Jan 5 FT PBOC balancing act, Dollar slides, Trump troubles, Pinduoduo PR problems and more


05 Jan

MARKETs at 2:30pm HK time
New out this morning that the NYSE would not longer delist the Chinese Telcos 'after “further consultation with relevant regulatory authorities in connection with Office of Foreign Assets Control.”’
JAPAN 
No data but the expectation a State of Emergency will be announced from Thursday.Nikkei 225 opened lower and worked back into the green mid morning in choppy trading but then eased back into lunch. PM sold down to 27,100 and then trade sideways to close -99pts (-0.4%) @ 27,159
Topix similar trading pattern closed -3pts (-0.2%) @ 1,791
S KOREA  
No data but covid concerns remain but tech still seeing good demand.
Kospi opened flat and traded sideways around yesterday’s close until 2:30pm, then it spiked; currently +38pts (+1.3%) @ 2,985
Kosdaq opened slightly lower tested to 984 in early traded but failed to break out then down to 965 before rebounding and trading around yesterday closing levels; currently +6pts (+0.6%) @ 983
TAIWAN 
Opened higher with Tech in focus and tested to 15,000 but unable to break above and then tested support at 14,862 before rebounding to 14,950. Testes 15,000 several times but unable to break above. Closed +98pts (+0.7%) @ 15,000
CHINA 
CSI 300 opened lower but worked back into the green in early trades, then traded 5,267, 5,313 in the morning. PM opened higher and worked higher. Currently +93prs (+1.8%) @ 5,360
HONG KONG 
Opened at 27,281 -191pts vs -377pts ADR's with Telco’s weak ahead of US delisting. Wuxi Bio weak as shareholder sells 100m shares.
Market then worked back to flat by mid morning but then eased back into lunch. PM worked higher to test 27,600 but finding resistance there. Telcos strong on news the NYSE has scraped plans to delist them; +VE also for Petrochems and others that were rumoured to be facing delisting. 5G plays also seeing good interest. BABA remains weak but other ECommerce names +VE KB Laminates weak as shareholders places 72.21m shares at a 7% discount.
EUROPE 
Futures indicate a lower open as UK goes into Tier 4 lockdown.
FTSE -25 pts at 6,554, DAX -54 pts at 13,682, CAC 40 -20 pts at 5,571 according to IG.
Data due
EUROZONE Loans to Households and Companies, M3 Money Supply
GERMANY Retail Sales, Unemployment
FRANCE No data due
UK New Car Sales
US Futures 
Opened flat in Asian time but have worked better Dow +40pts, S&P and NDX +0.2%. 
Congress due to ratify US election results but concerns as Trump still will not admit defeat.Georgia Senate run off’s voting today.Covid cases also overhang the markets Data dueRedbook, ISM New York, ISM Manufacturing (New Orders, Prices, Employment, PMI), API Crude Oil Stock Changes.


FT Paper.
PBoC faces tricky balance to support liquidity as interbank rates stay elevated.  It increased liquidity more than expected in December via its medium-term lending facility and reverse repo operations.  Thus easing the conditions that had been tightening in the 2H 2020.   It also illustrates the issues of trying to control a rapid but uneven recovery without excessively restricting money to businesses and households that need it.
The PBoC is trying to engineer a smooth transition back to more normal policy conditions without causing a liquidity problem. China was more reserved than other countries during the crisis that many other countries and certainly more reserved than during the last crisis. It did cut rates (MLF is at 2.95% lowest since 2014) but not to the extent of the US and Europe. Which is why its bond market has attracted so much investor attention. It also restricted short-term funding in the market prompting the Shanghai Interbank rate to rise to its highest in two years. Reflecting also the fact that Chinese banks require more liquidity into the year end. At the same time the recent bond and other defaults also impacted the rates.
But at the same time it is trying to restrict leverage, especially to the property sector, where President Xi sees the potential for unrest if house prices become so high that ordinary people are excluded.
Then the whole situation was compounded by signs of deflation in November raising real interest rates.
The PBoC says its policy will remain acommodative but it has introduced restrictions on lending to property in order to try and get money into the wider economy. Rate cuts are thought unlikely but an increase in liquidity to keep the system fluid is likely but at the same time keeping a close watch on leverage.
The January and February lending numbers will be interesting therefore, as usually the State banks front load their lending, especially to the SOEs. But the real drivers for the economy are the SME’s and seeing if they get access to funds will determine the prospects for the wider economy and recovery.

