Nov 23 FT Thoughts: Chinese Bond defaults, Funds thinking, Doubling the economy and lunch update

25 Nov

Nov 23 FT Thoughts: Chinese Bond defaults, Funds thinking, Doubling the economy and lunch update
MARKETs @ 2:15pm HK time FT Thought
Closed for Labour Day
S KOREA opened higher, pre market we data slight +VE Foreign buying continues. Covid concerns fail to upset the +VE market mood despite the government increasing the social distancing measure to level 2. Tech and bio leading.
Kospi saw an initial dip but then worked higher to 2,600 and then traded sideways around the level; currently +46pts (+1.8%) @ 2,599
Kosdaq initially sold down but then rallied to 875 level around 10am but then drifted lower currently +2.2pts (+0.3%) @ 872
First 20 days average prices
Exports +11% YoY
Imports +1.3% YoY
TAIWAN After market data Friday was positive an pre market consumer confidence data was down MoM but better than expected.
Market rallied on the open and climbed to 13,921 but then eased back to 13,825 and then traded sideways around 13,850 level, but saw a uptick at the end to close +162pts (+1.2%) @ 13,878
Consumer Confidence Oct 71.1 vs 71.6 Sept (F/cast was 71)
After market we will get Unemployment, industrial Production and Retails
CHINA opened higher and has traded higher through the day to hit 5,030 after lunch but has eased back Currently +69pts (+1.4%) @ 5,011. I suspect team China working hard. Market ignoring the threat of more Trump sanctions and the credit default issues.
HONG KONG Pre market opened 26,660 +208pts vs +130pts ADR’s despite the rising covid cases over the weekend, the suspension of the HK/SG travel bubble, profit warnings and news that State companies were moving into help Evergrande; which opened higher. At lunch green energy names seeing strong interest but Travel, Airlines and Macau stocks under pressure a covid cases rise.
EUROPE Markets look to open higher, Pre Market we get Flash PMI data. Vaccine hopes outweighing the covid fears. London’s FTSE is seen opening 17 points higher at 6,364, Germany’s DAX up 38 points at 13,169, France’s CAC 40 up 17 points at 5,512 and Italy’s FTSE MIB 29 points higher at 21,710, according to IG.
US Futures opened lower but have worked slightly higher Dow +112pts, S&P +0.3% and NDX +0.3%, but expect caution in a shortened trading week as Covid cases continue to rise and more social distancing measures are proposed.
Data due Chicago Fed National Activity Index; Flash Manufacturing, Services and Composite PMI
Fed Speakers Daly and Evans

Spate of bond defaults spurs Beijing to crack down on market misconduct. Responding to the three major defaults the government has said it will show zero tolerance and that bond issuers cannot run away from their debt. Vice-premier Liu He said they would “severely” crack down on illegal behaviour on bond financing, ranging from “malicious” transfer of assets to misuse of funds.
Other reports mention adopting a zero-tolerance approach and will punish all kinds of “debt evasion” to protect investors. It also promised to investigate “fraudulent issuance, disclosure of false information, malicious transfer of assets and misappropriation of funds”.
They are also investigating the brokers and banks for any wrongdoing; last week Haitong said it was co-operating with the authorities. This is a severe blow to the attractiveness of the Chinese bond market which has recently seen such a surge of interest, especially from international investors.
The Yongcheng Coal case is particularly working as there are another 25 outstanding bonds and the article notes that some of the company’s 180,000 are saying they haven’t been paid either.
It notes that the Henan provincial government has sent a team to investigate the situation but its ability to bail out the company is doubtful due to the financial pressures that it is under.
Other reports also note that senior party members have ordered reviews of the wider situation but the potential for Beijing to step in is in question. The key is that this coupled with Trump’s sanctions on some Chinese companies, the pulling of the Ant IPO is prompting a lot of international investors review their China strategy. Just at the time when China needs more international investment.
Another report mentioned that Xu Lin, a former official at the National Development and Reform Commission, told a forum in Beijing: “This is just the beginning, and the problem will continue to spread. “We have invested in too many projects through debt financing, and many projects can’t generate enough economic returns to repay the debt. It’s only a matter of time for defaults to emerge.”
The central government is reluctant to bail out local governments and has urged them to solve their own problems and “prevent systemic risks”. Whilst the Govt statement is +VE the expectation of more issues ahead is -VE for sentiment.

