Aug 27 FT HSBC, HK Arrests, Ant IPO, HK Property, Huawei issues for India and more

31 Aug

Aug 27 FT HSBC, HK Arrests, Ant IPO, HK Property,  Huawei issues for India and more

MARKETs at close
JAPAN opened flat and trended slightly lower all day with caution ahead of Powells speech tonight and covid concerns. At lunch the All Industry Activity Index Jun +6.1% vs -4.1% May revised (F/cast was -2.4%)  Market closed -0.4%
S KOREA  BoK kept the interest rate unchanged as expected.  Markets opened  lower and trended lower all day.  The new stimulus package failed in inspire as covid concerns remain high Kosdaq closed -0.6% and the Kospi -1.1%.
TAIWAN opened higher but sold down to yesterday’s close and then traded sideways closed -0.3%
CHINA Industrial Profits (YTD) Jul -8.1% vs -12.8% Jun revised (F/cast was -6.2%) announced on the open.  Market opened higher but initially sold down into the red bounced back to just above Wedesday’s close and traded sideways before a small bounce at the end to close +0.5%
HONG KONG Opened slightly lower but sold down on the China data and then traded sideways with small bounce into lunch.  PM traded sideways around the level to close  -0.8%
EUROPE Opened lower with caution ahead of Powells speech later today.French business confidence beat. Eurozone loans data slightly better than forecast.
US Futures opened -23pts and are currently -70pts. Powells speech in focus.  Other data GDP Growth Rate, GDP Price Index, Corporate Profits, Initial Claims and 4 week average, PCE Prices, Core PCE Prices, Pending Home Sales, EIA Natural Gas Report, Kansas Fed Manufacturing Index.

Pompeo scolds HSBC for Hong Kong freeze on pro-democracy accounts. HSBC is in a very awkward position with China and now the US, with no easy solution. The stock sold down on the news to a five year low. The big concern will be that he said it was still operating accounts for sanctioned people; he said: “HSBC maintains accounts for individuals sanctioned for denying Hong Kongers’ freedom while shutting accounts for those seeking freedom.” That will be a worry for fear of possible implications on HSBC.
It also highlights the problems that many other companies might have ahead due to the new national security law in Hong Kong. They will increasingly be under pressure to endorse China’s actions and policies but that could put them in conflict with the US or other countries. At some point they might even have to make the decision about which market is the most lucrative for them.
I still think the biggest worry is Trump restricting US investors putting money into Chinese firms, especially those that are not allowed to operate in the US and that is why we are seeing some caution on the Chinese tech names. Some Funds have converted their ADR’s into local to removed the US delisting risk but no one can really hedge or de-risk Trump’s decision.

Purge paves way for Xi to assume Mao title and hold on to power
Chairman post offers president means to stay in charge beyond second term.
Covered in yesterday’s note but let know if you would like it resent.

Hong Kong pro-democracy politicians held over unrest. 
Looks at the arrest of 16 people on Wednesday morning including two pro-democracy politicians with regard to an incident that took place in July 2019 and for which the police have come under a lot to flak, firstly for not attending the scene of the disturbance for many hours and then for their apparent inability to finds the white shirted perpetrators who attacked people. Now with their arrest of the pro-democracy politicians for rioting whilst not arresting anyone in the white shirts (many believe them to have been Chinese backed triad members) the police and the administration are likely to find themselves further distanced from many of the population in Hong Kong.
It is a real shame, the Hong Kong police force was once the most highly respected and most of the force still do an exemplary job but cases like this tar the whole force. It is interesting to note that recruitment into the Hong Kong police force has dropped and early retirements increased. I think the Hong Kong civil service could also be going the same way as the administration removes their right of free speech, saying that if civil servants take part on anti government protests they could lose their jobs. A negative for Hong Kong if working for the government requires giving up what were considered to be normal freedoms.

