Jan 15 FT HK Censorship, US to bloc Chinese Tech, TSMC more good news, WHO in China


15 Jan

MARKETs at 2:30pm HK time   
The Biden stimulus package largely in line with expectations prompting a 'sell the news' reaction in many Asian market 
JAPAN 
Opened higher buoyed by news of the Biden stimulus programme but trended lower through the day. In the morning it saw support at 28,600 but continued selling in the PM saw good support at 28,500 which thought tested a number of times has held. Currently -178pts (-0.6%) @ 28,521
Topix followed a similar trading pattern currently -16pts (-0.9%) @ 1,857
Data
Foreign Bond Investment Yen 580.8b vs -85.5b prior
Foreign Stock Investment Yen 730.7b vs -291.6b
Tertiary Industry Index Nov -0.7% MoM vs +1% Oct (F/cast was +0.5%).
S KOREA 
BoK kept interest rate unchanged at 0.5% as expected
Kospi opened higher and rallied to 3,180 in early trades but then trended lower to 3,095 level around 11am and then traded sideways to close -55pts (-1.8%) @ 3,094
Kosdaq followed a similar trading pattern sold down to 965 level and traded sideways to close -15pts (-1.5%) @ 966.
TAIWAN 
Opened higher around 16,000 level after TSMC’s (Closed +1.5% off initial high) good results but market and TSMC trended lower, Taiex initial support around 15,800 nt around 11:30am sold don to 15,615 level bounced but eased lower to close -91pts (-0.6%) @ 15,616.
CHINA 
CSI 300 opened flat and tested 5,500 in early trades as headline House Price Data was in-line but then sold down 5,450 and then traded sideways for most of the morning before selling down into lunch. PM opened lower but has worked higher. Currently +7pts (+0.1%) @ 5,477
I think Team China will keep it around these levels into the close.
PBOC mounted a RMB500 billion one-year Medium-term Lending Facility (MLF) today with an unchanged bidding interest rate at 2.95%.
Data
Dec House Price Index Dec +3.8% vs +4% Nov (F/cast was +3.8%)
Slowest growth since Feb 2016; reflects Govt curbs on the sector trying to deleverage it asn reduce financial risk.
Among China's biggest cities, Guangzhou recorded the largest increase (5.2 percent vs 4.1 percent in November), followed by Chongqing (4.6 percent vs 4.7 percent), Shenzhen (4.1 percent vs 4.9 percent), Shanghai (4.2 percent vs 4.1 percent), Beijing (2.3 percent vs 24 percent), and Tianjin (1.1 percent vs 1.1 percent). On a monthly basis, new home prices edged up 0.1 percent in December, the same as in November, remaining the least since March
Could get FDI data after market
Monday we get NBS Press Conference, FAI data, GDP Growth Rate, Industrial Production, Retail Sales, Unemployment Rate and Industrial Capacity.
HONG KONG 
Pre Market Opened @ 28,408 -91pts vs +21pts ADR’s
Xiaomi weak on news of being on US blacklist, CNOOC also weak. But E Commerce names firm on not being blacklisted.
Initially rallied back to flat but then sold back down to 28,400 before working higher to 28,294 late morning but then sold down into lunch 28,500. PM opened lower and tested down to 28,300 before bouncing. Currently -10pts (flat) @ 28,488
Johnson Electric +VE on good results with number of broker upgrades. Placement rumour on Man Wah.
EUROPE 
Expect market to open higher on the initial reaction to the Biden stimulus plan but then see the same ’sell the news’ pattern that was evident in Asia.
Data out Friday
EUROZONE Balance of Trade
GERMANY No data due
FRANCE Inflation Rate, Budget Balance
UK Balance of Trade, GDP, GDP 3 Month Average, Industrial Production, Manufacturing Production, Construction Output, Goods Trade Balance, NIESR Monthly GDP Tracker.
US Futures 
Opened in Asian time Dow +25pts  S&P and NDX +1% but sold down through the session and currently Dow -200pts with S&P and NDX both -VE
FRONT PAGE
Russia jab hits rural obstacles
Biden steers focus from Trump back to pandemic and economy
• Push for relief package • Impeachment trial casts shadow • Senate confirmations loom

Health and tech groups work to create digital passport as proof of Covid shot Health and technology groups are working together to create a digital vaccination passport in the expectation that governments, airlines and other businesses will require proof people have received a Covid-19 shot.

