Dec 15 FT Thoughts China another default, The Moon benefits? Tokyo Tech, Spying, & Updates

15 Dec

MARKETs @ 1:30pm
Having opened slight higher or flat all Asian markets are now trading lower. Covid concerns and the reality sinking in that maybe vaccines are not going solve all the current problems. Some investors already thinking about Christmas.
China Data largely in line
China’s restriction on Australian coal hurting the the likes of Whitehaven. I can’t help thinking that Australia should link its willingness to export iron ore to China with China being open to its other exports. That’s what I would do.

Nikkei 225 Opened lower tested to Monday’s close a couple of time in the morning but failed to break above. But found support around 26,650 level. PM opened lower and drifting lower Currently -107pts (-0.4%) @ 26,624
Topix followed a similar pattern currently -11pts (-0.6%) @ 1,780
Kospi %. Opened just slightly higher but sold down to 2,740 in early trades. Bounced back and traded 2,760/2,759. Around noon eased back to traded 2,750/2,740. Currently -23pts (-0.8%) @ 2,740
Kosdaq similar pattern but did briefly break into the green mid morning but then trended lower and currently testing the initial morning low  -6pts (-0.7%) @ 924 TAIWAN 
Opened flat but initially ticked higher to 14,250 before tended lower to 14,050. currently -143pts (-1%) @ 14,069
CSI 300 opened lower and sold down to 4,910 ahead of the data which was largely in line although Retail Sales missed. Rallied back but failed to regain the opening level. Then retested to lows before a small bounce into lunch. PM opened lower but currently working higher Currently.-8pts (-0.2%) @ 4,928
NBS Press Conference,
Fixed Asset Investment (YTD) Non +2.6% YoY vs +1.8% Oct (F/cast was +2.7%)
Retail Sales Nov +5% YoY vs 4.3% Oct (F/cast was +4.4% Consensus 5.2%)
Industrial Production Nov +7% YoY vs 6.9% Oct (F/cast was 7%)
Unemployment Rate Nov 5.2% vs 5.3% Oct (F/cast was 5.5%)
Pre Market 26,419 +29pts vs -127pts ADR’s @ 26,262 but then sold down to 26,200 and then traded sideways in a tight range 26,200/275. PM opened lower Currently -218pts (-0.9%) @ 26,158. Ecommerce and Financials weak
Expect markets to open lower on concerns that covid look-downs will hurt the recovery
Data due
FRANCE Inflation Rate, IEA Oil Report
UK Claimant Count Changes, Employment Change, Average Earnings, Unemployment Rate
US Futures 
Opened slightly higher but have eased back Dow now just 13pts S&P flat and NDX -VE. The roll out of the vaccine outweighed by the rising number of cases and prospect of more lock-downs. The lack of a stimulus deal not helping. Biden confirmed as the next President +VE, Attorney General Barr resigning a slight -VE
Data due
Import and Export Prices, NY Empire State Manufacturing Index, Redbook, Industrial Production, Manufacturing Production, Capacity Utilisation, IBD/TIPP Economic Optimism, Foreign Bond Investment, Net Long Term Tic Flows, Overall Net Capital Flows, API Crude Oil Stock Change.

Deutsche Bank survey on what the biggest risks for 2021 were; Top 3 were vaccine related; ‘the virus mutates and dodges existing vaccines’, ‘serious vaccine side effects start to emerge’, and ‘enough people refuse to take the vaccine” which hampers herd immunity.  Runaway money supply growth was sixth.  Consensus is that 2021 will be a good year.

Clothing group Shandong Ruyi defaults on $153m bond.  The latest case of default in China with more expected.  The company, privately held and known as the 'LVMH’ of China has been struggling since a number of high profile International acquisitions (The Lycra Company and Savile Row tailor Gieves & Hawkes).  It has been know to be in trouble for some time; it missed a annual interest payment in March and had been in negotiations for support from Jining City Urban Construction Investment, a Shandong-based local government financing vehicle.  But in June they announced pulling out from a deal to buy a 26% stake in the company.  Hence the current problems. It notes that 'Local government financing vehicles have come under scrutiny and thus were under pressure to cut back on risky investments,’That underlines the strains that are currently running through out the Chinese financial systems and the previously introduced cross-guarantees has gone from being an asset to a liability.  It also makes the point that there are going to be more problems next year.  The links between private and local government finding vehicles could become even more strained.