Funds review Chinese internet holdings Beijing’s antitrust plans and US moves to restrict investors increase risk. Looks at the recent rules brought into curb the dominance of some of its internet companies. That combined with Trump’s recent sanctions with the threat of more companies to be targeted. That has been a wakeup call to many fund managers. Coming as their dominance meant that fund managers could not afford not to own them if their funds were to show good performance.
With noting that coupled with what we are seeing in the credit markets and high profile bond defaults will mean that many asset allocators will be taking a hard look at their allocations to China for 2021.

Opinion Xi’s aim to double China’s economy is a fantasy by Michael Pettis a finance professor at Peking University and a senior fellow at the Carnegie-Tsinghua Center. Sets whilst in theory the calculations seem reasonable the economic and demographics factors are not.
It sets out that the high-savings, investment-led growth model China is following has been shown by other economies (Japan and Brazil) to have 3 stages:
1. Heavy investment in badly-needed infrastructure, delivered many years of rapid but unbalanced growth. Debt growing in line with the economy because when debt mostly funds productive investment, gross domestic product grows faster than debt.
2. Seeking to rebalance demand away from investment, typically with little success, growth remains fairly high, although now driven increasingly by non-productive investment. When this happens, total debt in the economy must grow faster than GDP. So the debt burden rose.
3. Having reached its debt capacity limits or a worried by being close to them the government takes steps to prevent debt from rising further. Either way, the economy was forced finally to rebalance away from investment and towards consumption amid far slower, sometimes even negative, growth.
Sets out that China is in stage 2 but doubts that China can continue to support the level of debt required to see the forecast achieved. History shows growth collapses.
It would also require changing domestic demand from investment to consumption; which Beijing has been trying to do for years without the required success. It would also require a willingness to see transfers of wealth from local governments and elites to the ordinary households.
There is also the issue of an ageing population which will making achieving the GDP target harder.
It finishes by saying it is not impossible but difficult. It could find a new engine o growth not before seen. The only other way would be have infinite debt capacity or by boosting consumption by a massive redistribution of income to ordinary households. Neither are likely and therefore the goal isn’t either.
A good read.

G20 vows to ensure global vaccine supply. Leaders pledge to ‘spare no effort’ but fall short on early dose allocations
Link to full text.

The key headings are combatting Covid, safeguarding the global economy, addressing international trade disruptions and enhancing global co-operation.
Most are focusing on their efforts to distribute the vaccine when it is available. Some are saying that first vaccines could be available within weeks if the companies get emergency use permission from the FDA.
Trump’s contribution was to say that the G20 must work together to restore strong global growth afterwards. Many have noted that the G20 made little reference to the wider global economic recover but it did rubber stamp previously agreed debt repayment suspension.
All the parties signed up to 'the communique’s call to support the multilateral trading system, pledged to seek agreement on international taxation of multinationals in the first half of 2021, and agreed to work to address climate change and biodiversity loss.’

Doubts raised over London to New York air corridor. Looks at the potential for air corridors between the US and London, which is thought to be the most difficult one to open. But notes that come other European Capitals might be easier. Covid testing is seen as the most important aspect along with the quarantine requirements on arrival. After the suspension of the Hong Kong - Singapore travel bubble due to rising civid cases I suspect that all travel bubbles will have taken a step back.

SK Group pursues path away from fossil fuels. South Korean M&A specialist embraces green strategy and looks to cut its oil and gas investments and cut its carbon emissions. Environmental activists are viewing it as a success. It notes that the other chaebol’s are reviewing their strategy too. It also looks into the background of SK Group and the fact that its recent activities seem to be copying the Softbank model although the company itself says ‘its M&A strategy is centred on buying companies that boost its existing businesses and carving off non-core units. “Controlling the whole value chain brings a lot of benefits as you can create synergies through cooperation between units . . . It increases your understanding of the whole business or industry, therefore reducing the risks of failures,”’
It also notes that SK lacks the brand recognition of other major S Korean brands like Hyundai and LG mainly due to the questionable history of; family control, corruption, political links and intellectual property theft and the fact that the Mr Chey (Chairmans and major shareholder) has spent time in prison for accounting fraud.

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