Dec 4 FT Thoughts China Tech focus, WeChat?, EU must take sides on China? and Updates


06 Dec

MARKETs @ 2pm HK time 
JAPAN 
Sentiment weak as covid cases surge and news of potential vaccine roll out delays. PM Suga to hold press conference on the recent surge.
Nikkei 225 lower at 26,700 level and initially rallied to 26,750 before working to 26,800 at around 10am it then sold down to 26,650 before bouncing into lunch. PM opened higher and is grinding higher Currently -81pts (-0.3%) @ 26,730
Topix opened lower but worked into the green before selling down and bouncing into lunch. PM opened flat and trading sideways currently -2pts (-0.1%) @ 1,773
S KOREA 
Pre market currently account was higher than forecast. The rally is continuing with Chip makers leading it higher but also good interest in wider Tech, financial and steel related shares on expectations that vaccine roll out will quicken the export-intensive economy. Rising covid case locally largely ignored.
Kospi opened higher and rallied to 2,743 in early trades and then drifted slightly lower through the session Currently +35pts (+1.3%) @ 2,732
Kosdaq opened higher @ 910 a dn rallied to 912 before selling down to 908 before working higher again, first to see resistance at 912 which it tested a couple of times before easing back then around 1pm rallied again a broke out to 913.4 currently easing back +5pts (+0.5%) @ 912.3
Data Current Account Oct $11.66b vs 10.21b Sept (F/cast was 8.5b)
TAIWAN Opened above 14,000 and has worked higher with resistance as it approached 14,150  currently +155pts (+1.1%) @ 14,132. Tech leading the index higher.
CHINA CSI 300 opened lower and sold down to 5,020 in early traded.  Then worked higher in choppy trading to 5,037 at lunch.  PM rallied initial to Thursday's closing level and then spiked to 5,072 Currently +11pts (+0.2%) @ 5,068. Looks like Team China active in the market.
Trade Data out Monday so may see caution into the close.
HONG KONG Opened  @ 26,811 +83pts vs -52pts ADR’s but sold down in the first hour to 26,650 level before trading sideways into lunch.  PM rallied to 26,780 but now easing currently +49pts (+0.2%) @ 26,764.  Ecommerce names +VE but Chinese Property names, HSBC and StandChart weak. Sentiment weak on US/China tensions and the surge in covid cases locally.
SMIC trading halted pending insider news on US blacklisting.
Next Digital +24% but opened +60% on resumption of trading.
EUROPE Expect market to open lower in reaction to Pfizer reduced initial doses news and with caution ahead of the PMI data and US job report.
Data Due
EUROZONE Construction PMI
GERMANY Factory orders, Construction PMI
FRANCE Budget Balance, Construction PMI 
UK  Construction PMI, New Car Sales 
US Futures opened flat but rose slightly in Asian trading Dow +60pts , S&P flat NDX +0.2% ahead of the US jobs report and other data.
Data due
Balance of Trade, Non Farm Payrolls, Unemployment Rate, Ave Hourly Earnings, Ave Weekly Hours, Imports, Exports, Factory Orders, Baker Hughes Total Oil Rig Count.
Speeches by Fed’s Evans and Bowman

