Aug 31 FT Thoughts. TikTok Beijing now involved, China Debt deals, Czech's Taiwan trouble and more

02 Sep

Aug 31 FT Thoughts. TikTok Beijing now involved,  China Debt deals, Czech's Taiwan trouble and more

MARKETs @ 1:30pm HK time
JAPAN opened strongly bouncing back from the sell off on Friday and rose slightly through the morning after mixed data pre market. Retail Sales were worse than forecast but Industrial Production MoM was better.  After lunch the market has drifted lower despite Consumer Confidence being better but Housing starts missed and still awaiting Construction orders.  Currently +1.5%
S KOREA  Kosdaq market opened higher and saw a small uptick before trading sideways.  Investors concerned about the rising number of covid cases.  Around midday the market saw selling pressure, sold down to Friday’s closing level before a small bounce Currently +0.3%Kospi opened higher but has sold down through the session currently, went through Friday’s closing level without pausing.  Currently -0.9%News of the extension to the short selling ban having no impact but leaving the hedge funds smarting no doubt.
TAIWAN opened higher and saw an initial uptick for the first 20 minutes but then sold down to the 12,670 level then trade sideways lower to the rest of the session; currently -1.1%
CHINA opened higher and has trended higher in the AM session after the PMI data was in line.  PM saw the market sell down Currently +0.6%
HONG KONG Opened higher with shorts being squeezed on the open.  Traded sideways through the morning session between 25,700 - 25,800. Market selling down after lunch, currently +0.8% at 25,600 level.
EUROPE Expect the market to open lower as Asian markets (except Japan) sell off.  UK closed today so expect lighter trading volumes.  Only German inflation data due today.
US Futures opened +106pts and have traded higher to +123pts, S&P and NDX also higher.   Dallas Fed Manufacturing Data due. Remember Apple and Tesla trade post stock split today and DOW index changes are effective;  ExxonMobil, Pfizer and Raytheon are out and, Amgen and Honeywell are in.

TikTok’s US sale put at risk by new Chinese tech rules. Beijing includes advanced technologies such as AI on list requiring special licences. The people that will suffer are ByteDance and users. China on Friday revised its list of technologies that are subject to export controls for the first time since 2008 and it now includes AI, along with Drones and some other Tech items.It is not the first time that ByteDance has seen itself at odds with Beijing but it has tried to steer a course of avoiding direct conflict. Here though part of the problem is political and the current standoff with the US. The article also notes that in China it has seen some backlash from those that view it as bowing to the US. Beijing’s ability to whip up nationalist support from its citizens is well know. Last Friday it threatened that Apple would suffer if WeChat was banned. Part of the problem with that course of action is trying to reverse it when the situation is resolved, which is often impossible.
For Chinese investors I think it will prompt more caution over companies that could become ‘collateral damage’ from the standoff between US and China.

China strikes debt deals with poor nations under G20 scheme. Half of requests to defer payments have been agreed — but key Angolan test awaits. Key here is that China is restructuring the debt, to facilitate a debt standstill, which would allow debt repayments to be frozen until the year end. The article notes that for other investors the real problem is that ‘ “The issues all investors wrestle with are: we don’t know the official size, we don’t know what is ‘officially official’ and what is not, and we don’t know what the terms are going in or what the terms are going out,”.
The negotiations though are important ahead of the IMF which will be required to sign off on the Angola’s debt outlook. It notes from a couple of sources that China doesn’t need the loans repaid immediately but equally it does not want to set a precedent by writing the loans off. It also notes that China will probably expect the IMF to issue more emergency support to low income countries as a ‘quid pro quo’ for its willingness to restructure.
Not mentioned in the article but likely to also be an issue will be Trump’s attitude. He has in the past critical of the IMF’s actions and anything that could be construed as being nice to China might come under attack.

China threatens reprisals over Czech official’s Taiwan trip China says the trip is a “despicable act” and has threatened retaliation against Prague. It comes at an awkward moment as China’s foreign minister is in Europe trying to counter concerns about Beijing’s crackdown on Uighur Muslims and Hong Kong. The trade delegation of about 50 business people along with Milos Vystrcil, the second-highest-ranked elected official in the Czech Republic, and a delegation of 40 fellow lawmakers and the Prague mayor.It comes at a time when there is growing opposition to the President making closer ties with China.
It also demonstrates that despite what China may say Taiwan is not a one of its provinces and that Taiwan is getting significantly more attention that China would like. China has said previously that there would be consequences for Czech companies doing business in China but with fragile state of the economy it will be interesting to see what those might be.
KEY here is the long standing threat by China to take Taiwan by force but it is coming when the world can clearly see how important Taiwan is in terms of technology, especially in the chips that are going to be essential for 5G and AI going forward. The US will not want to see that fall into Chinese hands. To say nothing of the fact that, post the imposition of the new security law in Hong Kong, the majority of Taiwanese do want it either.