Opinion To the moon and back, Chinese R&D is leaving America behind Compares the collapse of America’s Arecibo radio telescope of the US National Science Foundation in Puerto Rico and China’s moon landing.  Whilst there are no current plans for rebuilding the telescope, China does plan to go back into space. It says 'One of the most important opportunities for building economic prosperity comes from basic research. New knowledge generates social returns that can far exceed private returns as ideas can often be shared freely. Scholars consistently estimate that the social return to research and development is at least 30 per cent. One result of this is that private markets alone generate too little investment in research. So the proper solution to this positive externality is for governments to support it. Indeed, the US’s founding fathers recognised this by writing the so-called “patent and copyright clause” into the constitution.’Historically the US used to spent considerable more on R&D that is does today, especially when it was in competition with the Soviets.  It notes that today China has 'created more than 900 innovation funds that collectively planned nearly $350bn of new R&D investments.’  It also notes that  Chinese R&D spending grew at an average annual rate of around 17% .  In its view this left the US increasingly “seen globally as an important leader rather than the uncontested leader” with China “rapidly closing the innovation gap.”It concludes ‘…..last week, as the scientists of one nation mourned the collapse of one of its signature instruments, scientists of the other celebrated the prospect of discoveries soon to come. Will history view that moment as a harbinger?’

To me, the trouble with the article is over a few issues.  China’s 'planned investments' and actual spending are often very different.  Furthermore when money is spent it often does not end up where it was intended as evidenced by spending on trying to upgrade its semiconductor sector, where money has been ‘lost’ to property investment, embezzlement or corruption.China’s scientists looking for discoveries in the moon samples, are I suspect, unlikely to find much more than was found when America and Russia made their moon landings in the 1960’s and 70’s.  But it was those projects that drove much of the advancement in scientific and technology that the west went onto see. Tech we now take for granted but is widely available.  It is difficult to see what new, radically different technology China will develop from this mission.The US projects gave us new concepts in artificial limbs, robotic sensors, temper foam, scratch resistant lenses (from astronaut helmets).  Insulin pumps originally designed to monitor the crews blood Sugar levels, flame retardant suits with circulating coolant and advanced breathing systems, cordless power tools and dust busters,  Lasik, building shock absorbers (originally used to protect equipment at launches), Solar cells, water filtration, wireless headsets, smoke sectors, freeze dried foods, camera phones, CAT and MRI scans the list could go on.  Key is that China is not going reinvent or discover those things.  Areas where China has been advancing is 5G, 6G, IoT and even there they are reliant on tech that the US invented many years ago and has subsequently advanced. In some respects there is no longer the need for huge government spending as seen in the 1960’s and 70’s because  companies are better financed, focused and aware of what is required.  Even the posit note from 3M an accidental discovery but one that was quickly commercialised. Something governments are not well suited to and the Chinese government especially with its regimented bureaucracy. 

Tokyo to hire tech experts for digital overhaul  It is seeking over 500 computer experts for its new National Digital Agency as it seeks to catch up with S Korea and Taiwan in terms of digital  government services.  The Japanese government notes that today the adoption of online government has been at halfhearted.  THE covid pandemic has highlighted how behind Japan was and how that has put Japan as a disadvantage and made people realise the need to digitalise.  The aim is to mix computer experts with bureaucrats and the private sector. The article notes 'One striking aspect of Japan’s digital plan is the intention to recruit technologists direct into the bureaucracy rather than relying purely on private contractors. Governments around the world have often struggled when they have sought to act as developers. Mr Hirai said: “We want people to go in and out — we want a spell in the digital agency to be a boost for someone’s career in the private sector.”’It is hoped that the new agency will also inspire the private sector too.  Time will tell.