On line
China aims to shake US grip on chip design tools The article notes that three Chinese start ups, founded since September last year,  have been either been founded by or hired executives and engineers from Synopsys and Cadence Design Systems of the US, the world’s two biggest makers of electronic design automation (EDA) tools, as such software is known.  The firms include 'Nanjing-based X-Epic, Shanghai Hejian Industrial Software and Hefei-based Advanced Manufacturing EDA Co, or Amedac, in which Synopsys owns a stake.’China has been aware for some time of its lack of expertise in the area and has long sought to hire engineers from Taiwan but the issue was highlighted when the US cracked down on ZTE and Huawei.  It has since increased its efforts to build its own capability; offering big incentives to people prepared to come and help build China chip design tool sector.The success of Synopsys and Cadence is due to their ability to lock clients in; as the design tools are closely linked to the chip process flow so switching is expensive and difficult.It notes that Synopsys and Cadence are aware they will lose market share to China and hence are willing to invest in the new start ups and projects in China.
Others have also sought invest in Chinese start ups but with mixed results and have often faced set backs. The article notes that obviously the leading companies want to stay close to the start ups in order to be aware of how the sector is progressing.
China has made it a stated aim to improve its self sufficiency in the tech area but as other articles have noted it takes more that than just money.  Recruiting the expertise is important but also training staff and developing the processes all of which takes time. In the meantime the industry leaders are still progressing and advancing their processes.  It’s a long term project and will be interesting to see if the regime in Beijing and the attitude of the west turn more co-operative while the process is being under taken.  The other issue that China has to beware of is the mis use of funds.  A recent FT article pointed out that in the past many companies have taken government money and squandered it on property or other things rather than focusing on the task in hand.

‘High-value’ executives entering England to get quarantine waiver. Looks at changes to the UK system to allow some people to enter the UK and not have to self quarantine; the list  will include; high-value business travellers, professionals in the performing arts, TV production staff, journalists and recently signed elite sportspeople.   Seen as being good news for business as an exemption will also be made for 'foreign-based executives seeking to make a financial investment or place a contract in England.’Another change is that from Dec 15 people will be able to isolate for 5 days if they pay for and take a Covid 19 test that turns out negative under a new ‘Test to Release’ scheme.
It does seem to me a reasonable approach but I would have thought that a better scheme would be to have all passengers take a covid 19 test prior to travelling that way the risk of spreading covid 19 as well as infecting other passengers whilst on the plane is significantly reduced. 

The Print Edition 
WeChat censors post by Australia’s premier.  He had written '“The post of a false image of an Australian soldier does not diminish our respect for and appreciation of the Chinese Australian community, nor will it diminish our friendship with the people of China,’’’  but it was removed by the platform and replaced with a message saying '“text, pictures, video, etc that incite, mislead or are contrary to objective facts, inventing issues of social interest, distorting historical events, or confusing the public”.   It obviously will raise concerns about Beijing’s ability to export censorship overseas through technology groups.
I would think put Tik Tok’s claims in the US in a slightly more difficult position. But it also reveals the hypocrisy of Beijing who expects to be able to freely what it wants whilst denying the other countries the same.

Beijing critic Lai denied bail on fraud charges Looks at the case against Jimmy Lai who was denied bail yesterday as the court thought he was a flight risk, the other executives also charged with him were granted bail.
That came as a surprise considering that his family is in Hong Kong and that he has always said he is committed to Hong Kong. A reading of the FT Lunch with Jimmy Lai a few weekends ago would tend to support such the view that he is not a flight risk.
But it does increase the feeling that the Hong Kong legal system is becoming more politicised especially as one of the charges relates to not using a premises as permitted by the lease; that has historically been a civil matter and usually resolved with a financial penalty.  Making it a criminal issue shows how far the new National Security law can be stretched when the the administration when it wants to.
Also worth noting that the magistrate who denied bail is from a pool of judges selected by Carrie Lam to preside over national security law cases again raising questions about the independence of the judiciary.

China signals easing of S Korea products ban.  The first approval of a S Korean video game in four years after S.Korea adopted the US anti missile defence system in 2017.  Since then many S Korea have lost market share and somehow left China’s market completely.  The S Korean gaming/entertainment sector rallied yesterday on the news but it is too early to say whether there will be a broader adoption of S Korean products.  Another example of how China can use commerce to try and force its will upon its trading partners.  Key for many is whether being part of the RCEP will change China’s attitude; certainly so far   towards Australia it hasn’t!

