Dec 10 FT Thoughts China SOE's future? China Detentions, Vaccines, Starbucks and updates

10 Dec

MARKETs @ 1pm HK time
Most markets opened lower but have worked higher through the session, except Taiwan which has drifted lower having been a standout gainer on Wednesday.
Nikkei 225 opened lower and traded sideways in the morning session. PM opened higher and has rallied towards yesterday’s closing price. Currently -20pts (-0.1%) @ 26,802
Topix has followed a similar trading patten but currently flat at 1,779
Data pre market
PPI Nov -2.2% YoY vs -2.1% Oct (F/cast was -2%)
PPI Nov 0% MoM vs -0.2% Oct (F/cast was +0.2%)
BSI Large Manufacturing Q4 21.6 QoQ vs 0.1Q3 (F/cast was 5)
Futures and Options expiry today.
Kospi opened lower and sold down to the day low 2,720 before working better; currently +7pts (+0.3%) @ 2,762
Kosdaq followed a similar pattern currently +8pts (+0.8%) @ 921
Opened  lower at 14,295, initially drifted lower but the selling accelerated around 11:45am currently -151pts (-1.1%) @ 14,230, having just bounded off the day low. CHINA 
CSI 300 opened lower following weak New Loans data and trended lower in early trades. But the reversed at 10am and spiked higher into the green and worked higher in choppy trading into lunch Currently +12pts (+0.2%) @ 4,955
Opened at 26,308 -195pts vs  -193pts ADR’s.  Initially bounced but then reversed and sold down to test 26,335.  It then spiked higher and worked to 26,435 before easing back into lunch. Currently -93pts (-0.4%) @ 26,407. Tech, Ecommerce and Financials weak.  My pick Techtronics rallied now HK$103.  
Expect markets to open lower with the overhang of Brexit and concerns about further lockdowns in Europe in the run up to Christmas. The lack of a US stimulus deal also -VE for sentiment
Data due
EUROZONE ECB Interest Rate Decision and EU Council Meeting.
FRANCE Industrial Production
UK Balance of Trade, Construction Output, Industrial Production, Manufacturing Production, GDP 3 mth Average, GDP, Goods Trade Balance, NIESR Monthly GDP Tracker.
Futures Dow & S&P opened flat but traded slightly higher and the NDX now flat.  Hopes for stimulus remain and the FDA meets to consider approval of vaccine use in the US which if approved is likely to give the markets a boost.
Data due Core Inflation Rate, Inflation Rate, Initial Claims, 4 week Ave Claims, Continuing Claims, EIA Natural Gas Report, WASDE Report, Monthly Budget Statement.

FT Articles On Line
Fall of China’s ‘most profitable’ coal miner is a cautionary tale. Renowned energy group’s decline shows dangers of reckless borrowing by state companies.
Looks at what happened at Yongcheng Coal and Electricity Holding and the fact that its default has had a impact of other SOE’s ability toi issue bonds and that is making the situation worse for other companies and increasing the likelihood of a lot more defaults to follow. Key for Yongcheng Coal and Electricity Holding was it parent company forcing it to borrow more when overall credit was being tightened. But the problem had it start 10 years prior when it went from just being a coal miner to entering into coal-derived chemicals. The parent sacrificed profitability for expansion and when it failed it pressed its best performing subsidiary for money.An interesting read which will prompt investors to review their holdings in other SOE’s. The SOE’s are already suffering and having to pay higher borrowing costs the question is really how many can really survive.

China data platform linked to detentions.  Looks at a leaked government document; generated from a police data base that Chinese authorities used to identify people deemed suspicious by association.  The ‘database known as the “integrated joint operations platform”, or IJOP, shows how mass surveillance aided and encouraged authorities to detain individuals for everyday, lawful and non-violent behaviour, according to Human Rights Watch,’.
Key activities that made people suspicious were 'phoning a relative overseas, reading a Koran without state permission or using “suspicious” smartphone applications including Skype’.The document is similar to the that used by 'local officials in Karakax county, in nearby Hotan prefecture, and seen by the Financial Times.’
A quote from a Human Rights Watch researcher “Predictive policing platforms are really just a pseudoscientific fig leaf for the Chinese government to justify vast repression of Turkic Muslims,”
The article also notes that 'Although billed as a high-tech solution for what Beijing claims are security threats in the region, the technology is largely reliant on the daily grind of the region’s law enforcers inputting data and carrying out interrogations based on names the system provides.’
I’m not sure whether that last element is a good of bad thing, as it suggests that for all the digital face recognition etc this is just people giving up names.