Opinion Europe has handed China a strategic win. Looks at the EU/China agreement and believes it sends the wrong message; after year where China has 'has crushed the freedom of Hong Kong, intensified oppression in Xinjiang, killed Indian troops, threatened Taiwan and sanctioned Australia.  Notes its a big win for China and ‘a considerably kick in the teeth for Joe Biden’; especially after he stressed he wanted to rebuild past alliances and work with others to get China to play by the international rules rather than China’s.
The EU for its part says its won significant concessions but only time will tell if China adheres to those; its moves in Hong Kong suggest that written agreements mean little to Beijing.
It concludes 'Even in the current geopolitical order, China has repeatedly demonstrated its willingness to use its economic power as a strategic weapon. By deepening their economic reliance on China — without co-ordinating their policy with fellow democracies — European nations are increasing their vulnerability to pressure from Beijing. That is a remarkably shortsighted decision to make, for a “geopolitical commission”’
It is worth noting that whilst the agreement has been signed it still has to be ratified by the individual nations; so there is still potential for the deal to fail. But for President Xi it is very useful PR at home but I would less so as far as dealing with the Biden administration. They are still likely to work with allies and like minded governments and then present to China a joint proposal. The US trade deal only got to stage 1, I doubt Biden will seek the stage two but rather go back and re-work the whole thing. With the benefit of joining with other countries I think a number of domestic Chinese sectors could come under a lot more international pressure to open up.

Dollar slide pushes EM forex to record highs. The USD started the year by losing ground to all major currencies.  Most strategists expect the USD to continue to weaken but the recent speed of depreciation has caught some by surprise.  Recent factors include the new US stimulus package and Brexit.  Yesterday’s good Manufacturing PMI data from Asia also helped sentiment on the global recovery.   That has prompted a rally in risky assets and Emerging Markets +VE for Asia.  

Trump rails at ‘surrender caucus’ for failing to block Biden victory. Looks at Trump’s last attempts to remain in the White House despite not being able to provide any proof of electoral fraud.  The division within the Republican Party is growing but many are upset at his calling Georgia’s Secretary of State and asking him to ‘find’ extra Republican votes to reverse Biden’s win in the state.  
That call has prompted a couple of lawmakers to call on the FBI to investigate whether it was “solicitation of, or conspiracy to commit, a number of election crimes”.
It raises concerns that we may not see a smooth transition of power. It will also be interesting to see what impact it has on the Senate Runoff election in Georgia today.
For investors it is a slight -VE overhang for the market. The bigger worry is that it will sway some undecided voters away from the Republican Party in the run-off election and give control of the Senate to the Democrats which would make it easier for Biden to get some of his more anti-business policies passed.
Read also the Editorial A moment of danger for US democracy Trump’s bid to overturn the election is ever more desperate.  'Extraordinary as it may seem, what amounts to an undeclared coup d’état is being attempted in the US. It will almost certainly fail. But the next two weeks will severely test the strength of America’s institutions — and the courage of its public officials.'

OECD warns against rush to austerity in wake of pandemic The chief economist says the pandemic should change governments attitude to public spending and debt.  She warned against austerity measures or tax rises, and that governments should take their time in restoring their finances. She said that the lessons from the trough in 2009 was that stimulus should have been continued into 2010 and beyond.
It is an interesting change of tack since the OECD was very pro austerely back in 2009. She also advise a tailored approach for each country rather than a blanket approach. If adopted in Europe it would be radical change from the EU treaties that equip all members to limit debt to 60% of GDP.
She advocates more fiscal rather than monetary policies.It notes she though that one problem with monetary policy was that it tends to 'redistribute income and wealth to towards older people who already have more.’
Something that is inline with comments from Powell. Currently she said there was little change in policy but that Governments and organisations should be thinking about the next stage now.

