FT WEEKEND. HK Labelling, HK Investment banking and why the Chinese are behind the wall,


26 Aug

FT WEEKEND. HK Labelling,  HK Investment banking and why the Chinese are behind the wall,

Hong Kong to act against US label demand. Washington’s ‘Made in China’ rules breach WTO regulations, says territory.  As ever its never straightforward.  HK is a separate member of the WTO but as the recent National Security Law has demonstrated it is under China’s control and a part of China.  Hong Kong is trying to maintain that it operates free from China but recent events have shown that is does not.  The Hong Kong government and Beijing made a clear statement to the world about the position of Hong Kong and the fact that they are only going to respect the terms of the Hong Kong handover agreement that they want to. It is one of the problems for China as it aspires to take its place on the world stage; in that it will have to accept the World Rules not just the ones that work in its favour but the whole rule book and that for Beijing is a problem.
The reality is that the US has a lot more scope to take action than China does and this will slowly impact Hong Kong and China more and more. The fact that Trump lost an appeal to delay supplying his tax records to the Manhattan district attorney may mean we see him ratchet up action against China to deflect attention.
I still think he could further weaponise the USD and move to prevent US investors putting money into Chinese companies that would really bring Chinese companies to their knees

FT BIG READ. US-CHINA RELATIONS Is Huawei ‘too big to fail’? Washington’s latest sanctions have been likened to a ‘death sentence’ for the Chinese telecoms group, removing its access to essential parts. Yet that judgment could be premature if Beijing decides to intervene. The article looks at how for 15 years the US has tried to suppress Huawei and how the latest sanctions are the most effective but the really cost will be felt by consumers as telco operators world wide switch to other manufacturers with the assoccated increased costs.
BUT its reported that Huawei has managed to stock pile chips to give it a six month breathing space; which gets it past the US election and gives it hope that Biden might treat it better than Trump has. That could be a false hope say other as there seems to be a consensus in the US the is anti China. It is no longer just about Huawei but a wider range of acts and policies many of which China would not reverse. Central to that is Beijing’s National SecurityLaw that requires Chinese companies and citizens to assist the security services in whatever they request. Add to that the imposition of a National Security Law on Hong Kong and one can see that China’s ability to compromise is severely restricted.
So what happens to Huawei with our chips non of its businesses can operate. More importantly how can Beijing assist it? This is not about cash but technology. Whilst Beijing wants to build its own chip supply chain it cannot be done overnight especially not without US tech or equipment. Beijing may force some domestic chip makers who are using US tech to supply the company but that is very high risk as then those companies would be targeted by the US for more sanctions and that could set back Beijing’s aspirations for a domestic chip supply chain.
At this stage telco operators do not seem to be expecting Huawei to fail and if it did the impact wouldn’t mean a collapse of systems overnight.
It notes that the restructuring of Huawei is now expected and it notes
'That, ironically, might transform Huawei into something the US has suspected it to be but the Shenzhen company always emphatically denied: a Chinese state company.’
Not mentioned in the article but also of importance is the presence of Huawei in setting the specifications and protocols for 4G and 5G and beyond. If Huawei is not around then there is once again a chance for other companies and countries to have a bigger impact. That is something that Beijing will not want to happen. In this instance Beijing is being helped by the fact that Huawei has no clear competitors. Ericsson, Nokia, Samsung and others are not leaders at present but they are likely to be under pressure to step-up but its difficult to make money as the hardware supplier of 5G equipment. The big profits go to the app makers and platform operators. Which suggests that those who profit from 4G and 5G should be asked to pay more, that is something the US and West still have to address.

Also worth reading the article from Friday’s FT Huawei workers fear for their jobs as US turns screws


LEX Hong Kong/investment banking: Chinese wall Looks at the prospect for Chinese mainland deal makers to 'seize the moment’ by helping companies raise money Hong Kong.
Notes that around 25% of the equity offering have gone to US banks with Goldmans and Morgan Stanley taking most. Chinese brokers being the laggards. But with the more US sanctions and the new security law putting pressure on US firms the Chinese mainland investment banks are growing. With Mainland companies making up the bulk of the new listings their close links on the Mainland they are expecting to secure a greater part of the deals. It notes that Citic Securities and CICC have seen good growth since the March crash. It notes that is as Bank of China has suggested China moves to its own payment system instead of the international Swift one that could further help the Chinese investment banks. But that is likely to take years to come into operation considering the non convertibility of the Reminbi. In the meantime they are hoping for more.
I agreed that the of CICC are leaders in terms of research which is what western fund managers really want access to; but all the Chinese investment banks and brokers suffer from the same basic problem which explains why Goldman’s and Morgan Stanley are at the top.
Their problem is that they focus still on China and Chinese investors. Their best clients are Chinese institutions. For the main part they have only reluctantly build-up trading links to the big western funds. Their research is often in Chinese with English translations coming a day or more later. The fact that their trading desks predominately focus on their Chinese clients and not western ones will continue to prevent them leading the international IPOs. Chinese companies want western money and funds involved. Global funds are the biggest source of funds for Chinese companies be it in the US or Hong Kong (something Trump in aware of).
Additionally they are very late and slow at using trading technology which western fund house clients require for trading. When I joined Haitong Int in 2015 to set up their institutional trading desk, they had a manual trade allocation system. I had to research and implement an automated middle and back office system so that we could handle orders and multiple allocations from western fund houses. It wasn’t until 2017 that Haitong Int entered the programme trading scene, which is very competitive, by that time most funds were already swamped for choice and margins were so thin it was a costly exercise. I was made redundant as they switched from high touch to low touch but I don’t believe it has been profitable; despite having bought in a good team. Since I left the remaining high touch team was refocused onto Chinese clients. Some of the western clients I established there haven’t had a call from Haitong since I left!
Additionally the costs of entry into programme/algo trading were too high and the margins too low. It is difficult to compete with the US and international players who have been doing it for years and have already written off a lot of their initial costs over the years when margins were better and competition less.
If the Chinese investment banks really want to make it to the top of the list they will need both their close mainland contacts but also be able to demonstrate that they have access to the western fund managers that are crucial to a successful Hong Kong IPO.


