Jan 11 FT China says US playing with fire over Taiwan. Beijing's sanctions, Taiwan firms leaving China

11 Jan

MARKETs @ 2pm HK Time 
Market closed for Coming of Age Day.Tomorrow we get for Japan Current Account, Bank Lending, Eco Watchers Survey (Current & Outlook).
Kospi opened higher and after the initial rally worked to 3,266 driven by Samsung (possible deal with Intel over Chip outsourcing but could also go to TSMC) and Hyundai (announced talks with Apple). Other large caps also started out higher. But mid morning market reversed and sold down to flat and traded sideways. Then around 1pm sold down to 3,100 support before bouncing to close -9pts (-0.3%) @ 3,122.
Kosdaq opened flat and tested down to 975 in early trades before bouncing back Friday’s closing level. Traded Sideways until 11am the trended lower, first support at 970 but then sold swoon to 953 around 1:30pm. The worked better to close -17pts (-1.7%) @ 971
Opened lower on the range of news. TSMC and Intel possible outsourcing, US to further open relations and good trade data after market Friday. Initially rallied to 15,517 before selling back down. Basically then traded sideways 15,412/476 until 1pm when it rallied; to close +93pts (+0.6%) @ 15,557
Opened flat but sold down on deteriorating US relations. But Inflation and PPI data on the open beat F/casts and the market rallied to 5,540 level. Traded sideways for about an hour before selling down to flat at lunchtime. PM opened flat initial ticked higher but then sold down Currently -81pts (-1.5%) @ 5,414
Inflation Rate Dec +0.2% YoY vs -0.5% Nov (F/cast was +0.1%)
Inflation Rate Dec +0.7% MOM vs -0.6% Nov (F/cast was +0.4%)
PPI Dec -0.4% vs -1.5% Nov (F/cast was -0.8%)
Inflation driven by rising food prices due to bad weather and ahead of Chinese New Year. Health cost along with Education, and other goods and services also rising. Household goods and services flat. Declines in the price of transport, rent, fuel, utilities and clothing.
PPI was the 11month of declines but the smallest since Feb 2020, showing the economy continues to recover.
HONG KONG Pre market opened at 28,003 +125pts vs +275pts ADR’s but they were before US changed rules on relations with Taiwan and China announced retaliatory measure against US sanctions.  
Market then trended higher in choppy trading to 28,175 at lunch. PM opened lower retested 28,100 but failed and sold down currently -41pts @ 27,845.
Expect market to flat; as investors watch for indicators of more stimulus from the US.
London’s FTSE is seen opening 13 points higher at 6,877, Germany’s DAX down 2 points at 14,018, France’s CAC 40 down 2 points at 5,688 and Italy’s FTSE MIB 92 points lower at 22,549, according to IG.
No data only a speech from Lagarde due today.
US Futures 
Opened flat in Asian time but have fallen; now Dow -130pts, S&P -0.5% and NDX -0.3%.
Concerns about US/China relations and the scope for more US stimulus as covid cases weight on investors after the poor US payrolls number on Friday.
Data due Consumer Inflation Expectations

Front Page
Mutations test drugmakers. Drugmakers are exploring how shots could be tweaked in response to genetic changes in the virus — as already happens with the annual flu jab.
Comes as Japan discovers another mutation to the covid virus this time from Brazil.
See also Vaccine makers arm for mutation threat. Industry and regulators examine flu jab model in fight against changing virus.  Worth also noting Indonesia pins hopes on China jab as coronavirus cases surge

Push to impeach Trump resisted as Democrats prepare new vote. • Siege sparks GOP split • Schwarzenegger decries ‘worst president’ • Donors pull back.Whilst he only has days left in office he is now garnering more press coverage than ever.  With the Democrats planning to bring impeachment proceedings as quickly as possible.  But they are still unlikely to get much support from the Republicans.  Whilst many are decrying his actions they don’t think impeachment is the right course of action.
One notable thing is the number of party donors that are suspending donations. That will be a big concern to Republicans and could have a big impact on the party’s future.
An interesting point is that whilst the Democrats are pushing for impeachment they will look to defer referring the matter to the Senate for a trial until after Trump leaves office. They could then vote on whether to bar him from future office. Of course there is still the matter of whether Trump will try and pardon himself in advance.
Other articles Republican rift widens over party’s future after attack Grandees urge change of direction but Trump loyalists remain unrepentant.  Also Light touch policing of Capitol rampage fuels cries of racial double standards. Anger deepens over contrast with heavy-handed approach to Black Lives Matter protests.  Also Opinion How to rescue the Republican party from Trump’s chaos. By Charlie Dent

