Nov 25 FT Thoughts China lessons from Australia & Ant. Covid understanding, HK Policy & Markets


29 Nov

MARKETs @ 12:44am HK time
JAPAN

Nikkei 225 opened higher at 26,469 and traded higher to 26,700 level in early trades but drifted lower through the day Currently +314pts (+1.2%) @ 26,485 (back to 1991 levels)
Topix also opened higher and tested 1,790 level before selling down into lunch and opened and traded lower in the PM Currently +14pts (+0.8%) @ 1777
S KOREA opened higher but trending lower
Kospi opened at 2,637 and tested slightly higher before trending lower currently +8pts (+0.4%) @ 2,627.
Kosdaq opened at 877 has seen chopping sideways trading initially with resistance at 879. Sold down around 11:45am to 874 level; currently +2.6pts (+0.3%) @ 875
TAIWAN opened higher again at 13,860 and tested to 13,893 in early trades but sold down from 10:30am currently -68pts (-0.5%) @ 13,743
CHINA CSI 300 opened higher at 4,993 and initially ticked up to 5,005 but then sold own to yesterday’s closing price and traded around there but then sold down into lunch. At lunch -13pts (-0.3%) @ 4,961
HONG KONG Pre market opened @ 26,819 +231pts vs + 307pts ADR’s 26,895 and initial ticked up to test 27,000 before easing back to 26 870 level for most of the morning tick up to 27,040 as Carrie Lam gave her policy address as she mentioned allowing some further cross border trading access but then sold down into lunch. +227pts (+0.9%) @ 26,815
EUROPE Expect markets to open higher following Asia and the US overnight. Positive global outlook outweighing the short term rising covid cases.
Data
EUROZONE ECB Financial Stability Review, ECB speaker Schnabel
GERMANY Bundesbank speakers Mauderer and Wuermeling
FRANCE Unemployment Benefit, Jobseekers
UK 2020 Spending Review, OBR Economic & Fiscal Forecasts.
US Futures opened flat but have rising in Asian trading DOW futures +132pts, S&P +0.4% and NDX +0.6%. May see caution in US afternoon trading ahead of the markets being closed Thursday and short trading Friday as many are likely to take a long weekend.
Data
MBA 30 yr Mortgage Rate, Mortgage Applications, Durable Goods Data, Corporate Profits, GDP Growth Rate, Goods Trade Balance, Wholesale Inventories, Initial Claims, 4 week Ave Claims, Continuing Claims, Personal Income & Spending, PCE Price Index, New Home Sales, Michigan Final (Consumer Expectations, 5 yr Inflation Expectations, Consumer Sentiment, Current Conditions, Inflation Expectations), Core PCE Price Index, EIA Oil & Gas Report, Baker Hughes Oil Rig Total Count, FOMC minutes.


Carrie Lams policy address transcript available at
https://www.policyaddress.gov.hk/2020/eng/policy.html
Key points.
Promote Greater Bay Area, consolidate and enhance HK as an international financial centre, as an international aviation hub, develop it into an innovation and technology hub with Shenzhen (“one zone, two parks”).
Says that 'some issues are politically manipulated due to the society’s inadequate understanding of the Constitution and the Basic Law and the fact that some people’s awareness of the “One Country” principle has yet to be enhanced.’ 'One of our urgent priorities is to restore HKSAR’s constitutional order and political system from chaos.’
Defended National Security Law implementation and requirement for Oath taking by public officers and civil servants.
Looks to promote REITs, Private Equity and Family Offices in HK.
Removing Doubled Ad Valorem Stamp Duty on commercial property
Looks to restore Local and Overseas Confidence
Address housing policy; still mentioned Lantau vision
Lots on Education 'moral and national education’
Web page still being updates


FT On line
China sends a message with Australian crackdown. Pressure by Beijing offers a glimpse of the road map for a more illiberal order. Looks at the list of 14 grievances that China says are the cause of its rapidly deteriorating relations with Australia. There are the standard complaints of interfering in its sovereignty through critical statements on Taiwan, Hong Kong, the South China Sea and Xinjiang, and has unfairly excluded Chinese companies like Huawei from Australia’s 5G telecommunications network. But more interestingly is the mentioning of hostile local media coverage, foreign investment restrictions, critical think-tank reports and MPs outspoken on human rights. The article notes that there is hypocrisy because Beijing routinely directs attacks at its critics through its state-controlled media, regulates local think-tank output, screens foreign investment proposals and regulates the speech of Chinese officials.
It notes that Australian relations had been deterring but the tipping point came with 'the Australian call for an independent inquiry into the Covid-19 outbreak, and police raids on Chinese-Australians and Chinese media in Australia over allegations of covert interference in domestic politics.’
The response of hitting Australian exports to China on the pretence of anti dumping claims but the fact that China has not issued formal instructions just serves to demonstrate the pretence.
Whilst it acknowledges that some of Camberra’s moves have been clumsy; in the way it sought an investigation into covid, and a hardening of attitude which saw security policy taking priority over diplomacy and support of Trump.
It sums up by saying
'The message is clear. If your media is overly critical, if your think-tanks produce negative reports, if your MPs persist in criticism, if you probe Communist party influence in your community and politics and if you don’t allow Chinese state and private companies into your market, and so on, you will be vulnerable to Beijing’s retribution as well.
As documents go, Beijing’s “14 Grievances” doesn’t quite match the “Long Telegram”, the dispatch from George Kennan in 1946 that laid the foundation for US policy of containment towards the Soviet Union in the cold war. But it provides an illuminating road map for a future in which a powerful China demands that its political system be respected and its human rights record stay beyond foreign scrutiny.’

