Dec 24 FT Beijing probes Baba; really about the data? Deals Brexit, China/EU 5 key techs & Updates

24 Dec

MARKETs @ 2:30pm HK time 
Nikkei 225 opened higher and rallied to 26,765 in early trades but then eased back to around 26,675 and trading sideways into lunch. PM opened lower but traded sideways to close +144pts (+0.5%) @ 26,668
Topix traded in a similar fashion to close +9pts (+0.5%) @ 1,774
Tomorrow market open as normal and the Christmas pressies are data on Unemployment, Tokyo CPI, Retail Sales, Housing Starts and Construction orders.
Kospi opened slightly higher and worked higher thought the session to the day high around 2:30pm of 2,812 before easing lower into the close ahead of tomorrows holiday
Kosdaq opened slightly higher and worked higher to 933 around 1pm but then sold down to 926 before rebounding to 932 and currently trending lower into the close. +6pts (+0.6%) at 929.
Opened higher in reaction to Wednesday’s good Industrial numbers and rallied to 14,300 before selling down to 14,265. Then basis call trade sideways 14,324/14267. Closed +57pts (+0.4%) @ 14,280
After market We are due to get Unemployment and M2 Money Supply
Market open as normal Friday, no data due
CSI 300 opened lower but after an initial down tick rallied to 5,027 and traded sideways in choppy trading for the next hour before selling down to test the support at Wednesday’s close and then ticked higher into lunch. PM opened lower and sold down to 4,980 before rebounding Currently -5pts (-0.1%) @ 5,003
Markets open tomorrow
Opened @ 26,342 -19pts vs +40pts ADRs. Alibaba opened -3% (and closed -8%) as Ant Group confirmed it had “received a meeting notice from regulators.” It reported the regulator to investigate alleged monopolistic behaviour -VE cross read to other ECommerce names; the investigation is into its practice known as “pick one of two” in China, among other issues.AAC Tech rallied on proposal to spin off its optics unit on the mainland.At the close ECommerce remained weak but Chinese Financial +VE on news the PBoC would ’supervise and guide’ Ant Group. Renewables still seeing good interest. Initial sold down to 26,221 but then rallied to 23,400 level and traded sideways into lunch. Closed +43pts (+0.2%) @ 26,387.
Market closed for the PM session and tomorrow.
Germany closed, France, UK and other half day trading. Expect markets to open higher on expectation of a Brexit deal tone announced and following the lead from Asia. Covid still a concern and with markets closed tomorrow upside likely to be limited.
No data due. Markets closed tomorow
US Futures 
Opened slightly higher in Asian time but eased slightly Dow +40pts , S&P and NDX slightly +VE but expect markets to nudge higher following Asia and Europe.
Half day trading; Stock market close at 1pm, Bond Market at 2pm
No data due and Markets closed tomorrow

FT Online 
Beijing launches antitrust investigation into Alibaba. Probe into China’s biggest tech group is one of the first of its kind for country’s internet sector.Looking at the practice known as “pick one of two” in China, among other issues. Where users were ‘forced’ to pick its platform or see their products demoted in its search engine.  Also the PBOC said it  would ’supervise and guide’ Ant Group.
This is the first time China has launched an antitrust investigation on the grounds of market dominance. The potential fine is 10% of previous years revenues.
The People’s Daily said “Antitrust has become an urgent issue concerning [China’s] overall situation,” and said the “an important measure for our country to strengthen antitrust supervision of the internet sector”
The article links this to Jack Ma’s speech criticising the regulators but it probable goes deeper than that. This is probably more about control of the data that Alibaba and Tencent built up on consumers and their ability to give credit ratings. That is data the PBoC and Government wants but the companies have been reluctant to hand over. Hence the fact that PBoC is going ’supervise and guide’ Ant is important to note.
The party wants that information and under the guise of strengthening anti trust it is in fact increasing its monopoly about information on its citizens. Remember in China its always about following the money. With the data Alibaba and Tencent have it will hope to improve tax collection and be able to see who’s spending is not inline with their official income.

