FT Thoughts; China risk, S Korea Pop drop, Taiwan new status, Bitcoin $34k

04 Jan

MARKETs at 2:30pm HK time 
Nikkei 225 opened higher at 27,576 but initial sold down to 27,042 before seeing a rebound to 27,440 level at lunch. PM trading sideways Currently -191pts (-0.7%) @ 27,252
Topix traded in a similar pattern currently -11pts (-0.6%) @ 1,794
Data out after the open Manufacturing PMI Dec 50 vs 49 Nov (F/cast was 49.7).
Markets opened an hour later than normal for annual opening ceremony
Kospi opened flat but rallied to 2,940 and then traded sideways after good trade data released Friday. Currently +68pts (+2.4%) @ 2,941
Kosdaq Opened flat but sold down initially to 960 before rebounding to flat and around 12:45am rallied to 973 level and traded sideways; currently +6pts (+0.7%) @ 975
Data out
Manufacturing PMI Dec 52.9 vs 52.9 Nov (F/cast was 51)
Opened slightly lower but worked better through the day to close at the day high; +170pts (+1.2%) @14,902
Data out pre market Manufacturing PMI Dec 59.4 vs 56.9 Nov (F/cast was 55)
CSI opened lower but worked better through the morning session to 5,274 at lunch. PM opened higher but sold down to 5,260 level and traded sideways. Currently +64pts (+1.2%) @ 5,274.
Data out during market hoursCaixin Manufacturing PMI Dec 53.0 vs 54.9 Nov (F/cast was 54.6)
Opened @ 27,087 -144pts vs -185pts ADR’s
Market worked better to 27,400 but hit resistance and pulled back to 27,300 before rallying again to 27,485 only to ease back a little into lunch. PM opened flat but sold down to 27,350 before working better. Currently +188pts (+0.7%) @ 27,420 E-Commerce and Financials mixed, Chinese Developers and Telcos weak. HK Developers and Macau names seeing +VE interest in the morning session.
EUROPE  Expect markets to open flat.  A positive lead from the Asia but the first day of Brexit.  Plus the expectation of further lockdowns across Europe as covid cases spike.
Currently FTSE +18pts at 6,499, DAX +2pts at 13,712, France’s CAC 40 -3pts at 5,584 and FTSE MIB -32pts at 22,117, according to IG.
Data Manufacturing PMI’s due
US Futures 
Opened Dow -37pts, S&P and NDX down small but slipped during Asian hours and now Dow -58pts with S&P -0.2% and NDX -0.4%. Concerns over the spike in covid cases and Trump’s attempts to reverse the US election results -VE for sentiment. Also caution ahead of the Georgia run off voting which takes place tomorrow and could give Democratics control of the Senate.
Manufacturing PMI, Construction Spending. Total Vehicle Sales (after market).

China’s regions risk surge in bad debts, warn analysts Looks at how Regional governments are transferring assets to local investment companies in order to make their own debt-to-asset ratio look better.  In doing so they are able to raise more finance and instigate more infrastructure projects.  But many of the projects are of poor quality or offer limited returns.  The worry is that will prompt another wave of bad debt issues in China following the recent bond defaults.
It gives an example “Many of our assets do not generate much economic value,” Liu Pengfei, president of Taiyuan Longcheng Development Investment, an LGFV, told a conference in Taiyuan last month. “The Taiyuan government gave them to us so we can meet [the debt-to-asset] requirements set by our creditor banks and bond investors.”
Key here is that the company used to target just infrastructure but now has a range of investments; many of which are struggling. It cites the data that 'the total assets of 960 large LGFVs that regularly disclose financial results rose 40 per cent over the past four years, yet their revenues and net income increased just 6 and 4 per cent respectively.’
The problem is expected to get worse as the local governments seek to kick start the economy in line with Beijing’s directives. It is estimated that provinces, towns and counties receive about 50% of China’s tax revenue but are responsible for 66% of government spending. That is to ensure they keep in-line with Beijing’s directives.
Historically property was a key source of income to make up the short fall but as Beijing over the years clamped down on the sector they are forced to look for alternatives.
Hence LGFV but then last year Beijing started monitoring more closely how much they were raising and the debt. Consequently Local Governments are looking to get a bit more creative and move some of those assets off the books so they can finance new ones.
The only trouble is that many of them are not producing returns and so defaults are likely.
For investors that will not only hurt confidence but its is also likely to hurt the banks and other institutions that have backed these local investment companies.
Ideally China needs to overhaul its tax system and introduce the property tax that has been talked about so much. It would also shows why the PBoC want access to the personal data that Alibaba, Tencent and others have built up on clients in order to see if their spending matches their taxable declared income.
Income tax is paid on a progressive rate in China with incomes above RMB80,000 (US$12,275) being levied at 45%.Bearing in mind Trump’s weaponisation of the USD and investment money; more defaults is something that China cannot really afford at the present but avoiding them will be difficult.
It is aware of the issue and in June last year instigated a direct payments system to provinces to try and avoid LGFV defaulting but that doesn’t cover these projects that have been moved off the books.

