disconnect between finance and the real economy. Ramming that home, the market’s reaction to having avoided an accident has been to take on even more risk overall.’
The points he raises are not new. Investor protection and market collusion is difficult, if everyone read a broker report and decided to follow its recommendation is that collusion? In the same vein, reading something on a web board and following it, it that collusion?
On his point on systemic risk, I think the system worked well, Robinhood was required to put up more capital to protect the market integrity. Although from initially wanting $3bn to settling for $700m may mean that the system is not fully protected!

Read also China’s struggle to control stock bubble offers lessons in investor mania (On line version)
It is worth noting that Retail investors in many Asian markets hold more sway than institutions and that is very true for Hong Kong and China and a lot of the smaller markets. Hong Kong's Mandatory Provident Fund only came into operation in 2000. In China mutual saving plans are again still relatively new, and their growth is in part responsible for the recent rally in the Chinese markets. More people signing up for savings/pension plans so fund managers have to buy more shares in the local markets because off-shore investing is limited. The exception being through ventures like the connect programme; which has seen a recent increase in southbound activity; thus supporting the HSI.
So many Asian investors are investing their own pension money and have been doing so for years. They are, I would say more experienced than the day traders who behind the GameStop gyrations. They still don't read 32 page broker reports and do follow rumours and press reports but most, are older investors and are investing cash. The concerns are when investors are trading on margin as was part of the situation back in 2015. In those days I remember one metric for Chinese market performance we used was how many new accounts had been opened the previous day in China. Many of those were margin accounts and many of those investors were new and have only recently recovered from their loses. Those investors learnt the hard way.
But its worth noting that mid last year, President Xi called for a 'healthy bull market', so China's leadership has a fickle relationship with the markets. China's way of dealing with the risk is in part to close down prominent websites or commentators that are seen to give poor advice, especially those that get a cult status. The other is to try and restrict loans designed for other uses being invested in the market or property. The regulators try but there are many loopholes in the system.
Also worth noting that in China short selling is restricted and closely monitored and so the likelihood of a GameStop equivalent in China is minimal.  But you could see it in Hong Kong although shorting is relatively regulated but margin trading is rife.  It is estimated that todays KUAISHOU-W (http://01024.HK)  IPO, which was 1,203 times over subscribed and priced at the top end of the range is estimated to have tied up $162bn; half of which is on margin loans according to press reports.  So the potential for disaster is always present.  Look at the amount of money that had hoped to get into the Ant IPOs too.
You can also see the sway of retail investors in S Korea where the regulator has just extended the short selling ban there which was due to expire in March in part due to retail concerns; although many now think its more political.
At the end of the day you can try and regulate a lot of things but you can never stop people 'taking a punt'.

For Interest 
Silver Lake’s AMC trade proves a triumph. Tactics highlight tough negotiating, deft financial engineering and luck needed to profit from troubled businesses.  Worth a read because of the irony that the retail support of AMC has gifted Silver Lake and some hedge funds record profits.There was a lot of risk when it entered the deal and it hasn’t turned out as originally envisaged but due to good luck its done well.  
As they say ‘better to be lucky than smart’.

Grain and soyabean rally helps push food index to highest level since 2014 One of the drivers has been spending by China as it tried to restore its grain, oilseed, soybean and sugar reserve levels after it’s port industry was decimated by African Swine Fever. It is still trying to rebuilds its hog herds.
Other drivers mentioned; Dry weather in S America (a supplier of corn and soybeans) expectations of tariffs in Russia (wheat exporter). Shipping disruptions adding to costs. Global grain inventories at lowest levels for 5 years. Which means the markets are now much more susceptible to any production shortfalls.

FT BIG READ. INDUSTRY. The race to attract battery production
After Brexit carmakers with a UK presence are focusing on both fixing the supply chain, to increase their vehicles’ local content and avoid tariffs, and the switch to large-scale assembly of electric vehicles.

Opinion Robinhood’s merry band of investors. By Gillian Tett
Looks at the money behind Robinhood. Whist Robinhood seeks to disrupt the establishment it is interesting to see the type of money that is supporting it; largely private family money.In summary 'Meanwhile, in the current world, the irony is inescapable. Robinhood’s marketing pitch is to democratise finance by giving punters easy access to public markets. Yet that is not where the lucrative action is.’
Opinion GDP may be imperfect but don’t write it off yet. By Chris Giles
In summary 'Allegations that GDP is a terrible measure that is too important to decision makers are trotted out so often, they tend to get a free pass. But the evidence is flimsy, at best.’
We are entering the era of e-globalisation. By John Thornhill
Looks at the growth of UiPath, a Romanian software company which showing that you don’t have to be in Silicon Vally any more as long as you have access to the cloud.It concludes 'UiPath is on track to launch a public listing in New York later this year that may enable it to vault into the top league of global software companies. Alternatively, the company may be bought by a US giant, just as Microsoft swallowed Skype and Salesforce acquired Slack. Or robotic process automation itself may be absorbed into these US companies’ broader product suites and the technology disappear as a standalone service.Building a global software company is one kind of challenge. Remaining one is quite another.'

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