Team tracing origins of virus fails to visit Wuhan WHO says the team was only tasked with setting the ground work but many are concerned that it reflects China’s unwillingness to allow the matter to be fully investigated. The team it appears never left Beijing and so one has to ask what did they do for three weeks that needed them to be in Beijing rather than Wuhan. Especially if you consider the fanfare recently about the big pool party event that Wuhan held to celebrated that covid was under control in the City.
It is now 8 or 9 months after the initial cases were reported and yet there is still no definitive source or explanations of where it originated or how it first mutated to humans. Both I would think quite critical to really being able to find a long term solution. China has done much in terms of supplying relief equipment etc but its paranoia about allowing expert foreign teams in to investigate is worrying. If there is no 'smoking gun’ allowing a team of international experts to investigate would be the easiest way to prove it beyond all doubt.

Jackson Hole central bankers debate options to tackle next stage of Covid-19 Looks at what might or might not be revealed over the next few days from the symposium. Many think the key speech will be Mr Powells speech today and what he says about the tools the Fed has left to its disposal to tackle the current crisis. The worry is that its running out of options and that maybe the markets have got ahead of themselves.
An interesting read especially as many are expecting the markets to see a consolidation, having recovered so quickly and now breaking new highs. I was saying on RTHK this week that at some point Wall Street and Main Street are going to have the reconcile their different views. Mr Powells speech could herald the start of that process.

Reshaped Ant on march to blockbuster IPO
The business has undergone a transformation from direct provider to digital supermarket of others’ offerings. Looks at the history of Ant over the past 5 years and how it changed from a market disrupter to a becoming a aggregator or customers working with the financial sector. It has also managed to move from being of concern to the PBOC, because of its size, to being accepted. But as Martin Chorzempa at the Peterson Institute of Economics notes that large parts of China’s financial system have been reorganised around tech platforms. “It’s the western banker’s worst nightmare of what would happen under an open banking system. Essentially the banks lose their direct relationship with the customer and all of it is mediated by the platform.”
Looks at its growth in the payment arena in which it lead but is now seeing competition from Tencent and the preference for using payment apps rather than cash. It notes how Alipay is the leader for online commerce payments but WeChat for money transfers. Alipay also has a loans business too and a consumer credit score system. But the key is that “Much of the decision-making, the data, the risk analysis, the rules, the financial product — it is all designed by the tech company, not the banks,” said Mr Chorzempa. “The banks provide the capital, but in a way, the banks are becoming dumb pipes, vying for customers and businesses on the platforms of the tech giants.”
It also has wealth management, Insurance and other products.
A lot of its profit in the services it offers are from the fees it gets. Certainly it is a diverse and profitable business and the IPO is likely to be very well received.
Everyone is very positive about the IPO and is is difficult to imagine that anything would upset it. Valuation may be an issue as far as the star price determination is concerned but the selling the IPO will not. As ever my only concern would be Trump and the potential to weapon the US investment dollar to prevent US investors taking part.

Wall St banks poised to reap bumper fees from Ant IPO. Citigroup, JPMorgan and Morgan Stanley are poised to share at least $300m in fees from the blockbuster dual listing of Chinese payments company Ant Group. Key is that fees from Chinese listings are still important to the US banks. They have limited exposure to the Shanghai listing where the Chinese Banks are heavily involved. But the US banks are still essential for reaching the international investors for the Hong Kong listing.
For investors it is likely to mean a further rotation of focus for the Hong Kong market away from the historic property related conglomerates and more to E commerce. Even Telco’s which were the market darlings in 10 years ago are becoming sidelined. In the short term expect to see some increased selling to raise cash for the IPO and we could see a slight drop in trading volumes when the IPO starts as retail investors use margin to take part in the deal.