Opinion The EU must take sides with the US over China. Set out that Prudent Xi’s aim is for China to rule the world; and for the current rules to be replaced by Beijing’s rule by might.  China’s ambition is not limited to the western pacific.  Looks at how President Xi’s 'regime has settled into one of voluble disdain for “western” rules and studied aggression towards supposed adversaries.’
Cites the cases of Canada, Taiwan, Hong Kong, Vietnam and obviously Australia. Quotes Gui Congyou, China’s ambassador to Sweden, summarised the approach late last year: “We treat our friends with fine wine. But for our enemies we have shotguns”. He notes that 'The common denominators are disdain for international rules and for the freedoms that sustain democracies. Sanctions on imports from Australia, the dismissal of a UN-sponsored court ruling in favour of the Philippines about maritime boundaries, and the arbitrary arrest of foreign citizens are Mr Gui’s shotgun. Think of anything that might be called a western, or European, value and Beijing has it in its sights.’
It notes that Europe has become more wary of China, the recent paper prepared by the EU for working with the US underlines this. Key he thinks is that currently Europe is not willing to admit the geopolitical collision with Beijing, and China’s efforts to divide and rule through the “17+1” cooperation group. Notes that Merkel still thinks economics and geopolitics can be neatly separated. But going forward whilst not want a new Cold War there needs to be 'of a clear-eyed understanding of Beijing’s ambitions and methods. Europe will have to take sides.’
For investors in China that could either result in further opening up and a truly level playing field for companies or more sanctions on China if it is not prepared to open up.  Worth remembering that the US only got as far as phase one on the trade deal.  China was not prepared to concede on any of the tough issues as it negotiated with the US.  If however if it is negotiating with the US, Europe and other allies it may find it can no longer refuse to face up to the issues. But that could also lead to China lashing out against some companies and countries.  I doubt anything will happen quickly but investors need to watch carefully.  

China #MeToo trial halted after no-show. The accused refused to turn up.  That then led to a closed door hearing for more that 10 hours and no verdict.  Whilst it didn’t go as expected there is the expectation of another hearing.  China has written “sexual harassment” into it’s civil code, which was passed in May and comes into force in January. But there is no precedent for such cases and I would think little understanding of the issues but it could lead to a lot more cases and the potential to embarrass party officials at many levels.  It will be interesting to see if there are more cases.

Daimler plans to curb suppliers and earmark cash for software development looks at how its new strategy will be more about building the tech than developing the car.  An interesting read and one that highlights that jobs are likely to be lost a it suppliers Continental, Bosch and ZF, which sell electronic control units and software to large car manufacturers. Initial costs will be high but I hopes in the longer term the cost base will be reduced.  Not mentioned in the article but it will be interesting to see whether the Chinese and Japanese car manufacturers go down the same route.  

Europe’s banks are ‘all over the place’ on bad loan preparations, ECB warns.  'Andrea Enria, president of the European Central Bank’s supervisory board, said that banks’ preparations for a likely rise in delinquent loans was one factor to be considered in its decision on whether to allow them to resume dividend payments and share buybacks.’She also said that failure to address the issue could result in bank balance sheets being clogged and then the banks would be unable to support the recovery.The key here for investors is that the ECB expects to see a significant rise in delinquent loans ahead.  Many companies have managing to survive so far but that is no guarantee that will continue.  Investors should be looking at companies in the same light, especially those with out sourced supply chains where one of the outsourced links might fail and hence undermine the companies ability to continue or force the company to buy in that unit.
Read also the Editorial The legacy of Covid is a corporate debt mountain. Public wealth funds can play a role to ensure economies recover.