FT Front Page 
UK and EU on cusp of trade deal. Rare mood of optimism on both sides, fishing rights largely resolved. Sterling rallied on the news. Details yet to be seen but a deal will remove a lot of uncertainty for investors.  
Read also Future ties Agreement would fundamentally change relations between Britain and Brussels looks at the key areas (Trade in goods, Fair Business competition, Fish, Financial Services, Migration and Security). On Finance it notes both sides have said market access should be based on bilateral decisions by Britain and the bloc, whilst at present there is obvious equivalence as they markets are operating. Going forward that may change but I would doubt quickly so it would seem sensible to allow at least several months before looking to review. But because this involved bureaucracy it is not going to be so straightforward, with lots of piecemeal talks expected.  
See also Trade deal closes in after fraught fortnight. For a time line on the talks.

Democrats urge Republicans to back Trump’s call for larger stimulus package. Following Trump’s tweet the democrats have now got a lever to use.  It looks very much as if Trump is using his remaining time in office to try a secure as much good will as he can, which he may well need when he leaves office.

Lobby group urges EU to sign pact with Beijing on investment. So says the head of the European Chamber of Commerce in China on the basis that the China-EU Comprehensive Agreement on Investment (CAI)  offers important concessions to EU companies.  He feels there is no need to wait for Biden, but acknowledges that China wants the deal so it can show Biden it can conclude deals.
It notes that Australia, New Zealand, Japan and South Korea joined the Regional Comprehensive Economic Partnership trade pact with China and members of the Association of Southeast Asian Nations. That the US secure concession under the Phase 1 trade agreement but that the EU has been largely left out.
The deal would be good for 'EU companies in financial services, telecoms, new energy vehicles and other sectors.’
Biden’s team so far has merely commented that they would welcome discussions with the EU on “our common concerns about China’s economic practices”. Key being International Labour Standards, especially over Xinjiang and the allegations of forced labour. Many can see that for China this would be a huge PR win.
Read also Brussels looks to tap China’s zeal for an agreement on investment.  Which makes a number of good points. One being that we can’t know how good the deal may be because the negotiations are confidential.  That is something China loves but should be resisted.  It also makes the point that China often gives concession in areas  once its own companies have built up 'impregnable positions, such as banking or payment services. Once allowed in, foreign companies also face all sorts of licensing and administrative requirements.’
Also says Beijing is prepared for the first time to give greater insight into subsidies to the SOE’s and could then be pressurised to commit the same to the WTO. BUT as ever its dependent on the precision of the wording and Beijing's commitment and being able to actually force Beijing to reveal the true details.
Beijing is also resisting access to its procurement markets and a demand for a binding investor court system for settling disputes. Beijing prefers looser arbitration, which will do little to support companies suing Beijing. Not that many would anyway considering Beijing’s willingness to use political retaliation. Something I think any agreement should look to prevent.
In his view 'A deal looks as if it will fall well short of European groups’ demands that the EU and China enshrine the notion of reciprocity in their investment relationship and provide a high level of protection for investors and their investments.'
I think that having waited for seven years most people must recognise that China is only now trying to rush the deal through because it wants the deal. It is making some but no real concessions. Some say the EU is unrealistic in its expectations of what concessions it can get out of China on labour practices and in other areas. The truth is that until the deal is signed you can hang out for everything. The Head of the European Chamber of Commerce in China says that for the past four years the US hasn’t worried about the EU’s position so why should they wait. He also noted that “Australia, Japan and Korea signed RCEP without [labour provisions] so how come we are trying to force China to accept our way of living and jeopardise jobs at home for it?” he asked. “Do we want to feel better or do we want to trade better? We have to get real about how much can we shape China.”
For me the important issue is that this is about going forward. The fact that Biden’s administration is seeking to build a common ground is in sharp contrast the the past four years under Trump. The EU should look to leverage that. Having waiting from seven years a new opportunity is potentially possible. For too long China has been allowed to used its leverage in dealing with divided trading partners. If Biden’s administration can facilitate a united front then getting a level playing field for everyone will be mush easier. The EU in my view should wait and at least give Biden that chance rather than rushing in and wasting a good opportunity.