LEX Hong Kong: return to the office. Notes the arrests and clampdowns have made Hong Kong property less attractive to overseas investors. But suggests there is hope as mainland money and businesses increase their presence. It’s not clear if it's referring to residential or commercial.
Mainland businesses have liked coming to Hong Kong as a financial centre and the ease that if offers to meeting international investors. As long as that is true and that Trump doesn’t put more sanctions on Chinese investment it should remain the case. But if the USD is further weaponised or if the new national security law becomes seen as a threat to international investors all that could change. But if there is a case of arbitrary arrests under the new law like we saw with the arrest of two Canadian nationals when Huawei’s CEO Ms Meng Wanzhou was detained in Canada; then that glimmer of hope will disappear in an instant. Mainlanders may want to increase their presence here but that will only be the case if it is good for business.

Move away from Huawei creates dilemma for Indian groups
Shutting out Chinese suppliers risks operational problems and cost rises for 5G rollout. Whilst not official, Huawei is being squeezed out and whilst is has weathered similar storms in the past this one could be different. The fact that its not official reflects the government’s recognition that it needs cheap equipment to leverage the potential that India has to become a digital superpower.
Without Huawei it would mean; more operational headaches and potential delays to 5G rollout, higher costs for the Indian telco operators and the possibility of more consolidation. It notes that Huawei equipment is 30% cheaper than Ericsson, Nokia or Samsungs; makes you think that it cannot all be down to cheap labour.
Also that trying to get customers to pay more to make up the difference is nigh on impossible since Jio triggered a cut throat price war when it entered the market in 2016. Of the operators Jio has already tied up with Samsung in 4G and rules out using Chinese gear. Bharti and Vodafone Idea have started 5G trial without Huawei. So the future for Huawei in India looks bleak.

Vanguard uproots staff from Hong Kong to focus on Shanghai. It’s to close its Hong Kong and Japan offices as it seeks to focus on individual investors not institutions. Key here is the opening up of China’s domestic fund markets; especially as in China it can operate without having to pay commissions. In Hong Kong it was hampered from gaining market share because it doesn’t pay commissions for selling its products and is hoping it can make more impact on the mainland.
It will be interesting to see how successful it is in operating on the mainland because there are a lot of established financial advisors that work on commission and I would imagine that it will face the same competition on the mainland as it did in Hong Kong.

Abe’s biggest win was convincing Japan Inc he would stick around. Looks at what the recent concerns about PM Abe’s health and note the two key things that will have to be faced by Japanese businesses at some point are:
1. how much of their world he has really changed
2. how much of that is robust enough to survive his departure.
It’s not just the laws and reforms or even the trade deals, though they are important but also the changes to business practices and the relations between companies and investors.
Some think the course set by Mr Abe will continue but others think whoever comes next will not have the motivation to keep change going. That is because much of it was driven by his style of leadership. Not presenting great ideas but convincing both the corporate sector and the bureaucratic machine that he would be in power long enough to see a conclusion.
It notes that 'Some companies have found this phase of political stability burdensome, with the unusual focus from the top giving them fewer places to hide. For others, it has encouraged them to go ahead with restructuring that they had avoided in the past.’
Friday’s press conference will be closely watched but Japan’s future and continued change depends on the next PM being able to stay in power long enough to created the same impression.

Editorial Apple is at the risk of losing an epic challenge The tech company’s fights with developers may backfire. Basically even if it wins against Epic which is by no means certain, the company risks coming under scrutiny from legislators who are likely to use very blunt legislation to make it changes. So the editorial suggests that it should compromise, which I think would be sensible.
Notes that in some cases, through its 30% ’tax’ it is making more money than the app owners.

FT BIG READ. LEX IN-DEPTH Why rescue finance will slow recovery
Companies raised unprecedented amounts of money as the pandemic hit. Their soaring cash balances forestalled a wave of bankruptcies but defensively managed corporations will be a drag on economies.
Notes that whilst some of the cash I evaporating just to keep companies going but one a normality returns the question is what will happen to the cash. Thinks it get split three ways
1. Repaid either via dividends or share buybacks.
2. Expansion capital
3. Held as cash, expect higher cash holdings being acceptable whilst investors remember Covid.
An interesting read.

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