Huawei shifts focus to cloud unit in push for survival. Looks at how the company is changing direction as the US sanctions hit its access to chips. This will be a slight -VE to Alibaba and Tencent, who are the market leaders in China, because it is likely that the Government will support Huawei with contracts.
The power of being able to control the supply of chips to a company is another reason why the US will not want China taking Taiwan.

China’s Sinopec slides into first half-year loss. Its first ever loss, which reveals the significant impact that covid is having and it was not just Sinopec, Petrochina also posted a loss and write downs. It was also interesting to see the weakness in the State Banks, who have been tasked with shouldering the burden of helping companies through the covid crisis at the cost of investor profits.

Can China continue its recovery momentum? Looks at tomorrows Caixin manufacturing data which is expected to show a solid growth but slightly down MoM.
The PMI data out this morning saw manufacturing slightly weaker in line with the erratic global demand cause by renewed outbreaks of covid 19. Non manufacturing saw a positive trend as the rest of the Chinese domestic economy continues to recover albeit at a slow pace.

Japan to get new leader within weeks. Abe’s party plans speedy selection of successor as candidates vie for position. The speedy selection process should help Mr Abe influence the choice of his successor, especially as they are avoiding a full party vote. Current front runners are: ex-foreign minister Fumio Kishida, chief cabinet secretary Yoshihide Suga and former defence minister Shigeru Ishiba, have already indicated that they are likely to stand, along with Seiko Noda, a former minister of internal affairs.
Expect more jockeying in the days ahead. Meanwhile the market bounced back from Friday’s sell off with plenty of bargain hunting on the open.
Read also Editorial Shinzo Abe’s legacy must not be squandered. Retiring prime minister has brought new ideas and energy to Japan. Notes that whilst Abeconomics may not have achieved its state aims Japan has changed from the previous bureaucratic state that it was. 'Given Mr Abe’s background in nationalist politics, his openness to social reform and his internationalist foreign policy have been surprising to some. But he has been intelligent enough to understand that in today’s Japan, a nationalist also needs to be open to radical change.'

Singapore seeks to cut number of expatriates as recession bites. Asian financial hub tightens regulations on employing foreign professionals by lifting the minimum salary conditions. Likely to have a big impact on lower paid jobs in retail and services sector which have been filled by Malaysian and Chinese workers. Unlikely to have much impact on higher paid professionals, especially as Singapore tries to attract more companies that feel uneasy about the changes taking place in Hong Kong. It is also a positive for the government to be seen to be taking action as unemployment in the city state rose to nearly 4% in Q2; its highest for more than a decade.

Drugs agency ready to fast-track Covid vaccine but denies pandering to Trump. Key is that they are not given carte blanche approval. What they are saying is that if companies feel the benefits of their vaccine outweighs the risks that there might be side effects etc before the completion of stage 3 testing then the agency will consider the merits and then make a decision.
Key here is that it seems to leave the risks of future law actions against any side effects that might become apparent with the drug companies. They have sought the government to indemnify them but it appears the administration is unwilling to do that.

FT BIG READ. PROPERTY. Pandemic exposes ‘severe stress’ in CMBS market
Commercial mortgage-backed securities fill a funding gap for developers involved in everything from hotels to offices and shopping malls. But as delinquencies rise, investors are bracing for losses. Some properties can be sold and investors will get their money back but some properties will struggle to find buyers and so investors will face losses.
Something that I have written on before but the key is that these loans are held by a wide ranges of investors rather than the banks and there are different levels of debt within the CNBS schemes.
Most of the companies affected do not qualify for any of the US government scheme but there are calls for government assistance.
Two key points. Support of the CMBS will not lead to the recovery of any jobs. But without assistance mortgage borrowers will be unwilling to take on more debt and that could impact other efforts to help the US recovery.
Also the glut of commercial property that comes onto the market will further depress prices, which is likely to hurt the commercial property stocks. It could also mean that covenants on other property loans are breached and so adding more pressure to the system.
The article suggests the government lend at a fixed interest rate through what is known as preferred equity. That would assist ailing properties and then to take losses ahead of bondholders should things turn sour.
It does also note that the price of debt in the CMBS market is off its lows. But as I say the big risk is that even if we see a strong V shaped recovery which I doubt there will be another down leg in the commercial property market.

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