South Korea faces pension and labour strains as population falls for first time The number of deaths was +3% YoY in 2020 and births were -10% YoY according to a census.  The data highlights the problem facing policymakers.  
It’s baby boomers born after the Korean War are due to retire in the next decade; which will place more strain on the healthcare and pension system, with lower a tax base and labour shortages.
In response the Govt has launched a number of policies to try and address the issue; with an emphasis on financial support for families with young children and new last month was a “congratulatory allowance” for pregnant women of Won1m ($920).
The real trouble seems to be more about high property prices, education costs and a deeper cultural fissures in society.
S Korea is not the only country facing such issues, many others are too, including China. Many are looking to automation to help with the labour issues which will help but that will not address the additional pressure and cost on the healthcare infrastructure or pensions. Furthermore the tax base will need to see changes too to reflect less people working but costs to the state rising.

Taiwan economy lifted by pandemic haven status. Thousands have returned home or stayed put as virus rages elsewhere in the world.
Looks at how its successful containment of covid has brought the Country new status. It notes that many Taiwanese who would normally travel have just stayed put and that has benefits too; primarily to retail and leisure. They now buy they things they would have when traveling at home. Hotels have also benefitted from ‘staycations’ and restaurants have continued to see good business.
It's haven status has also been used to attracted Taiwan businesses over seas to return home along with trying to attract top international talent. Something that has been helped by Beijing’s crackdown on Hong Kong.
It poses the question though as to whether Taiwan will remain as attractive post pandemic.
That I think will not just be about the pandemic but China’s crackdown on Hong Kong and other issues. But freedom of expression is very important in Taiwan and is probably the main reason the country is so resistant to Chinese advances. That now coupled with doubt over Chinese sincerity seeing the freedoms that were initial enshrined in the HK Handover agreement have now been removed.

Bitcoin surges past $34,000 as frenzied trade resumes  Looks at the strength of the recently rally, it was up about 63% in December alone.  Historically is often rallies into Christmas but usually then sells down.  But many think this year it may correct but not to the same extent.  In part due to the Fed’s commitment to low rates and in part because of the growing number of institutional type of investors involved.  Time will tell.
Read also Opinion A dangerous reliance on the Fed. Which points out the dangers facing the US.  The Fed’s policy has benefited asset buyers in the US.  The price tag is steep but cheaper than had the Fed not acted.  The Fed’s ability to act and commitment to act is in contrast the politicians inability to agree a new stimulus package.  
But as Mr Powell has told congress; monetary policy is a blunt instrument but fiscal policy can be targeted to those most in need.
It's final paragraph is a good summary
'Alas, the chances are that the Fed will remain “the only game in town”. This would be both a missed opportunity and pose a severe danger. The opportunity is for the US government to borrow long term funds at near zero rates and invest it in productive capacity. The danger of not doing that can be expressed in a simple equation: QE — F = P. Quantitative easing minus fiscal action equals populism.'

For Interest
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Key signals to watch for after last year’s wild ride in oil.   Looks at demand, supply, Opec, geopolitics and Refining.  The key for prices remains output management.

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