INSIDE
Hong Kong uses security law to block activist website.   Hong Kong Broadband Network, said yesterday it had disabled access to the website, HKChronicles, a pro democracy website after a request from authorities issued under the law. The provider said it blocked the site on Wednesday. Many think it could mean more censorship ahead and that could start to impact Hong Kong’s standing as a free international financial centre.  Shareholders of HKBN include TPG, Canada Pension Plan Investment Board and Capital Group, and it will be interesting to see if the move impacts their investment decision.  Additionally whether pro democracy investors in the company decide to sell their shares.
Shares were sold down this morning on the news; stock is currently -2.8%

US agency helps Ecuador repay China debt. The US International Development Finance Corporation has struck a deal to help Ecuador repay billions of dollars in loans to China in exchange for excluding Chinese companies from its telecommunication networks.  The Trump administration hoped the model would be used with other countries too. Biden’s team is said to be looking at the scheme too.  It notes that 'While DFC partners with private sector financial institutions on development projects worldwide, Washington views it as a foreign policy tool, since the bank can attach strings to its financing.
Previously, Mr Boehler said DFC did not take the lead on foreign policy but was cognisant of what China was doing globally and the need for the US to be “playing offence”. He said Chinese investment had become a “drug” for countries which created debt traps.’In this case the condition is that 'Quito signs up to what Washington calls “the Clean Network”, a state department initiative designed to ensure nations exclude Chinese telecoms providers as they build out their high-speed 5G networks.’
In a way this shows how China has forced the US to compete on the same terms as China rather than on the basis of free trade both the US and China are promoting their products not on the basis of best in class but with cash.

US sets out new powers to block Chinese technology US commerce department has finalised new powers that make it easier for the federal government to block imports of technology from China and other adversaries.  The new rules cover 'software used in critical infrastructure and hardware such as drones or surveillance cameras, gives powers to the commerce secretary to issue licences or block imports.’  It comes into effect in 60 days.
In presenting the new rule the Commerce Dept pointed to examples of Chinese hacking to illustrate the risks to the US supply chains and said it wanted companies to be more diligent regarding technology imports. 'The rule applies to six categories of technology, ranging from products used in critical infrastructure and telecoms networks, to artificial intelligence and quantum computing. It could also apply to apps that collect user data or drones and network surveillance cameras that use cloud services to store data.'
It was announced on the same day that the US blacklisted CNOOC and said the company acted as a ‘bully’ for the PLA to intimidate its neighbours. The Pentagon is said to be looking to add none more companies to the blacklist.
I would imagine that the Biden administration is very happy with these moves from the Trump administration as it gives them more negotiating leverage with China when it takes office.

TSMC confronts ‘priority’ of fixing car chips drought. Highlights the lack of capacity in the sector as the auto industry sees a surge in demand for more chips.  Notes that this recent results were boosted by demand for smartphones and supercomputers as well as bulk buying by some client worried about covid disruption to supply chains.See also LEX TSMC/Apple: in the chips Thinks that the upside for TSMC is just starting; the US ban on Huawei did not hurt it as had been expected and new demands mean the future is looking good; especially as some of its smaller rival don’t have it’s scale and so can’t compete. (See article in Intel).  
Notes that 'The lengthy process of sourcing raw materials and producing chips — which takes at least three months — means the shortage is here to stay. There are few other suppliers that can produce at the scale of TSMC.’
In summary 'Even though the Taiwan-listed shares are up 140 per cent from a March low, there is room for upside. An added bonus is the group’s payouts. TSMC has no trouble covering its dividend yield of 1.6 per cent.That is significantly higher than global peers such as Micron.’

Low borrowing costs allow PE groups to load targets with extra debt.  Looks at the fact that some PE firms are loading their target companies with large appoints of debt that whilst payable with interest rates so low will become crippling once interest rates start to rise, even by a little.  An interesting read and highlights why many in the US are calling for more governance on the issue and the potential to see money clawed back if it becomes apparent that amount of debt piled on a company whilst rates are low would be unsustainable at more normal interest rate levels.

