FT Online Sunday Evening Update Chinese Bond, RCEP, China GDP, Austria curfew, Vaccine

17 Nov

Japan Tokyo reported 255 new covid cases (-97 from Saturday) with 1,439 nationally after 6,257 tests.
S Korea Saturday reported 208 new covid cases after 205 Friday which was the first time above 200 since Sept Slight -VE
Hong Kong reported 14 new covid 19 cases on Sunday (vs 8 on Saturday) with 5 being local transmitted. HK will impose stricter social distancing measures from Monday. It has also introduced mandatory testing for high risk groups and for private doctors to issue a notice to any patients who are suspected to be infected with the virus.

From the FT online
Vulture funds buy up bonds of China state-owned enterprises.
The default of two industrial groups triggered the plunge in prices of Chinese corporate debt. As mentioned in my Friday wrap the default put the Chinese banks under pressure as investors sought to quantify the exposure of the banks to the default and to other potential defaults.On Friday Yongcheng Coal & Electricity, a coal miner in central Henan defaulted. It followed Brilliance Auto, owned by the Liaoning provincial government, saying it would not be able to repay a three-year Rmb1bn bond.
The big question it raises is whether the Central Government will step in? Many think Beijing will because if they don’t then it opens up a whole range of other systemic risks. Others are not so sure; previously triple A rated SOE firms were thought to be safe; that is no longer certain.
Other issues include what happened to over Rmb20bn of cash that both had on the balance sheets according to their last financial statements? Was it was really there in the first place? If so where has it gone?
Adding to the concerns is the fact that both have spun off profitable assets before defaulting. Brilliance spun off its shares in its BMW JV prior to saying it couldn’t repay the bond.

In my view, I doubt the Beijing will step in and just bail them out. It may try and coerce other players in the respective sectors to step up and proved a solution; as it has done with other sectors most notably the Banks. Furthermore we have also seen, over the past year, the Central Government warning investors about the risks of investing; be it in the stock markets, bank products, property etc. So for the Government to step in now would be an about face and President Xi doesn’t seem to do those.
As I and others have previously written the Chinese bond market has been offering very attractive yields but as always with attractive yields comes risk.

Asia-Pacific countries sign one of the largest free trade deals in history
It has taken 10 years to get 15 countries to reach an agreement on pan-Asian trade.
What you need to know about the Regional Comprehensive Economic Plan (RCEP) pan-Asia trade pact
1. Signatories Brunei, Cambodia, Indonesia, Laos, Malaysia, Myanmar, the Philippines, Singapore, Thailand and Vietnam (combines them into a single multilateral pact) with Australia, China, Japan, New Zealand and South Korea.
India was originally involved but dropped out in 2019 fearing it would be swapped by cheap Chinese completion.
2. Biggest beneficiaries of cheaper goods are likely to be Japan and S Korea but the benefits are expected to extend to Europe and the US.
3. Significantly the ‘rules of origin’ a product made in any RCEP country is covered.
Previously the FT says 'for example, if a company in Indonesia makes a bicycle it might be eligible under a free trade deal with Japan but would need different components to be eligible under a deal with South Korea.’ No longer the case.
4. It is the first trade agreement between China, Japan and S Korea.
5. It eliminates 90% of tariffs (The TPP eliminated 100% and there is some overlap). It does not cover much in terms of agriculture, services covered are mixed, and it does not set many common standards. On E-commerce there was no agreement on cross border data flows or a customs moratorium on data transmission.

Many are concerned about the dominance of China; which increased dramatically when India pulled out. China has the ability to be influential in the setting of standards. Giving it great potential to increase its ’soft power’ in the Asean region.
Whilst it may take time to ratify and put into effect it does mean that Asia now has a trading zone that is similar to the EU and the USA.

Austria announces strict lockdown as virus cases soar. The government has locked down the country; telling its citizens that “One contact is one contact too many,”. People are under a 24 hour curfew and can only go out to buy groceries, travel to essential work or provide urgent care. Comes after the country reported 9,586 cases on Friday the highest number per million inhabitants in Europe. Austria was one of the early success stories in the first wave of covid but is now struggling.

LEX China/GDP: think of a number. President Xi envisions massive economic growth in the next 15 years, and why not? There are plenty of precedents. An interesting read, notes that China’s economy is planned and has made an art of hitting pre set targets; even if sometimes not everyone believes the numbers. But it sets out that the target is achievable. However GDP is more about bargain rights more importantly would be GDP per capita; which President Xi is also confident about achieving. With a population that is set to start shrinking in four years time and halve by the turn of the century like many other countries; that target may be easier to achieve!

On the Pfizer vaccine an interesting note from Mark Tinker at Market Thinking
Link https://market-thinking.com/2020/11/risk-management-and-magical-thinking/?utm_source=mailpoet&utm_medium=email&utm_campaign=market-thinking-latest-updates_1

He points out that the results showed 90% efficacy and assumes most of the 94 case who developed symptoms had taken the placebo. I presume because in the study results they did say 'that the split of cases between the groups suggested that the vaccine was more than 90% effective at preventing disease, when measured at least one week after trial participants had received a second vaccine dose 3 weeks after the first.’ Which he suggests means that taking the placebo is almost as effective as taking the drug. An interesting read.
Whilst discovery of an effective vaccine is important stage on the path to normality a number of other articles raise a number of good questions that still need to be answered. The market’s however, are likely to overlook the details and focus on that fact we have a vaccine.
For those that are interested, some of the questions raised by other articles I read included:-
How long is the vaccine effective? Difficult to know on the basis that the first tests were only started 6 months ago.
Is it as effective on all age groups? The first wave hit the elderly but the second wave is impacting the younger generation.
Whether it was effective against the virus being transmitted?
What was the severity of the cases that the vaccine encountered?

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