Aug 26 from the FT Chairman Xi?, Ant's listing, China Housing, US Housing, and more

28 Aug

Aug 26 from the FT  Chairman Xi?, Ant's listing, China Housing, US Housing, and more

MARKETs at 12.30pm HK time 
JAPAN opened lower but initially rallied to 23,350 but then reversed and sold down to the opening level and traded sideways into lunch.  PM opened lower but trending higher. Currently -0.2%
S KOREA  opened flat but trended slightly lower until mid morning when it revered and started trending higher
Kosdaq currently +0.7% and the Kospi -0.1%.
TAIWAN opened saw and initial dip but rebounded to 12,815 level and has traded sideways/slightly lower since  Currently +0.2%
CHINA opened flat, saw an initial bounce to 4,780 level but then reversed and sold down to close at the morning low going into lunch currently -1.1%. It could be that Chinese investors are raising cash for the Ant listing with the CSI 300 trading around the YTD highs.
HONG KONG Opened in line with the ADR’s  +34pts E commerce names +VE and stocks with good earnings rallying but other sectors remained cautious.  Initially saw a rally to 25,600 but without the momentum to break out and retrenched first to yesterdays closing level and then to the morning low at 25,360 before a bounce into lunch.  Earnings in focus and caution ahead of Jackson Hole symposium.
EUROPE Expect markets to open lower following Asia
US Futures opened flat with S&P and NDX very slightly higher.  Expect initial caution ahead of Jackson Hole Symposium starting.  Data today MBA Mortgage Applications & 30 year Mortgage Rates, Durable Goods Order Data, EIA Oil Report.

Worth noting that the Germany economic recovery was boosted yesterday by the Ifo severe whilst the US was questioned after the Consumer Confidence number fell for a second month. Prior to that the US recovery had seemingly been more assured than for Europe..

On line
Xi Jinping sets stage to resurrect ‘chairman’ title created by Mao

China’s president looks for way to cling to power beyond second term, say experts
Notes that a new anti-corruption campaign swung into action last month targeting the party’s legal and domestic security sections, with the Shanghai Police Chief to first to fall. The stated aim is to channel the spirit of the “Yan’an rectification movement” launched by Mao Zedong in 1941, the first big purge in the party’s history. The push for ideological purity, not seen since Mao’s time. Mao used it to clear out opposition and consolidate power, and Xi seems to be doing the same. The campaign is stated to last until the spring of 2022; Xi official second period of office ends at the end of 2022. There is debate about how Xi will maintain control but its possible he’ll follow Mao’s lead again and become party chairman (a position without time limits).
Some think considering the power Xi already has the fact that he’s carrying out this latest campaign shows that there could be some dramatic changes to the party ahead. There is opposition to Xi but it is generally quickly removed as seen last week with Ms Cai who was expelled from the party and lost her pension for saying the Xi was turning the party into a ‘political zombie’. She believes he feels paranoid; to quote
“Eventually he will have purged everyone and put in place new people, but after a time he won’t trust them either,” she said. “That’s the psychosis of being the highest leader in an authoritarian system.”
For investors the issue will be about how far he pushes the ideal behind his ‘Made IN China 2025’ ambition. Whilst the slogan has been removed but the ambition remains the same. The confrontation with the US is likely to continue and the threat to Taiwan I think is increasing; especially as the US restricts Chinese companies like Huawei from the advanced chips they need for the business success.

Also read in the print edition Opinion The risk of China-US military conflict is disturbingly high. By Zhou Bo a senior fellow at the Center for International Security and Strategy at Tsinghua University, is a China Forum expert.
Sets out that relations are bad and an accident could trigger a larger incident. Thinks that ‘US defence secretary Mark Esper has said he wants to visit China this year, which shows the Pentagon is worried.’
Believes that the US things China wants to derive it out of the Indo-Pacific whilst China thinks that the US has abandoned its neutrality in the South China Sea.
Also that 'Haunted by economic recession and the pandemic, and desperate for reelection, President Donald Trump has also made confronting China his last-straw strategy to beat his opponent, Joe Biden.’
It’s an interesting read, the key being that dialogue between the two is key to avoid an ‘accident’.
The article obviously doesn’t mention Taiwan but that could well become the flash point. I think that if the worlds nations recognise Taiwan and allow it back into the UN again a potential flash point would have been removed.