Pinduoduo faces growing PR crisis over death of employee.  An employee died on her way home at 1:30am.  Many Chinese tech companies are known for their ‘996' work culture (start at 9am, finish 9pm, six days a week).  In 2019 there was an anti-996 campaign but with little impact. Pinduoduo is know for its particularly gruelling schedules and secretive practices but its staff are amongst the highest paid.
Whilst the cause of death is unknown it has prompted some Chinese Netizens to call for a boycott of the platform.
Its handling of the incident has been poor. It initially issued a post saying “Look at the people at the bottom — who is not trading life for money[?] . . . this is an era where we fight with our lives.”
That went viral, was deleted and denied but they were later force to admit is had come from the company but blamed a rouge, external employee and said it didn’t represent the firms official line.
At a time when Chinese tech companies are under scrutiny the timing is bad. Pinduoduo was the subject of and FT in depth article recently and there are other questionable issue surrounding the company. Its ADR rallied into the year end but was down 6% yesterday.

Kirin taps Indian market with stake in craft brewer Bira 91  Investing $30m for a high single digit stake in its first foray into the Indian market.  But continuing its focus on premium beers that command higher margins than lager.  It notes that India is a relatively untapped beer market, Partly due to drinking being taboo for many it also has labyrinthine regulations and high taxes.  Those that drink tend to prefer spirits.  But according to UBS Indians drank about 2 litres of beer per capita in 2018.  Beer sales grew 8% in 2019 but in 2020 were hit by a six week ban due to the pandemic.  As yet the details of the partnership have yet to be agreed.
But overall it fits in with Kirin’s strategy, it's a new overseas market and should help offset declines at home. Stock opened lower this morning.

Case of Canadian detainees casts light on China’s secret prisons. Party is increasingly using foreigners as political bargaining tools, say human rights campaigners.Focuses on the two Canadians being held in China which it says high lights Beijing’s use of secret prisons and using foreign nationals as political tools. Many as asking governments to be more vocal with their pressure noting that China does not react to quiet diplomacy.
The two Canadians were detained after the CFO of Huawei was detained in Vancouver. Unlike Ms Meng who is under house arrest and has full access to her legal team and others, the Canadians are being held under a scheme known as “residential surveillance at a designated location” (RSDL) and were only allowed to meet consular officials once during that time. They have been charges with espionage but the Canadian government called the arrests 'arbitrary and compared China’s approach to hostage-taking.’
It interviews Anthony Grey who was held under house arrest almost about 50 years ago, it also notes the recent arrests of Australian citizens like Cheng Lei. It doesn’t mention the recent detention of the Bloomberg journalist Fan Haze who was arrested in December.
It notes that in addition to RSDL the Chinese police can detain people for long periods and cites the case of Peter Humphrey and his wife who were held for two years.
It mentions that 'Ren Zhengfei, founder of Huawei, believes the charges against his daughter are politically motivated’.
A nice quote from a former British diplomat
“I don’t think quiet diplomacy works with the party. Quiet diplomacy depends on the two parties having a shared set of values,” said Roger Garside, a British diplomat in Beijing at the time of Mr Grey’s arrest. “That means respect for the rule of law and norms of international diplomatic behaviour. The CCP under Xi’s leadership has demonstrated it rejects any notion of universal values.”’
It notes that many advocate robust negotiations with China and trying to take the issue head on. As in many things China’s actions are not dis similar to the British gunboat diplomacy in the 19 century. The difference being that the world has moved on and new standards of acceptable behaviour have been adopted.
For investors is raises the risk arbitrary detention of key staff operating in or visiting China. Whilst covid has shown that business can continue without face to face meetings I think that is a temporary measure. But the risk of detention will deter some investors. Not mentioned in the article but the fate of the 12 Hong Kong citizens is another example and the fact that two mainland lawyers who were seeking to defend them may have their licences removed is anther illustration of China’s attitude. There were even calls at the weekend that Jimmy Lai’s case should be heard on the mainland not in Hong Kong.
Investors rely on a fair and understandable legal system to project them and their investments. In the past doing business through Hong Kong ensured that; today that is not the case. It comes at a time when China is trying to attract more investment but it does seem to be shooting itself in the foot at the same time.