Central banks are doubling down on lending schemes by Huw van Steenis at UBSLooks at how the BoJ recently incentivised smaller regional banks to cut costs, merge or lend for sustainable development.  He says the key is that Central Banks want their banks to be in a position to support the recovery; especially the SME’s when government support ends.
He notes 'How policymakers answer this question has major implications for bank dividends, financial regulation and the shape of quantitative easing programmes. This makes the next salvo of measures from the European Central Bank all the more interesting.'
He looks at what has happen in the UK, US and New Zealand. He recognises as the Fed has done that some policies introduced to allow the banks to do more were not taken up by the banks; nice quote 'So far in the pandemic crisis, banks have been the dog that did not bark.’Looking forward the pandemic has highlighted the need for more tech investment , something that is easier for larger banks to make than smaller ones. 'Simply put, the winner-takes-most dynamic we see in most digital markets is coming to banking — and fast.’
That is certainly true for the current growth in virtual banks who are not constrained but existing infrastructure and branch networks. That could prompt more mergers of smaller banks. He also mentions his idea that banks to piggy back on another’s scale through far greater use of utilities or outsourcing their entire back end to a cloud provider. But change takes time and in the meantime bridges are needed.
He outlines four implications of the the shift in Central Bank policy
'1.Any changes that shield banks more effectively from the corrosive impact of negative rates are net positive for bank securities and, in turn, financial stability. Eurozone bank earnings could benefit more than 5 per cent on UBS estimates, should the ECB extend their scheme or improve its terms. But the spread of winners and losers is likely to widen over time as the winner-takes-most dynamic plays out.
Second, the more that special lending schemes such as the ECB’s targeted long-term refinancing operations (or TLTROs) are extended, the greater will be the pressure to make them support the move to a lower carbon economy.
Third, expanded special lending schemes will have spillovers into sovereign bond markets. Given that the ECB’s TLTROs are disproportionately taken by southern European banks, this will keep bids on peripheral eurozone bonds strong.
Fourth, the more workarounds there are for banks, the longer policy rates could stay at zero or negative rates. The pressure on pension funds and insurers to optimise their asset allocation for ultra low rates will be intense.’
He closed with a good quote 'Milton Friedman used to say nothing was as permanent as a temporary government programme. Funding-for-lending schemes look likely to follow his maxim.’

Lex. Pandemic cash: after vaccination, appropriation. Looks at how with a vaccine in sight companies that dashed for cash at the start of the pandemic can now with more confidence use the cash.  Investors hope for buybacks and dividends but for companies that received Government cash that seems unlikely; the other options are M&A or just retiring debt.  I suspect that a lot of bosses are looking around for M&A opportunities; that would be good news for their investment advisers.
Lex China property/Evergrande: towers of debt. Notes that in the past despite changing fundamentals shorting the Chinese developers  has been a 'no win' for the past 10 years but that might be changing.  Notes that whilst development activity has increased property prices has shown growth to be slowing. Added to which the recent defaults has raised concerns about the ability of some developers to refinance their debt.  Plus there are now doubts about the availability of government to bail outs and the recent imposition of Government limits on the developers leverage means the developers could be under serious pressure.  Whilst property prices are unlikely to fall in China, developers with large debts are unlikely to be so lucky.  
Whether Beijing would allow a big developer to collapse is questionable.  It has for a few years tried to get better run developers take over smaller ones in trouble but here is no precedence for a developer the size of Evergrande to fail.
Whilst I agree property prices are unlikely to fall in the short term if Evergrande was to heavily discount its unit prices in order raise cash it could put other, better developers under pressure too.

McConnell signals stimulus accord. Senate majority leader shows willingness to break stalemate on funds.  With investors watching and recent data pointing to the importance of a stimulus package Mr McConnell is signalling a more conciliatory position, no doubt aware that being seen as block a package at this stage could have a negative impact on the run off vote in Georgia in January.  
A key point being that Mnuchin has said that the President would sign a proposal put forward by McConnell.
The bipartisan proposal would allocate an additional $288bn for small business aid, an additional $180bn for unemployment benefits and $160bn for state and local governments.
Mr McConnell’s proposal would not provide any funding for state and local governments — a proposal many Republicans have characterised as a bailout for poorly-run Democratic cities and states — nor would it continue the supplemental unemployment benefits.

For Interest
Coatue wins big on Tesla boom and Wirecard bust.  One of the largest long short funds shows that stock picking still works; its main fund has returned 52% net of fees to then of Nov says the article.  Key long positions are reported as Tesla, Paypal, Zoom and Sunrun with a big short on Wirecard.  It also notes that a stake in Disney was a rare mis-step but shows they are human.

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