UAE claims Sinopharm jab highly effective. Saying it is 86% efficacy according to an interim phase 3 trial.  That is a boost for the Chinese pharma companies who say that they were forced to carry out trails oversea because the virus is fully under control in China.  But like many of the Chinese trials the underlying data has not been made public.
Sinopharm is also preparing to develop a 'second vaccine developed with the Wuhan Institute of Biological Products, has said it would have manufactured 100m doses of the two vaccines by the end this year and could provide as many as 1bn doses by the end of 2021.’ It is conducting phase 3 trials in Bahrain, Egypt, Jordan, Peru and Argentina.
The listed arm of Sinopharm was limit up in Shanghai on the news yesterday but HK Pharma names in HK were mixed.
There are also questions circulating about how under control the virus is in China because of the number of people China has already innoculated; rumoured to be more than 1m.
It will be interesting when jabs are available how discerning people are going to be about accepting a Chinese vaccine vs a western one. Already some people are saying they would prefer to wait and see whether there are any side effects in the future that haven’t shown up yet. Comes as yesterday the UK warned not to give the new vaccine to people with a history of allergic reactions to food and medicines after 2 NHS workers reacted badly to the vaccine but are said to be recovering.
It is obviously going to be sometime before people have confidence in the vaccines and it will be key for the Chinese to be able to demonstrate the safely of their products especially because at the start of the pandemic some Chinese equipment was found to be faulty which compounded China’s historic reputation for poor quality; something that in recent years it have worked hard to change.

Tokyo bourse rule change opens door for Bain on chips business float. Looks at how Bain maybe able to revive the listing of Kioxia, the former memory chipmaking unit of Toshiba, having pulled it in September. The reason given at the time was price, as rising uncertainty caused by the US-China trade dispute sent shockwaves through the tech sector and fuelled concerns that Bain would not be able to secure the valuation it was seeking; especially as it was a supplier to Huawei.  At that time it needed to offer a minimum of 35% of the group stock. It can now list and it only has to offer 10%, although smaller it gets the company listed; it then has 5 years to increase the float to 35%.  
If it doesn’t do it before February then it will need to reapply and hence unlikely to be able to list before late 2021.With the current improvement in sentiment over tech there is a window of opportunity. Kioxia, is the second-largest producer of NAND flash memory chips and it has been given permission to export some chips to Huawei so it seems to make sense. The question mark though is what difference good or bad would Biden’s administration have on the sector. Only time will tell.

Merkel calls for tougher lockdown as German deaths surge.  Calling for tough measures before Christmas to try a curb the spread of covid 19.  She made an emotional speech to the Bundestag in which she said “If we have too many contacts before Christmas and then it is the last Christmas [we will ever spend] with our grandparents, then we will have failed,” she said.’ She also accepted the recommendations of the Leopoldina;  that all shops should be shut between December 24 and January 10 and school holidays should start December 14, and be extended until January 10.
She doesn’t see vaccinations taking place until Q1 2021 after which see expected a significant change. Germany did well in the first wave but has suffered badly in the second, a similar situation is occurring in France too. The lock downs will impact the economies in Europe especially as Christmas is such an important time for many businesses; which could impact the smooth recovery that everyone is hoping for.

Wall Street chiefs upbeat over capital markets. Looks at home with JPM and BoA have said that Q4 has been good for their trading and investment banking businesses.  JPM said trading revenue was +20% and BoA about 15%.  They were also more positive about potential loan loss provisions which is encouraging but some the lack of a new stimulus package could quickly alter that.  They follows Citi and MS who last week also reported strong trends for Q4.   Interestingly the banks opened higher yesterday but sold down as hopes for a stimulus package faded.

Starbucks races further ahead in pandemic as smaller rivals are forced to shut up shop Coffee chain’s market value has risen 80% from March lows and its chief is expecting record customer demand.  Interesting because Starbucks has the size to survive and take market share from smaller rivals and especially the ‘Mom and Pop’ operators.  But there are also changing their format.  The ‘third place’ concept remains but it is going for more ‘drive through’ stores in the suburbs and pick up centres in cities.  It also notes how China is expected to be fully recovered by this quarter.  Where the digital push has been significant; saying the proportion of orders via mobile phones has doubled in the year to Sept and accounts for 25% of total orders.  It notes that Starbucks seeks to use technology not to replace staff but the ‘free them up’.Also interesting that shareholders approved employee wage rises in the US of at least 10%.  It increased its dividend but put share buybacks on hold until it has reduced the additional debt out took on to survive the pandemic.A good read, past metrics for store locations and the type of store have change and Starbucks in the US is adapting to that.  It doesn’t cover what it is doing in China but the recovery in growth there is a good signal that the middle class in China have recovered.

Disclosure reform shifts burden from banks. 'The US Congress is expected this week to approve the first overhaul of the country’s anti money-laundering laws in decades, a change supported by politicians of both parties, bank regulators and banks themselves.’Basically companies will have to register the identity of their beneficial owners with the Treasury, which should eliminated the ability of criminals to use shell companies to hide ownership.  Good news for the banks because it will no longer be their responsibility (bad news for compliance staff).The bill also requires 'that the Treasury set priorities for AML policy among law enforcement, bank supervisors, and banks, and establish channels of communication between the three groups. The aim is to make the current system — under which set types or patterns of transaction automatically trigger alerts that banks must notify to the Treasury in “suspicious activity reports” — more streamlined and flexible.’Seems like a very positive move but remains reliant on hints declarations and that the people registered are not just puppets for the criminals.

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