PPE supplier Top Glove hit after worker dies from Covid.  One of the early beneficiaries of the covid pandemic (shares rose 500% plus) and now its worker dormitories are the sources of a major outbreak.  The article notes that 'The Malaysian government this month recommended charges against Top Glove after 19 investigations into its worker dormitories. The Ministry of Human Resources said it had not applied for the correct certification and living spaces were crammed, uncomfortable and lacking proper ventilation.In July, the US imposed an import ban that is typically applied to goods allegedly linked to forced labour on products made by Top Glove subsidiaries.’Stock was trading lower yesterday.  Highlights that a lot of the manufacturing in Asia and India is cheap because of the conditions people work and sleep in.

Solar power insurance costs surge. Whilst solar power is relatively cheap the cost of insuring it against extreme weather is rising significantly.  That cost is now, in some cases so significant that solar farms are no longer able to make their expected returns in some cases.  Also the fact that some insurers will no longer underwrite such business suggests that insurance costs could see further rises ahead.Highlights the need to take all the costs into account when appraising renewable energy projects.

Spy agencies scramble to counter ‘nation-state’ cyber attack on US.   Looks at a significant incursion into US systems.  Notes that the malware was inserted between March and June, so the hackers could have been active within some systems for months.  The fact that the software was so widely used will no doubt rise some questions going forward.  'The US issued an emergency warning on Sunday after learning that software that may have been used by most Fortune 500 companies and multiple federal agencies, including the US military and the Pentagon, had been hijacked to gain entry to secure IT systems.’Currently it is not known who launched the attack.
For interest also read Novelist who used espionage to explore ethical issues the Obituary of John le Carré Writer 1931-2020.  Spy and writer, creator of George Smiley the antithesis of Fleming’s James Bond.  A man with a sharp sense of humour who spoke as elegantly as his prose.  Who once said  “A good writer is an expert on nothing except himself and on that subject, if he is wise, he holds his tongue.”  It notes that David John Moore, his real name 'put to good use his first-hand knowledge of espionage, deception and the frailties of the human character.’  An interesting obituary.  I met him once at an event that David Tsang had arranged in Hong Kong during the literary week; he was a panelist with Stephen Fry and when asked if he was worried, in this modern age about having his work ‘hacked’ whilst writing.  He said that until someone comes up with a method to hack a typewriter ribbon his work was safe.

Germany faces risk of double-dip recession.  Looks at how some expect the hard lock-down, being imposed from Wednesday,  increases the risk of the economy entering a double dip recession. So far Germany has benefitted from its large manufacturing sector and rising exports to China.  Those could lessen the impact of the hard lockdown as long as they continue.  In the meantime retail spending will be dramatically hit and that could impact Asian suppliers.   It notes that the Germany Central Bank raised its forecast slightly for the economy to rebound to pre-pandemic levels by the start of 2022; which is quicker than the Eurozone target.Also mentions the French central bank revised its forecast too but it was slightly more pessimistic that in September due to the second nationwide lock-down that is still partly in force.The range of opinions reflects that we still do not know the full impact.  The Central banks are assuming that a significant proportion of the public take the vaccines, that the current vaccines are effective and that the virus doesn’t mutate in such way as to make them ineffective.  Reasonable but unproven assumptions.  

For Interest
City’s proud past gives way to uncertainty
FT Series London has long been a global hub for financial activity but Brexit and Covid are bringing significant change

Dawn of the zombies is not so scary as it seems.  Looks at a new paper from the New York Federal Reserve which suggests that the impact on the economy from Zombie companies might not be as much as previously thought and that more importance should be given to bankruptcy proceedings; that they occur swiftly as that  has a bigger impact.  An interesting read.
Read also Credit crunch hits US small business.  Bigger companies have been the main beneficiaries of central bank largesse, issuing a record $2.4tn of corporate bonds this year. But smaller companies are struggling without much support from lenders.  Compares what happened to American Airlines and the supplier of the packet nuts that it used to give out with drinks.  

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