Tokyo faces emergency curbs as virus cases soar, warns Suga. Looks at the rising covid cases in Japan and the expectation of more social distancing measures, maybe as soon s Thursday to try and contain the situation.  The spread in Japan seems to be coming from eating out, and the expectation is that restaurants will be asked to close early and people to refrain from meeting.
Japan is different from many counties in having a constitutional right of freedom of movement, so the government cannot declare a compulsory lock-down. But it benefits from a largely compliant population. A new law will also allow it to penalise businesses that do not follow the government guidelines.
The move will also hurt the tourism sector that the government had been trying to support via it's ‘Go To’ programme. That was suspended as cases rose and will be difficult to restart with a state of emergency in place.
Equally a state of emergency will also put more doubt on the holding of the Tokyo Olympics. Vaccines are unlikely to be available for administration in Japan until the end of February.
For investors the situation has hardly impacted the stock market. Companies have adapted to the situation although a state of emergency might have more impact, but work from home is accepted. Factories have also adapted and continued to operate and export markets have gradually recovered. The cancellation of the Olympics would be seen as a mixed blessing by many. The big losers are the restaurants and leisure businesses many of whom are not listed and family run.

Shadow banks subject the global system to a rolling stress test  Warns the global financial system is likely to face a big stress test next year.  'The so-called dash for cash was in part a reflection of how the big banks’ balance sheets had failed, since the 2008 financial crash, to keep pace with the growth in the stock of US Treasury securities that was spurred by the post-crisis surge in federal deficits. Their ability to act as intermediaries in the Treasury market was thus impaired. And their readiness to provide liquidity to the market by absorbing investor flows on to their balance sheets, as opposed to simply matching buyers and sellers, was further reduced by the tougher capital and liquidity regulations introduced after the financial crisis.’The strict regulatory system meant the banks emerged safely but the role of liquidity provides has been taken by 'less-regulated non-banks, or shadow banks, such as hedge funds.’  Their funding relies on being able to do large sizes but on thin margins.  When the crisis hit they too faced issues and so instead of stabilising the market they amplified the stresses.  Hence when the US treasuries market saw yields rise sharply it lost its safe haven status until the Fed stepped in.
It then looks at a paper by Darrell Duffie of Stanford University’s Graduate School of Business, about what matters for the rescue beyond 2021. He sets out 'that there is counterproductive moral hazard in relying on future Fed rescues of the Treasury market as an alternative to reforming the structure of the market so it can better handle large episodic future surges in demand for liquidity.'He wrote that such surges could be expected to arrive with greater frequency and magnitude, given both the historically high and growing ratio of federal debt to gross domestic product and the ballooning stock of outstanding Treasury securities relative to the capacity of dealer balance sheets.
In other words, a financial system with a morally hazardous inbuilt incentive for excessive risk taking is now subject to a rolling stress test on an unprecedented scale.
That all highlights how the financial system has changed from challenging people’s savings to the current financial intermediation of collateralised repurchase agreements; with much of the risk dealt with by the derivatives markets.
So now liquidity relies on the wholesale markets, with the ‘shadow banks’ being highly leveraged into collateralised lending arrangements. Which makes them much more sensitive to interest rates than the big banks.
All of which poses challenges for regulators; especially as the system will need to refinance a growing amount of debt when many have constrained balance sheets. Which is likely to mean reliance on Central Banks providing liquidity for some time to come.
For investors that means that the big banks are more stable but margins are likely to continue be squeezed but there are insulated from some of the more risky elements of the market. Other financial institutions have been happy to step in and look at creative ways to provide finance but because this is financially engineered lending the risks are greater and for the regulator understanding the risks and trying to mitigate or defer them will be problematic. Those with money in the ‘shadow banks’ could do well but as with Long-Term Capital Management back in 1998; there are risks

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