US risks enraging China by easing Taiwan restrictions Looks at the lifting of the guidelines that have been in place since 1979, when according to Pompeo, the US acted to appease China over Taiwan.  But the mood has changed, largely because of China’s actions in recent months but also since its declaration of Made In China 2025.    Interestingly in his last few days of office Pompeo will visit Europe to explain why the administration has now changed.  
I would imagine much of that is to do with the arrests in Hong Kong but on other issues too. It is likely also to make the transition to dealing with the Biden administration a little easier too, in my view.
China has already responded by saying that the US is 'playing with fire’ and there is always the potential for China to resort to military action but I doubt they will. Not least because the US move comes as the US, Canada, Britain and Australia all condemn Hong Kong opposition arrests.
The bigger question is how will Biden react. On the campaign trail he said he was committed to the 1979 Taiwan Relations Act. That set out defined relations with Taiwan and and to the one-China policy.
But his office said according to the article that “Once in office, he will continue to support a peaceful resolution of cross-strait issues consistent with the wishes and best interests of the people of Taiwan,” . I think that is likely to mean more support for Taiwan because he also said on the campaign trail that he would make China adhere to its commitments and promises.
Many view the action in Hong Kong as undermining the Handover Agreement. Additionally both sides of American politics are aware that they cannot allow China to takeover Taiwan because of the technological advances that would gift China. The so called TSMC shield needs further enhancements and this move will allow the US and other countries the ability to make them.
This creates some big problems for President Xi’s.
First his reputation, his commitment to bringing Taiwan under Chinese control was something he promised the people of China. That promise now looks to be in tatters; especially as the people of Taiwan have; through the recent election, rejected China’s advances. Even the pro china party in Taiwan was positive about the US move but noted it was key see how the Biden administration reacted.
Second is political; the generals in China have been angling for this for so long and whilst President XI has a secure power base, nothing is absolute. If he were to allow the use of force it would make China an international pariah which would damage all of China’s other ambitions. The US move will now make it easier for other countries to adopt new relations with Taiwan; further undermine the years of work that China has done to isolate the country.
I would imagine that President Xi and Beijing is hoping they can work out a compromise. But with the mood in Washington, on both sides on the political spectrum, wary of China’s ambitions and especially with regard to the Tech that Taiwan controls I doubt that can happen.
Which leaves us with the very awkward question of how will President Xi react?
He needs some really good news to downplay this. He’s already got the EU deal but that’s already been publicised. He is likely to try and ensure that other key countries don’t follow the US course but that is likely to be an uphill battle. He can belittle the importance of Taiwan and stress that China doesn’t need Taiwan’s tech, although everyone knows that’s not true. It could be that this just reinforced the Grey Rhino event that was the standoff between China, Taiwan and the rest of the world.

Beijing acts to protect companies from US sanctions. Businesses and individuals ordered not to comply with punitive measures.  This combined with the Taiwanese situation is going to make investing in Asia much more complicated.
Basically China has said that its companies are not allowed to comply with sanctions imposed by foreign governments. It they do, they can be sued in the Chinese courts.
Where a Chinese company is targeted with ‘unjust foreign sanctions’ they can appeal to the Chinese commerce department who will investigate and recommend a course of action or support.
What is interesting is that these regulations seem to have been quickly drafted. The market has been waiting for China’s ‘unreliable entities’ list since 2019. But these seem to have come in weeks. It could be the Beijing feels it needs to act. In the past it has been vary of upsetting multinationals who have set up in China as it knows they are important for jobs and investment. But now with US sanctions prompting the re-organisation of supply chains along with the restrictions on access to US technology, it may feel it has less to lose and that in bringing these actions that companies will put pressure on the US government to go easy on Chinese companies. It is difficult to say but it will put the likes of HSBC and Standard Chartered in a difficult position should more Hong Kong officials be sanctioned for the recent arrests of political opponents.
All this comes at a time when China is trying to restart and reshape its economy. It does not have the fiscal power that we saw during the financial crisis and is very wary of using leverage. It has a number of credit issues already weighing on investors minds, not least the fact that the Government will not backstop failing enterprises in China. So not needs as much foreign investment as possible. Yet these new rules may result in companies opting not to invest in China.
Key for investors will be how rigorously these new laws are implemented.

Taiwan manufacturers bid farewell to China. Tesla supplier Hota is among groups refocusing beyond an increasingly difficult market.
Rising costs and trade tensions cited as the main reason for the moves back to Taiwan. Coming with all the other changes mentioned over the weekend likely to have an impact on global manufacturing. It notes that the Taiwanese impact has been a blessing and curse; without the likes of Foxconn back in 1988 China would not have grown as a contract electronics manufacturer. But by shifting from Taiwan to China as a means of cost saving the Taiwanese firms missed more sustainable ways to improve competitiveness. So it says many missed out on promoting their own brands or moving into higher value areas. Now much of that is coming to head because of the trade war, increased costs in China, incentives no longer being available and China’s increasingly nationalistic policies.
An interesting read.
Notes that some companies are diversifying through acquisition.What the article doesn’t mention but I think is true for China is that because it was the manufacturing base for so many companies it lacked the incentive to develop its own home grown technology which is what is currently hampering its growth and giving the US so much leverage over its tech sector. Obviously it can catch up but it will take many many years.

Iran tanker seizure serves as ‘slap in the face’ to South Korea. Looks at the seizure of the S Korea ship.  The US, which is the root cause of the action, says the matter is extortion.  Iran says Seoul is the hostage taker because it will not release US$7bn of Iranian cash.   That is just part of the cash that is held by Chinese, Indian and Iraqi banks because US sanctions.
Iran is trying to pressurise individual governments to release the money rather than incite the US says the article. But they may have underestimated the US concern.
At the same time Iran has also announced 'boosting uranium enrichment to 20 per cent,' and taking it further beyond the levels agreed in a 2015 nuclear deal, a deal which the US abandoned. That could further complicate talks with the US in the future.
For investors it increases the risks to vessels that transit those waters. It also highlights how effective US sanctions can be.

For Interest
Vietnam’s Communists convene away from prying eyes to choose leaders. It will be interesting to see how successful candidates from business friendly south Vietnam are verse the party stronghold in the north.  But key is Vietnams distrust of China and whether it will continue to drift towards the US despite the recent trade despute.

US banks set to embark on $10bn round of buybacks
• JPMorgan to lead way in quarter
• Buoyant capital markets aid plan

FT BIG READ. TECHNOLOGY. AI suffers pandemic backlash
Facing a stark health emergency, Covid-19 has prompted a largely unnoticed acceleration of the use of automated forms of decision making by governments. The moves concern data protection activists.

Opinion Why investors shrugged off the US riots
Basically because they were looking through it to the Biden administration taking over. That will include good bits and bad bits but the hope is that the overall future for the US is a better one.

* The email will not be published on the website.