WHO team arrives in Wuhan after delay. Scientists in virus probe fly in as China reports first Covid death in months.   Key really is that they have arrived over a year after the virus was first discovered and hopes of determining the source are very low.  The international community will also be watching closely to see how much freedom to investigate the team is going to be really given.  The article notes that is comes at a time when Beijing is trying to dictate the narrative that the virus started outside China and a thesis they are putting forward is that is arrived via frozen food rather than originating at the Huanan seafood market in Wuhan. That market has been closed for over a year now.  This is raising further concerns about how transparent Beijing has been with its knowledge about the origins.
It notes 'Mike Ryan, executive director of the WHO’s Health Emergencies Programme, said this week the probe would look for answers that could save us in the future and was “not about finding someone to blame”.‘ Fine words but I think a lot of people around the world are looking for someone to blame.

FT BIG READ. GLOBAL ECONOMY. Business travel on standby
Cancelled flights, accommodation and exhibitions cost the sector around $710bn in lost revenue last year. Will hotels and airlines, which use corporate activity to subsidise mass tourism, ever claw that back?
Looks at the situation pre covid and the expectations as the pandemic is contained with mass vaccinations. The reality is that in the short term the industry in not going to see a return to the past normal. An interesting read but the business models for airlines and hotels will no doubt change.
Also worth reading LEX Delta: cleared for take-off. In summary 'If Washington simply sought to save jobs and keep Delta out of a messy bankruptcy, those imperatives have been achieved. The government and central bank bailouts of 2020 have clearly favoured large, politically connected enterprises. If there is a next time, any taxpayer largesse must be more broadly available.'

Cambodia begins ‘show trials’ of opponents. Looks at the background to the trial of 136 people mostly affiliated with the now banned Cambodia National Rescue party, and are facing charges of treason, incitement and other crimes, according to the Asean Parliamentarians for Human Rights, a campaign group of south-east Asian MPs.  Amnesty International called the cases as “cynical show trials”, and described them as part of “a relentless campaign of persecution against Cambodia’s political opposition and other dissenting voices”.
For investors the key point will be that this and other actions by Hun Sen have resulted in the country seeing the EU revoke trade preferences and the US has sanctioned some Camboidian officials. So whilst the country could be a beneficiary of the move by many companies to relocate out of China it is not seeing as much investment as places like Vietnam and yet the country has similar potential. It is also worth noting that Hun Sen is a close ally of China’s President Xi and that a lot of Chinese investors have set up in the country. As ever there is some local resentment of that especially as the Chinese tend to buy up large tracts of land and price local’s out of the market. The presence of Naga Corp running large gambling operations is a clear sign of the relationship. Elsewhere in the country the domination of Chinese companies and workers can be seen and is viewed with local resentment. With Hun Sen and his party controlling all the seat s in parliament there is little hope of change, even with local elections and a general election in a couple of years time.
It is a shame because the country has a large available work force and the government has made inroads into improving infrastructure but there is so much more that needs to be done.

Ghosn hid pay from Renault for fear of the sack, court told
• Nissan whistleblower gives evidence
• Ex-chief accused of concealing $88mLooks at the testimony from Mr Nada, one of the prosecutions key players, who advised on how to reduce Ghosn’s disclosed compensation, reveals that full merger plans started in 2012 and were coming to fruition before the probe started. Which would have been disadvantageous to senior Nisson staff. The case revolves around the 2010 rule change that required salaries over $1m to be disclosed. It looks as if it comes down how it was concealed, because it was in the accounts. For investors I think the incident is a big negative for corporate Japan. It highlights the Japan first of many established executives which is bad news as Tokyo tries to attract more bankers as China clamps down on Hong Kong.

