Nov 3 FT Thoughts Ma summond, Evergrande, Beijing Bashing

05 Nov

MARKETs at 1:30pm
Asian Markets trading higher, RBA lowered its cash rate target to 0.1%
JAPAN Market closed for Culture Day
S KOREA opened higher and worked higher be eased back after 1pm
Kospi currently +1.5% @ 2,333
Kosdaq currently +1.5% @ 815
TAIWAN opened higher worked higher to 12,750 and then traded sideways currently +1.2% @ 12,736
CHINA opened higher, chopping initial trading then rallied to 4,793 before easing back into lunch. PM opened flat but ticked higher Currently +0.9% @ 4,764
HONG KONG Opened higher and rallied to test 25,000 but failed to break above and eased back into lunch. PM opened higher and looks to test 25,000 which could prompt short covering, last time we were at these levels was early Sept.
EUROPE Expect the market to open higher following Asia. The only data due is the French Budget Balance. Investors will watch covid cases and US election but it would seem most are relaxed with their current positions.
US Futures opened higher in Asian time +87pts but has risen to +160pts; S&P and NDX also +VE
Data Redbook, ISM New York Index, IBD/TIPP Economic Optimism, Factory Orders, Factory Orders Ex Transport, API Crude Oil Stock Change, Presidential Election.
Earnings Humana, Fox Corp, Bayer, Sysco, BNP Paribas, Gartner, Eaton, Thomson Reuters, Exelon, McKesson, Bausch Health, Expeditors International, Progressive, Super Micro, Prudential Financial

Beijing orders Ma to attend talks ahead of $37bn Ant IPO. The PBoC and three other Chinese regulators (China Banking and Insurance Regulatory Commission, the Securities Regulatory Commission and the State Administration of Foreign Exchange) summoned Jack Ma, chairman Eric Jing, and chief executive Simon Hu in for a ‘regulatory interview’. No details given but the Chinese word used to describe the interview ‘yuetan' generally indicates a dressing down by authorities.
Whilst there are no details the article suggests that it could be related to the speech that Jack Ma gave recently criticising the banking standards both internationally and in China. It quotes Ma as having said “China doesn’t have a systemic financial risk [problem], China’s finance basically doesn’t have risk, the risk is instead from lacking a system,” “Today banks are still operating with a pawnshop mentality, needing collateral and guarantees are just like pawn shops . . . China’s financial pawnshop mentality is the most serious,”
It notes that China’s financial regulators over the past few years forced Ant to change its business model. Many think Ma’s latest speech was a challenge to the PBoC’s rolling out of a digital currency; which is seen as a government initiative to level the playing field between the established banks and Ant and Tencent.
Ma had said “Supervision and regulation are two different issues,” said Mr Ma. “Supervision is to watch and pay attention to development, while regulation is to manage when there is a problem. Right now we are strong at regulation but lacking in the ability to supervise.”
In a statement Ant Group said “Ant Group will implement the meeting opinions in depth, and continue to follow the guidelines of ‘stable innovation, embracing supervision, service to the real economy, and openness for mutual benefit’, in order to continue to improve our inclusive service capabilities, and assist the development of the economy and people’s livelihood.”
Very interesting situation as Ma has in the past sought to keep out of the spot light on controversial issues and even his stepping down from Alibaba and not taking a board position in Ant; which was seen being inline with not drawing attention to himself. So it would appear there has been a change.
There has also been a standoff between the PBoC and both Ant and Tencent over their collection and use of personal data. That is what they use to determine the credit worthiness of clients. The PBoC and government would like access to that data; partly no doubt for its own system of rating ‘citizens’ but also just because it gives so much insight into individuals and being able to control them.
To date there has been a standoff but it out appear that more pressure is being bought to bear. Obviously whilst Ant was private the government leverage could go so far but once listed it maybe the Government thinks it has a stronger position?
It may also be the President Xi is aware of the power of the information and the able to grant credit gives to people who control such companies; and does not want competition.
For investors it should highlight the huge regulatory risk that Ant has both at home within China where the regulations in the past have to a large extent facilitated its huge growth. Equally overseas from US sanctions which could be used to curtail it partnering with local financial organisation as it seeks to build a global business.

Evergrande generates $2.2bn cash from asset sale. They company that has been beset by rumours about its financial position completed an asset sale which gave investors encouragement; especially as the company said it would focus more on its core business. Which is important as Beijing is increasingly tightening up on the debt levels at the large developers.
Beijing is aware that a number of developers have grown from just being provincial developers to a national level. With that comes the risk of failure which would impact thousand of people it the company was to fail; people would not only lose their deposits but probably also faith in the property market and that is a key driver to Beijing’s plan to develop domestic consumption.
The other problem for Evergande is that is has always been supported by ‘friendly’ investors who whenever the company was under threat from shorting would step in to buy shares and burn the short sellers. That in itself is a red flag to a lot of investors and maybe explains why it has never had significant foreign shareholders to influence its management.
Property in China will remain a key driver as it seeks to develop its domestic consumption. It has sets property for living in rather than investment. In China property investment is often buying a flat and leaving it empty, because often tenants do not care for the unit. The problem with empty flats is that you don’t buy air cons, fridges, settees, etc for them; so it doesn’t help domestic consumption.
But leverage in property is also a bug issue and some thing the PBoC will continue to seek to address. A large property company going bust is likely to be on the ’too big to fail’ for the government but bailing it out would also be fraught in the signals it would give.