European tech accuses US of China block.  Executives claim that the US is using sanctions to exclude them from the Chinese market whilst offering American companies exemptions.  A case they feel of ‘America First’ as some US companies can now supply Huawei but European ones cannot; especially in the chip and chip making equipment sectors.  In many cases European companies said they had been stopped from selling but the Chinese were now buying US products sold through third parties.  Key companies suffering include STMicroelectircs, Infineon, ASML (who was expecting 25% of its sales to be to China).
Whilst the list of suppliers granted permission to sell to China is not public; its known that several US companies have been given permission to sell certain products along with Samsung, Sony and others.
As a result the EU has announced “European initiative on processors and semiconductor technologies” with the aim of being less reliant on US technology. That may provide some relief over time but the US's weaponisation of the US$ means in the future it may still be able to prevent sales just as Trump managed to scupper the Iran accord. The main hope that the EU has is that it can design and produce tech that the US wants in order to have some leverage in negotiations. The years of co-operation that preceded Trump’s time may never be restored but the hope must be that under Biden there will be better, fairer practices for all.

Asia’s developing economies shun coal power. Looks at the policy changes announced by Vietnam, Indonesia, the Philippines and Bangladesh could mean only 25 gigawatts of new coal-power projects will remain in pre-construction planning stages in 2021, an 80% reduction from the 125GW planned 5 years ago.  In India planned coal projects will fall to 30GW, from 238GW in 2015.Another key change is Vietnam's expected new energy plan due to be related early 2021 and not mentioned but tomorrow Japan will realise its ‘green growth strategy’.   All pointing to a long term decline in coal’s use. Although existing power stations will continue to use coal and the International Energy Agency this month forecast an increase in global coal demand in 2021 as rising use of the fossil fuel in parts of Asia offsets declines in other parts of the world.  This as thermal coal prices hit highs due to demand from China, India, South Korea and Japan.
But analysts note the outlook for coal is shrinking helped by the fact that many lending institutions are no longer prepared to find such projects.
Whilst that is all very encouraging it does mean that existing coal fired power stations will continue to operate using older and less efficient technology. China recently noted that whilst it is still building coal fired power station they use new technology allowing it to de-commission older more polluting power stations. The key really is for a compromise; ESG should not be seen as an absolute; but as a stepping stone to improvement. Lenders should finance modern, efficient power stations that are replacing older more polluting ones as a transition to even cleaner technology in the future.

Pinduoduo showcases the realm of Shanghai’s secretive internet king.  Assortment of ecommerce and gaming ventures in spartan offices laid foundations for $170bn Chinese colossus. Was in the on-line edition Wednesday that I wrote about see Colin Huang, Shanghai’s secretive internet king. 

LG and Magna join forces on electric car parts  Looks at the deal announced yesterday. The deal is the latest in a sector expected to see more consolidation; it follows BorgWarner taking over rival Delphi and Toyota Motor setting up an EV parts-making venture with Japanese manufacturers Aisin Seiki and Denso.  LG shares rallied on the news yesterday.

Kim’s vanity projects hit by financial crisis. Looks at findings from 38 North analysts; that show a number of construction projects in North Korea are being delayed as the regime is suffering from sanctions, covid restrictions and typhoon damage. It notes that a number of the vanity projects seem to have been been put on hold indefinitely and that others like the new General Hospital in the capital may have been built they probably haven’t been fitted out.  Instead resources have been focused on rebuilding Komdok; a lead and zinc mining area that was damaged in a typhoon. With homes being build to rehouse those left homeless. It also suggests that this will be a tough period for Kim.  But I would guess being a dictator it's not as tough as it remains for the North Korean citizens.It will be interesting to see Biden’s approach to North Korea and vice versa.  I doubt we will see the same approach as Biden background knowledge of China is likely to mean he sees North Korea as linked with China’s support for the regime.