Print Edition
China’s Ant Group paves way for blockbuster $200bn share debut

Payments group aims to raise $30bn. Dual HK-Shanghai listing will use the Funds to boost R&D.
It will be the focus of attention in the days to come. But it is likely to be the largest ever IPO’s, obviously +VE to HK Exchange; which is trading higher today and outperforming the HSI.
The initial documents show that Ant Group made a 21.2 billion yuan ($3 billion) net profit in the six months to June 2020. Profit margin circa 30%. Revenue of 72.5 billion ($10.5 billion) and has been growing at 41% in 2019 and the first half of 2020.
Alipay had about 711 million monthly active users as of June, in addition to 80m businesses. Those users will be the key to the valuation.
Alipay processed Rmb118tn of transactions in mainland China and Rmb622bn internationally in the year to the end of June. Visa’s payment volume stood at $8.8tn for the year to end of September 30.
Key to the listing is keeping on side with the regulators is something that it warns about in the prospectus evidently. The other key element will be keeping on side with the government too. It also notes that US/China tensions could impact its business, especially cross border payments an areas it is keen to expand.
The Trump risk should not be under estimated in my opinion.

It notes the dispute that erupted a few years back when Mr Ma transferred Alipay out of Alibaba 'to comply with Chinese regulations prohibiting foreign ownership of financial businesses’. I bet Yahoo and Softbank are still smarting over that one. But it does illustrate one of the risks of doing business in China.
Citigroup, JPMorgan, Morgan Stanley and CICC are leading its Hong Kong share offering.

LEX Ant Group: Jack the giant-maker. Positive on the prospective listing even if there is a pull back in the markets. Thinks that the timing good as profits in 2020 have grown. There will be decline in Chines tourist spending but that should be offset by the increase in online spending. Chinese on shore demand for equities is running high, in summary 'There is a glut of new Chinese stock listings. But even if a market backlash comes, Ant should remain one of the stocks able to keep returns positive.’
I worry a little at the Star board listing; it is obviously necessary to keep in with the party line but the potential for huge initial price swings could be damaging. For the Hong Kong listing I still think the risk that Trump further weaponises the USD is a real threat.

China’s tech giants grapple with threats at home and abroad Looks at how large companies in China are seen as a political threat and so staying small and under the radar pays off. Or if you get big then the founder steps down as Mr Ma and other have done in recent times. It also notes that the PBOC is also more wary that in the past as these tech firms become so big. There was recently a stand-off because Alibaba and Tencent via their payment apps were able to better asses individuals credit worthiness than the banks. The PBOC would love that data but at present the companies aren’t handing it over.
In summary the article notes
'So at home they are under suspicion and abroad they are under threat. Shareholders may be waiting a while for a Chinese tech company to crack the $1tn barrier — never mind $2tn.'

China housing market shrugs off pandemic fears
Shenzhen symbolises urban resilience to virus risks as prices rise in 70 of the biggest cities.
Looks at how profitable buying property in Shenzhen is; such that some people who don’t have a local ‘hukou’ are will to pay to marry someone who does in order to be able to buy a flat in the City.
Notes that in the second-hand market units flats have seen a 78% rise in value since 2015 the largest gain of any Chinese city and new prices are +56% over the same period.
Whilst Shenzhen might enjoy some special status for being China’s tech city it is not alone in showing resilience to the pandemic. Which explains why the government is not relaxing any of the property purchasing restrictions that its has introduced over the past couple of years. It is still seem as the best investment as China continues to urbanise its population. It cities a case of a businessman buying two units in Shenzhen last year which have doubled in value without the construction being completed. As the businessman says the government is the major beneficiary through the sales and taxation; much of which is essential to keep the local government solvent. The governments also benefits via the jobs that construction creates, both direct and indirect.
Despite efforts by the authorise to tighten up on the use of credit, local agent say that consumer loans and credit cards are still being used to make property purchases. Something the PBOC is trying to control. Officially with a consumer loan you sign a declaration to say the money will not be used to invest in stocks or property. But then you find a local merchant who will supply to a false invoice and then the money is available for any use. (Similar with credit cards, false invoice and get the cash). Other means are setting up shell companies, raising business loans and buying property.
China is aware of the risks and President Xi has said that property should be for living not speculation but the people are not so convinced. China has tried and continues to try and curb speculation but its very difficult.
Now in Shenzhen you have to have been a resident for three years to buy a unit. There are now restrictions on people getting divorced buy property if they already own two or more properties. When restrictions on being able to buy second or additional properties were first introduced there was a spike in muffle class divorces to try and get around the restriction.
But the demand for property is in contrast to retail spending which has declined due to the pandemic.
It touches on the fact that some people have to sell their flats. Its prime case being the cafe owner who bought a flat after and arranged marriage. The pandemic hit his business so he could no longer afford the mortgage. That is a little unusual, as families in China tend to rally around to give support to pay the mortgage.
It doesn’t mention the number of young people who have bought to rent out and are now finding that their migrant worker tenants have left because factories have closed. They are struggling to pay the mortgages and so don’t have spare money to spend in the shops which in part explains the decline in retail spending.
But key is that whilst urbanisation is a central tenant of the governments plans property will be in demand and that makes it sought after in the top tier cities.
Investors still need to worry about developments in lower tier cities and about the developers. In Hong Kong the developer stocks were weak on the prospect of new regulations from the PBOC about their borrowing levels.
It is worth focusing on the larger developers. The sector still has the potential for a lot of consolidation and it is interesting to see the large developers expanding out from their home cities to other parts of China, a relatively recent development.
Despite what President Xi says those who can afford to like to invest in property and their preference if they can afford to, is not to rent it out!
A good read but the property sector is China is not as simple as one city, investors need to carry out due diligence in the developers especially because of their elevated debt levels.