For Interest 
Opinion US inflation pressure cooker builds up steam notes that last year US inflation-linked binds returned 35% on a risk-adjusted basis as investors hedged inflation risks.Inflation is a risk especially with so many portfolios structured on the assumption that it isn’t.
It gives 3 reasons for concern:
1. Re-inflation risk from the stimulus programmes and not least from the one Biden announced last night. Which combined with the roll out of wide spread vaccinations could prompt a surge in economic activity. Just at a time when supply bottlenecks are at their worst due to the lockdown; as warned of by Esther George, the head of the Kansas Federal Reserve.
2. Structural factors that have changed that again could lead to inflation, such as the changes to globalisation.
3. The Fed allowing the economy to run hot. Says 'Mr Dudley and some other Fed officials recognise. “We are in this La La Land right now where the Fed’s quantitative easing is providing support for financial markets [and] markets are just not focused on the end of QE,” Mr Dudley warns. “But at some point the Fed will have to hint that it is moving into another regime.”’
That could lead to the resumption of ’taper tantrums’ only with the Fed having less scope to accommodate them.In Summary says 'Thankfully, that risk probably lies in the future. The Fed’s tone is still dovish. But what is here now is a shift in inflation probabilities from “very low” to “not so low”. Investors are thus correct to hedge their bets, however gloomy the news about the pandemic. After all, something else we learnt in 2020 is that the unthinkable sometimes does become unexpectedly real.’
For investors, at the very least, they should consider what inflation might do to their portfolio!

Marking the boundaries of goodwill puts rule-setters to the test
'After decades of debate, investment analysts and chief financial officers still do not agree how to treat this bookkeeping legacy from takeover deals. The debate might sound arcane but it matters to financial analysis, and therefore to investors. For some corporates, especially acquisitive ones, goodwill can make up half or more of their total assets.’Now the US Financial Accounting Standards Board, and the International Accounting Standards Board, are now considering changes to answer critics of this long-held accounting practice.
It looks at the various options but in summary decides 'Frankly, adding another adjustment to earnings, an annual goodwill charge, will only make messy earnings reports worse. Regulators generally do not accept goodwill as reducing income tax expense, so more charges would only amplify net earnings volatility. Already investors often ignore a company’s reported earnings, based on local accounting principles, in favour of adjusted figures.Given all this, it may be best to leave a properly performed goodwill impairment test method in place, however much CFOs complain about the expense and complication. Amortisation would provide zero insight on company performance. Maintaining the annual discipline of goodwill assessment is a good thing for governance and investors.’ Worth a read.

BlackRock hails recovery as assets reach record $8.7tn.  The share price closed lower after the results as investors seemed disappointed with the margins it achieved but key for investors is that Larry Fink expects momentum will extend into 2021 on the back of robust recovery in the global economy. “There is a shortage of great assets and why we are seeing froth in some components of the market. Some companies will grow into their earnings expectations and some will not, that is what we see all the time.”For investors it underlines that need for diligence as the recovery takes place, always a good thing to remember.

New Intel boss faces gruelling turnround test
Growth, manufacturing and design challenges loom as rivals AMD and Nvidia gain ground.
Looks at Mr Gelsinger and the challenges he faces.A key point being predominance of TSMC that has allowed Intel’s rivals to to leap ahead of it in design terms.There is also the issue of its internal manufacturing which was once leading edge but has slipped in recent years. As well as a move to modular chip design. An interesting read. It notes he has the credibility require the question is whether he has the time. For investors it highlights the need for good management and the commitment to remaining at the cutting edge of technology. TSMC is now the world leader and just announced record results but it is aware of the competitions and have committed more money to Capex in order to maintain that lead. It also underlines the importance of Taiwan as a free country. The world would look very different if China were to annex it.

Ailing, scandal-prone Indian banking sector bleeds red ink
Struggle to withstand pandemic as bad loans take toll and New Delhi phases out support.As India is viewed as the alternative to China it is worth a read. India’s banking system has its problems just like China’s has; with bad loans a problem to both. Worth a read.

Europcar investors left empty-handed after ‘textbook short squeeze’ on CDS. Looks at the latest tech quirk of financial engineering that has left some investors with nothing.Worth read as a reminder that some financial engineering whilst making sense in theory dent work in practice.

Rally in LNG heralds more gas price volatility. An interesting read, notes how The market had ‘shifted from a bearish perfect storm last year to a bullish perfect storm now’“Buyers are going to become aware that you may not always be physically able to source a cargo in the spot market regardless of price,” Mr Harris said. “The most likely outcome is it shatters some of the complacency that’s crept into the market over the last 12-18 months.”

Editorial By impeaching Trump, Congress upholds the law. Action against the US president should not stop at a symbolic censure.   Worth a read about the need to show the world what US democracy will tolerate and why.  

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