Beijing bashing has hurt the US more than China. John Plender notes that is spite of the bashing the Chinese economy has been rebounding. But unlike 2007-08 the US will not benefit as much. US exports to China are down as China has increased its imports of similar goods from other countries. The Trump trade deal is also running below the targeted levels. He also cites a study that shows 'the trade war lowered the market capitalisation of US-listed companies by $1.7tn, equivalent to a 6 per cent fall in the value of the S&P 500 constituents. That reflects how new tariff announcements reduced profit expectations at exposed businesses. The study found no benefits for businesses receiving tariff protection.’
Key is that China diverted its trade flows; and whilst the overall trade deficit has not come down with China; Americas trade deficit with other countries has also increased. Also that the US market is up due to bug tech not mainstream business. Tariffs have results in less revenue to the treasury as the government pays subsidies to farmers who were hit most.
At the same time China is opening up financially and business is improving as US financial firms expand into China and China’s shares and bonds get more international exposure. It notes Chinese bonds pay positive interest so western pensions can be paid. Although notes there are currency and regulatory risks; which can be significant.
He says 'The prize of more secure pension incomes for the elderly courtesy of China ought to be an incentive for western policymakers to foster a stable and peaceful financial interdependence. Under a new Trump administration that will not happen. Whether, against the background of aggressive US-China strategic competition, Joe Biden might choose such an option is moot’
As I have written before China is opening up and fast as it needs to attract money to finance its rebooting of the economy. The big risk is that western money gets trapped in the Chinese system as it has in the past due to regulation changes. But for the meantime it is a very attractive market.

‘Arbageddon’ risk recedes as deals go through. Looks at how a number of M&A deals agreed pre covid, like the Tiffany LVMH deal, could have been poised to fall apart. In many cases the share prices fell. Interestingly in most cases buying those lows has proved very lucrative. The main reason it suggests is that the Delaware courts have stood up to enforce the terms of the deal; as long as parties can show they have acted prudently. Additionally the reputational risk of going to court could also be harmful. So most deals have gone through, some saw price variances, some were mutually cancelled but most proceeded. Some have seen good post merger results.
An exception might occur later this month when Simon Property Group seeks to get out of its February $4bn buyout of rival Taubman Center in a Michigan courtroom. At present Taubman shares trade at close to a 40% discount giving arbitrage players an interesting opportunity.
A good read and worth noting the opportunities within merger arbitrage. Other cases that will be being watched no doubt are those that require governmental approval like Nvidia’s acquisition of Arm, where a different set of risk criteria comes into play.

Abandoned US home lender listings highlight doubts over housing boom’s durability. The pulling of a number of IPO’s underlines the dangers that the US housing market is currently facing. In theory it is a great time to be a mortgage lender, low interest rates, refinancing's etc etc. So as long has you focus on the positive. But with covid there are a number of question marks over mortgage delinquencies as forbearance programmes end. There is also the risk of rising interest rates ahead. Much was written about this when Rocket listed in August, it lowered its target price below the original range and they have traded around that level. I think the unknowns about delinquencies is a huge concern. Whilst employment numbers are coming down they are still elevated and with rising covid cases the potential for more companies to face hardship remains elevated. That could lead to another wave of redundancies.
See also the FT article Apartments look like trouble spot for property investors. FT Weekend 21 Oct

US digital start-ups challenge banks with push to win customer deposits. Peers are set to follow Varo’s lead after it becomes the first consumer fintech group to secure a national charter. The US finally allows its financial market to enter the arena that the likes of China and others have allowed for sometime. This is the backbone of Ant and Tencent financial services. Worth a read because as seen elsewhere this will put the traditional US banks under pressure. It is noted that one of the reasons it has taken so long to occur was lobbying from the established banks to retain control of the right to take deposits and lend money. Now Amazon, Facebook and other can enter the market without having to tie up with a traditional lender.

Investors boost macro funds as choice of portfolio hedge. High bond prices mean fixed income has lost its appeal as a ballast against falling equities. The new alternative is Macro Hedge Funds. An interesting option but not without its risks. Another illustration of how out of kilter the financial system has become when money is mis-priced and interest rates go to zero or lower.

Second lockdown in England takes heavy toll on leisure sector debt. Looks at the impact on debt-laden pubs, gyms and restaurants as revenues dry up; especially in what would be a buoyant period running up top Christmas. A key point to note is that many of these guys are likely to fail now; which means the property sector is likely to take another hit. With prime high street units becoming vacant but no prospective tenants. That will hurt property companies and the banks.

For Interest
FT BIG READ. US ELECTION. Trump’s last gamble
Well behind in the national opinion polls, Donald Trump is making a final push in Pennsylvania. To win the key state, he will need to retain Democrats who supported him in 2016 and confound the pollsters.

Opinion Global liquidity trap requires a big fiscal response by Gita Gopinath chief economist of the IMF. Calls on governments for significant fiscal policies to ensure the recovery.
'This is a once in a lifetime crisis. Policymakers have responded strongly, averting an even deeper recession. Monetary policy has and will remain central to this effort, but with the world in a global liquidity trap it is time for a global synchronised fiscal push to lift up prospects for all.'

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