LEX US homebuilders: through the roof 'US homebuilders are having a surprisingly good pandemic. It turns out that nothing motivates people to trade up for extra space like being stuck at home with their families, day in and day out.’
+VE for developers: DR Horton, Lennar, NVR and PulteGroup but notes headwinds rising. Yesterday the rise in timber prices was highlighted (20% of builders costs). The fact that there are 1million Americans without jobs. It also notes that 'The big four homebuilders have most recently put an emphasis on low-priced, entry-level homes to drive growth. This may have to change. Existing homeowners seeking new pastures appear to be a far more attractive market.’
A useful read and worth noting that Techtronics (669 HK) that makes a lot of equipment used by home builders and DIT’s is trading lower today, the resistance at HK$100 may be significant without a new driver.

Interesting that Housing in the US and China are both in demand but for very different reasons.

Apple wins partial victory on ‘Fortnite’. Court rules App Store ban can stay but Epic software should be allowed free rein.
Not much of a victory for Apple and it highlights the control that Apple can exercise which I am sure is something that politicians will take note off. Apple’s comment that the 30% fee is merely a checkout counter and that without it the whole App Store business model would be at risk is unlikely to carry much weight with politicians and it might not with the court either. Apple has made a lot of money with its control of the App Store and with the stock trading at new highs I think investors should be wary.
The fact that Apple wasn’t allowed to ban Epics Unreal Engine shows that the court is aware that there are wider issues at stake.

Best Buy buoyed by working at home trend. Strong results but the shares closed lower. Whilst it didn't give financial guidance it did note that sales were slowing. Investors are becoming more wary as the new stimulus package doesn’t appear likely any time soon with the two side in deadlock. The lack of stimulus cheques could hurt a number of these retailers.

For interest
Fearful consumers power an uneven rally. In summery the markets have been lead higher by the top 5 tech firms . A lot of other firms are still struggling. But the good news that even if a vaccine or cure becomes available tomorrow; those top five are unlikely to see a big slump.
'By all means, celebrate the new record highs for the index if that is your thing. The fact we are no longer stuck in the horror show of March is something to be thankful for. But be aware of what this narrow rally really signifies.’

Opinion Leave public debt worries for another day.
The national debt has inspired a million boring speeches and exactly one witty remark. “If something cannot go on forever, it will stop,” says Stein’s Law. Coined by the economist Herbert Stein, an adviser to US president Richard Nixon, it was originally about the balance of payments but he used the precise phrase in 1986 to warn Congress that the federal debt cannot rise without limit.’ That law is being put to the test currently but he sets out that:
'Governments should therefore postpone any concern about public debt until they revive their economies sufficiently to get interest rates above zero. Once that is achieved then, given the costs, it may make sense to try to reduce public debt somewhat.
Stein’s Law is often taken as a warning to act against the unsustainable. But that is not how the author intended it. It was, he wrote, “a response to those who think that if something cannot go on forever, steps must be taken to stop it — even to stop it at once”. If public debt is indeed becoming unsustainable, the warning signals will arrive soon enough’
An interesting read

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