Nov 27 FT Thoughts Lessons from Japan, HK Judiciary, China/Australia, Covid origins and updates

02 Dec

MARKETs at 2:15pm
opened lower and dipped initially, Tokyo CPI was weaker than expected. But then market rallied to the morning high of 26,638 but then sold down to morning low 26,420 before bouncing into lunch. PM market opened higher and traded sideways around the 26,600 level. Currently +120pts (+0.5%) @ 26,659
Topix opened higher but followed the same trading pattern as the Nikkei; currently +11pts (+0.6%) @ 1,789
Data Pre market
Tokyo CPI Nov -0.7% YoY vs -0.3% Oct (F/cast was -0.4%)
Tokyo Core CPI Nov -0.7% YoY vs -0.5% Oct (F/cast was -0.6%)
Kospi opened lower and initially dipped to 2,620 level before working higher in choppy traded to 2,635 mid morning but then sold down to 2,620 level at midday before rallying back to 2,630. Currently +8pts (+0.3%) @ 2,633
Kosdaq opened higher and worked higher but saw resistance as it approached 885 level. Then traded sidewise around that level currently +11pts (+1.3%) @ 886.
TAIWAN opened lower bounced to flat initially but then trended lower to 13,812 before working higher but resistance as it approached 13,880. Then traded sideways to close +21pts (+0.2%) @ 13,867
CHINA CSI 300 opened higher as data showed Industrial Profits surged and initially traded in a tight range 4,930/40 but then rallied to 4,950 before selling down into lunch 4,924. PM opened lower but worked higher Currently +18pts (+0.4%) @ 4,937
Industrial Profits (YTD) Oct +0.7% YoY vs -2.4% Sept (F/cast was -0.6%)
For 10M20, the total profits of Chinese companies of industries above designate scale was RMB5.01 trillion, up 0.7% yearly, data from the National Bureau of Statistics (NBS) showed. For the month of October, the amount was RMB642.91 billion, up 28.2% yearly.
Early it was released that State-owned enterprises and state-owned holding companies in China grew their total profits by 52.5% YoY in October 2020, announced the Ministry of Finance. Equally, their revenue ballooned 7% in the month.
HONG KONG Opened -60pts in line with the futures and traded sideways through the morning 26,790/720. PM saw the market rally back to flat currently flat at 26,826
At lunch Ecommerce firm but Chinese Financials and Developers firm. Rumoured that the new covid cases continues to rise.
EUROPE Expect markets to open slightly higher following the trend in Asia and the good China data
Data due
EUROZONE Economic Sentiment, Consumer Confidence, Inflation Expectations, Industrial & Services Sentiment. ECB speakers Panetta, Schnabel
GERMANY Import Prices Bundesbank speaker Balz.
FRANCE Inflation Rate, GDP Growth Rate, Household Consumption, PPI
UK Nationwide Housing Prices
US Shortened trading today and no data due. Expect market to trade slightly higher after Trump said he would hand over power if the Electoral College voted Biden the winner of the election.

FT series. Lessons from Japan. State spending bonanzas risk building roads to nowhere Past investment projects hint at possible pitfalls as IMF urges nations to loosen purse strings.
The IMF is urging capital spending on big capital projects to kick start economies and longer term investment in digital and green tech infrastructure. Saying that governments shouldn’t worry about rising public debt. Notes that the US and EU both seem to be looking to do just that. BUT the article looks at some of the lessons that can be learnt from Japan’s experience where projects were undertaken but failed to revive growth or inflation in the longer term.
It notes that many of the packages were 'intermittent and seldom matched their headline size. Pork-barrel politics sent cash to the least productive projects in rural areas. Meanwhile, the bad debt crisis in Japan’s banks festered, and the underlying pace of population and productivity growth continued to slow.’
So can countries avoid the mistakes?
A key point seems to be that building infrastructure does not ensure future growth. Also that spending on education or family support might be more effective.
The EU seems to have an awareness of this as its recovery fund is looking at promoting 'energy efficiency, low-carbon technologies and digital skills.
Infrastructure needs vary across the bloc; Germany and Italy, which ran tight budgets for a decade, need to invest in transport and broadband connections. Yet Spain, the European economy hardest hit by the pandemic, has among the best high-speed rail, broadband and road networks on the continent.’
It refers to Alicia García Herrero, an economist at Natixis who points out that 'spending to raise productivity requires long-term planning, which runs counter to the need for speed.’ So rather than infrastructure they should be supporting incomes and small businesses. The key takeaway from Japan is that it abandoned the policy.
There are plenty of examples of infrastructure not working, that governments really do need to think carefully about the prospects. It has been interesting to see that a number fo the Belt and Road Initiative projects have been curtailed or halted too.