Beware the five big tech convulsions reshaping investing   Sets out that companies should be investing in: DNA sequencing, robotics, energy storage, artificial intelligence and blockchain technology.  Which should also take priority over share buybacks and dividends. The five main groups have 14 sub technologies which include gene therapies, 3D printing, cloud computing, big data analytics, and cryptocurrencies.  These key areas cut across existing sectorial demarkations so companies that are siloed or highly specialised could face problems.  The writer thinks that the risker sectors on that basis are energy, industrials, consumer discretionary, communications services, healthcare, and financial services.
It gives examples 'As autonomous transport evolves, for example, cars, rails and airlines are likely to capitulate to the convergence of robotics, energy storage and artificial intelligence. Combined, these forces will collapse the cost structure of transport.Traditional healthcare is also likely to give way to the convergence of next-generation DNA sequencing, artificial intelligence and gene therapies.Meanwhile, in traditional financial services, the middlemen that dominate today’s financial ecosystem face disintermediation thanks to application programming interfaces, social platforms and blockchain technology that will enable the convergence of business and consumer marketplaces.’
From their analysis that puts nearly 50% of the S&P500 at risk.Importantly 'Though at small bases today, we believe most innovation platforms are entering dramatic growth trajectories thanks to lower costs and higher productivity.’
It cites Tesla as a example of how the good will win big time and existing petrol auto will lose.Also that 'Both growth in the value of goods and inflation are likely to surprise on the low side of expectations as market share shifts to the poorly measured digital world and as the “good” deflation associated with technology takes hold.’ I think that is a good point, some of the gains will come just because we currently do not know how to quantify the upside.
It concludes 'While risk-free interest rates are likely to remain low, spreads between companies on debt costs could widen dramatically as disruptive innovation — the likes of which we have not seen since the telephone, electricity, and the automobile burst on the scene in the Roaring Twenties — causes dislocation.
So, investors beware. Innovation appears to be evolving at such a rapid pace that traditional equity benchmarks are being populated increasingly by so-called value traps — stocks that are “cheap” for a reason.
Critical to investment success will be moving to the right side of change.’
A good number of points in the article but I doubt it will be so clear cut. Most companies are aware of the issues and trying to embrace the change that is required. In some cases covid will have accelerated either the adoption of new tech or a companies demise. The one area I question is specialisation. Most, but not all, specialist companies do will because they are unique and they know it. They are usually aware of the tech related to their business and remain on its leading edge or ware that the services they offer can’t be replicated by automation or robotics.
But certainly investors need to be aware of change and also of sound balance sheets.

For interest 
France reopens border but tempers fray among drivers stuck in UK. The key problem being getting covid tests.  The test facilities are miles from the ferry terminals and take time to process.  So with between 8,000 and 10,000 drivers to test and then get them their results its a nightmare. You can hardly give your address for posting the results as a lorry parked on the M20!  Next will be the issue of those who are actually infected and who they have come into contact with whilst waiting.  Moving their lorries out of the queue or finding a relief driver.   All this over Christmas is a real shame, especially considering that the mutant strain of covid is already within Europe.  
It really demonstrates how behind the curve governments are on dealing with covid. If better testing had been mandated for drivers that would’ve helped; as has been done with HK taxi drivers. Having a Europe wide app to trace would be useful, the trouble is that the EU couldn’t agree on which one to go with. But lorry drivers aren’t difficult to trace because they tend to remain close to their lorries.
It to me, shows that politicians once again have used the situation for their own purposes rather that the good of their people.