China scrubs internet posts on positive economic impact of Covid-19. Academic’s suggestion that country would profit from pandemic sparks online backlash.
Comes as 'Li Ling, head of the China Health Development research centre at Peking University, estimated that efforts to fight the pandemic would be responsible for earnings of Rmb67tn in 2020, or about two-thirds of China’s gross domestic product.’
It would appear her comments were misinterpreted and the Party propagandists in a move to retain control over how the discussion takes place in China the removed the post and related articles.
The nationalistic response I think illustrates how, by not allowing balanced discussion, only the nationalistic view predominates. Which whilst it's working in your favour is good but could one day prove difficult to control.


Print Edition
China mission aims to bring back Moon rocks. Chang’e 5 launch yesterday is China’s first since the 1970’s. It’s an unmanned vehicle and aims to retrieve about 2kg of rocks and soil. Giving Chinese scientist access to moon samples. They currently do not access to NASA samples. The mission is an essential precursor to the Chinese plan to establish a Chinese space station (hoped for by 2022) and perform a manned moon landing. China says its ambitions are peaceful but its growing status as a space superpower has raised concerns from European and US about a possible space race.
It is a very useful nationalistic symbol for President Xi at a time when there are a large number of negative issues; such International relations with India, US, Australia, Japan and Europe. China’s reluctance to allow an international investigation into Covid. A number of those issues could become pressing as Biden is now acknowledged at President Elect and the prospect of a more unified approach from countries in their trading arrangements with China. It was widely thought that Beijing wanted a Trump victory but now has to contend with Biden.
For investors is could mean a re-appraisal of China risks; coming as the State guarantee behind the SOE’s is being questioned only with the risked associated with its bond markets. Not to mention control of the Ecommerce names and the implications for other leading companies in China.
It is expected that Biden will keep the current sanctions in place and only roll them back in exchange for real concessions from China on market access. That is likely to put President Xi in a difficult position having taken such a hard line on previous talks. In the wider market President Xi will continue to say that China is open to investment and trading opportunities.


Money pit Mongolia demands probe into cost blowouts at Rio Tinto copper project. The Mongolian government is seeking an independent review which could be negative for Rio Tinto. The project has been subject to delays and cost overruns from the start. Rio Tinto has been seeking to alter the agreements that underpin the development. It is also possible that regulators from the US and UK will want clarification of what has been happening, after a former employee claimed Rio was aware of problems months before it informed investors. The article notes that Rio Tinto’s subsidiary has already commissioned an independent report into the issues. One of which is associated with a claimed botched construction of an access shaft. The mine remains key for Rio and Ulaanbaatar as the demand for copper is expected to increase as demand for elective vehicles and wind turbines increases.

Lessons from China’s decision to halt Ant’s blockbuster IPO. First was that the government was and is looking to control micro lenders and prevent disruption of the established bank system.
Second was control of companies that are deemed too big to fail.
Third that the party viewed Jack Ma as too outspoken and a threat to the Party.
But behind those factors is the realisation that the Party or President Xi does not fully understand how Ant operated or how to regulate it or work with it. Hence its knee jerk reaction to stop Ant. It contrasts with Tencent that follows the more traditional path of operating within the existing banking rules rather than outside them.
The article notes that Tencent’s WeBank has performed well mainly because it it only offers relatively small loans.
At the heart of the problems seems to be the structure of China’s banking system with regard to access for potential borrowers to funds and returns for investors.
China has cracked down on shadow banking but it has not provided those that had used shadow banking facilities with access to lending facilities within the established banks. Until it does entrepreneurs are likely to look for meeting an obvious market demand.
The other main lesson for investors is that companies need to ensure that their relationship with the government is a good one. Unfortunately that is not an easy thing to quantify or due diligence on and can quickly change as Jack Ma has demonstrated.
The article notes that 'Beijing also needs to understand that if it fails to manage its own excesses as well as those of its start-ups, China’s economy will be the biggest victim.’ I would add that it needs to ensure that SME’s have access to funds to grow and hence the State banks needs an overhaul and also that if it is really going to promote domestic consumption then it will need to extend credit to individuals in an efficiently.

Beijing cracks down on livestreaming. Kuaishou and Joyy among operators set to be hit by tougher rules for sector. Basically more censorship in an effort to control big tech’s influence. The new rules focus on how viewers interact with and send virtual gifts to online performers, they increase controls on content, ban teenagers from making purchases and limit the total spending by any single user. They also tighten rules on livestreaming ecommerce, where hosts promote goods to shoppers, one of China’s fastest growing areas of online shopping.
The new rules come in response to the increase in on-line participation due to lockdowns which saw people confined to their homes.
Key will be the limits on spending; if they are set low then the platforms are likely to be unviable.
I think much of the concern is because the media streams could be used to undermine the Party’s control, especially amongst the young who have seen the advances that their parents have. Something that could get worse unless China is able to create good jobs for those entering the work force.

India bans another 43 Chinese mobile apps. India’s Electronics and Information Technology ministry said in an order yesterday that the apps had been blocked for “engaging in activities which are prejudicial to sovereignty and integrity of India”. They included Alibaba’s AliExpress and Snack Video, owned by the China’s Kuaishou as the deterioration in relations between India and China continues. Whilst Indian firms are looking try and take advantage of the situation they still lag behind the quality of the Chinese apps; which will remain a fundamental issue for the sector.

China’s renminbi on course for record six-month run after economic recovery With many expecting the run to extend into 2021. The out performance was triggered by China’s ability to control covid and re-open its economy. The positive vaccine news could continue to drive that demand. Also helping was the fact that the bond yields are higher than those offered in the west. The other key element is the weakness in the US dollar due to the Fed’s monetary easing.
But it will be interesting to see whether the current concerns over bond defaults and other credit market issues impact that. Additionally whether the positive vaccine news means that investors look for opportunities in their home markets for recovery plays.

For interest
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