Hong Kong Judiciary braced for Beijing offensive. Looks at the expected attack on the independence of the judiciary by Beijing as it tightens its grip on Hong Kong. Following the disqualification of opposition politicians, sacking teachers and arrested independent journalists the judges are expected to next inline.
It notes that UK ministers warned British judges about the risk of lending legitimacy to HK by sitting in Hong Kong’s Court of Final Appeal.
Hong Kong’s legal system is one of the main foundations of its success and The Basic Law is supposed to guarantee its courts “exercise judicial power independently, free from any interference”. But with some much that agreement being reinterpreted and the imposition of the National Security Law the concern is that will no longer be the case. Specifically the fact that 'The law allows trials for some offences to be conducted in mainland China and for Carrie Lam, the Hong Kong chief executive, to appoint directly a pool of judges for national security-related cases in a stark break with the spirit of the Basic Law.’ Also the fact that 'Zhang Xiaoming, deputy director of the Hong Kong and Macau Affairs Office, suggested this month that Beijing planned to “reform” the judiciary.’
The article looks at Why Hong Kong’s system matters; the key being that it means that ‘international groups and financial institutions operating in the territory, the city’s legal system serves as a guarantee they can enforce contracts against Chinese state-owned enterprises and companies linked to mainland officials.'
Also Why Beijing is against the separation of powers; it notes that some magistrates have already been targeted after complaints about their handling of protest cases. But last week government prosecutors agreed that Carrie Lam’s 'authority to assign judges under the national security law should be extended to a case that was not being tried under the legislation. They claimed the case was related to national security, which meant the special powers could be used.’ That is a huge change in the procedures and would bring Hong Kong much closer to the mainland’s system.
What next? The fear is that Beijing seeks to alter the balance of judges and appoint those that will follow its direction and remove those that will not.
Nice summary quote “What it boils down to is they [Beijing] do not accept an independent judiciary.”

Chinese media query origins of Covid-19. Looks at how Chinese State media is 'marshalling fringe theories to argue that the coronavirus pandemic began outside China, ahead of a World Health Organization investigation into the origins of the virus.’
I still think that the fact that China is resisting an independent investigation is rather like a smoking gun. The obvious way for China to clear itself as the source is to instigate an international investigation.
From China’s propaganda machine’s point of view though the way that it has handled to news flow to date may make that difficult.

Kirin finds Australian buyer for Lion Dairy. After the deal to sell it to a Chinese group was scuttled by the deterioration in relations between Australia and China. The decision not to allow the sale to China Mengniu was a surprise as it already holds assets in Australia but probably reflects the soured government relationship. The new deal is at a A$40m discount to the original deal. I think a key takeaway is that we could increasingly see Chinese company interest in acquiring overseas assets being spurned due to poor government relations.

China start-ups nurse wounds as India blacklists apps with a vengeance. Hopes of tapping vast market dashed after deadly border clash triggers ‘digital strike’. Another case of how soured national relations have impacted commerce.

Default concerns drive up borrowing costs for China state-owned enterprises. Looks at the fact that the recent defaults are prompting investors to review what were once seen a risk-free asset class with the presumed State guarantee. Now investors are having to look more closely at the fundamentals especially as local governments are under financial pressure too and unable to refinance the SOE’s.
The bigger problem for China is that these come at a time when the government seems to be under financial pressure and keen to attract foreign investment in order to restart the economy.

Japanese equities are worth the effort for global investors. It is not about whether the timing of buying Japanese equities but about being aware of the companies that are listed there. It notes that Japanese companies are a lot more investor friendly than they used to be. It also notes that Japan offers better value investing opportunities than elsewhere. He views Japan as being cyclical asset dominated. He notes two potential catalysts; PM Suga who is likely to maintain Abenomics only make it better. But he notes that long premierships are usually followed by short ones; which suggests Suga will not be around for long. (I’m not so sure about that being in mind Suga’s skills a ‘king making’.)
The second is the fact that Warren Buffett has invested
Another simpler view is that with the covid recovery in sight the Japanese market should outperform with its dominance of cyclical trading companies; which it says are cheap which should add to their allure. Whilst younger investors brought up on Amazon and Alphabet may not believe it, Buffett probably does.
A little simplistic but I do think there are a number of good companies in Japan and that it remains an important market both within Asian and globally.

Editorial China-Australia quarrel is a worry for the world. The west should co-ordinate responses to pressure from Beijing
“If you make China the enemy, China will be the enemy.” That sentence, attributed to a Chinese government official, has been splashed all over the Australian press in recent days. It deserves to resonate well beyond that country’s shores.Notes that China’s attitude to Australia sets a worrying precedent since 'China is making demands that would impinge upon the country’s domestic system — affecting basic liberties such as freedom of speech.’
Refers to the 14 point memo outlining China’s ‘grievances’ and makes the point 'Unable to tolerate free speech at home, Beijing now appears intent on controlling speech overseas as well.’ It hopes that with a change of leadership in the US that China may also reign in its ‘wolf warrior’ diplomats and attitude. Makes the point also democratic countries should present China with a united response to make clear bullying is not acceptable at any level.

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