US office space dumped after success of working from home.  This is important because it means an increase in available space and that is likely to lead to a fall in rental values.  But more importantly it could put pressure on the loans associated with the properties.  That in turn could hurt investors in the banks and other institutions that had moved into Property loans in recent years in search of yield.  To an extent the risk may be masked by the fact that standard office leases then to be on a 3 to 5 yr basis but large tenants seek longer terms up to 10 years. But those are the guys now needing less space. Most leases allow sub-letting but it is unlikely to be at original rental value so the head tenant will paying out more and that drains available cash from the rest of the business.  Not a big issue whilst interest rates are low but could be more of an issue in the years to come.  Whilst a lot of property loans in recent years are covenant lite this situation does raise covenant concerns.  
Lastly the really important part is future demand that will only be know as companies reassess their property needs in the post pandemic environment. What I expect is less demand for major CBD’s and more regional hub demand. For the large property groups that is more bad news. It means the staples of offices and Malls are now both suffering. In both cases re thinking will be needed. One potential answer will be to convert part of some of the regional mall locations into office and distribution hubs, but that will only work in limited number of locations. The prospects for property remain challenging and that means the risk to lenders remains elevated.

Stimulus helps private equity dealmaking hit fresh highs.  Key being Buyout groups are “pricing in a recovery that will be driven by the vaccine and there’s light at the end of the tunnel here”, said Goldman’s Mr Kamo.“All the factors that embolden private equity were still there: the large amounts of dry powder sitting on the sidelines, supportive financing markets, willing sellers. The model doesn’t work if you don’t put the money to work.”
An interesting read and all assuming that interest rates don’t rise. It would be interesting to know what interest rates groups are using in their models and whether there is any provision for rates to rise in the near rather than distant future!For investors its more good news for the banks.

Japan law firm to allow full foreign partners. 'Anderson Mori & Tomotsune has become the first of Japan’s Big Four law firms to let foreign lawyers become full equity partners, as the quartet fights international rivals for advisory work on cross-border deals.’  It is seen as a big change for Japan and follows Japan’s hopes of attracting more businesses by setting itself up as an alternative to Hong Kong and Singapore.
It is definitely a step forward for Japan but it will still take many years before Japan really becomes international in the acceptance of global norms. As was reported earlier this week Japan is only starting to come to terms with hostile takeovers or even unsolicited approaches. Banks and law firms still currently want to hide behind non-disclosure agreements rather than being honest about their business.
The other point being the fact that it has taken so long to get this far is a sign of the closed thought process that currently runs through much of Japanese business and the fear so often mentioned that it could revert to its old closed ways. In many ways Japan like China has to realise that there is more business off shore than domestic. Embracing other cultures and practices is how to really leverage opportunities. The fact that change is being forced by circumstances rather than being freely adopted is an indication that it will be met with resistance for sometime to come.

FT BIG READ. TECHNOLOGY. ‘Regulation can get it wrong’  After a bruising week, with antitrust cases launched in the US and new laws proposed in Europe, Sundar Pichai, boss of Alphabet, expects to be spending as much time with regulators in 2021 as he did in 2020.  A good read and I certainly think that regulation can get wrong because too often it is looking at trying to prevent past errors happening again.  But equally in a free society it is not really the regulators job to fashion a sector; that is what command economies do and rarely with good results.

LEX Hits and misses of the year. Pandemic prediction: turkey and trimmingsAn interesting read not least because Lex is reviewing what it got wrong as well as right.  

US president’s private banker Vrablic resigns from Deutsche.  No reason given but comes after the Bank launched an investigation into an undisclosed flat purchase.  It will now be interesting to see what happens regarding Trump’s loans from the bank; reported at $340m, when he leaves office.  Not least because there are legal cases looking at his financial records regarding some of the properties; where is it possible that at the same time he declared high occupancy to get a loan and also declared high vacancy to get a tax reduction.

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