Covid-crippled property market rings alarms at banks by John Plender
With retailers closing stores and in many cases going bankrupt and corporates questioning the amount of office space they need as they consider work form home alternatives rent arrears are escalating. He asks whether this will lead to a collapse in Real Estate prices and what impact it will have on the financial system?
Assessing the damage is difficult because property valuations move slowly even when prices as falling as valuers use evidence and judgement. Quoted Reits however should provide a better indication. The Bank for International Settlements has calculated that covid has wiped out Reits cumulative valuation gains made over the past 5 years in US, UK,Continental Europe and Japan. Unlike the rest of the market REITs have lagged the market in bouncing back from the March sell off.
Also property deals are being called off and Property companies are seeking raise money. It notes 'In the view of one seasoned property expert, innumerable properties in the US and UK are now worth less than the debt that was used to finance their purchase.’
Delinquencies in CMBS’s are rising and credit agencies expect those levels to get towards 2008 levels but the year end.
Usually that would have banks in a panic but not at present. Key reason being that the situation has not been created by a surge in new developments or by sub prime mortgages that had been seen in previous property crashes. Covid has accelerated some of the trends that were already present. Retail accelerated a move on-line. But key is that Zoom will not do to offices what Amazon did to shopping centres. Older buildings will suffer and maybe need redevelopment sooner that was expected but there isn’t a ‘crash’ in the market. Part of which is probably due to the fact that offices usually come with long lease terms than retail. Yields have remained stable; with most weakness in retail which is to be expected.
So what about the Banks, because of previous the previous crisis most have undergone stress testing for various property scenarios and hence are better placed to cope; both from corporate default and distressed property. So he thinks
'a banking crisis, while not inconceivable, does not feel imminent. The underlying problem in property may best be seen as an extension of the corporate sector’s wider problem with excessive debt. After scrambling this year to raise funds to cope with the rental shortfall, property companies remain vulnerable to interest rate or earnings shocks.
The villain of the story, then, is the virus and the subsequent lockdown of economies in response. Rather than a saboteur, the real estate sector is just another victim. ‘
I agree with much that Mr Plender says but the unknown in the equation show long the covid crisis continues and how effective any vaccines and cures might be against a virus that appears to still be evolving. I am also concerned about the US housing market and mortgage securitisation there. The market is currently operating normally but with many households enjoying payment holidays and with the timing of return to normal employment levels being unknown; I think the risks are growing. Admittedly paying the mortgage in this crisis is more important than the car loan, in most cases its a higher monthly outgoing and hence could present more of an issue.
Read also Under the hood Bankruptcy ‘a growth industry’ in US amid mounting distress. Even as bourses hit record highs, large filings are running at a record pace and are on course to surpass levels reached in the financial crisis. Notes that 'As of August 17, a record 45 companies each with assets of more than $1bn have filed for Chapter 11 bankruptcy, according to BankruptcyData.com of analytics group New Generation Research.'
That compares to 38 for the same period in 2009 and 18 last year. A worrying trend.

Delivery Hero’s Asia plan draws fire from Seoul. Looks at how the company is intending to use a $4bn acquisition of Woowa Brothers (behind Baemin a popular food delivery app) to take on S Korea’s E commerce retailer Coupang. If the acquisition is successful Delivery Hero would control 90% of the online delivery food market. Delivery Hero plays down the anti-trust issue by focusing on the competition to Coupang aspect (who is backed by Softbank). The deal is currently being assessed by the Korean Fair Trade Commission. They along with others are grappling with the growth of companies using new tech to disrupt existing businesses and create new dominant companies as well as control the entry/dominance of the likes of Google, Amazon, Alibaba and Tencent.
This is going to be an ongoing issue for a lot of countries as these companies vie for dominance in what they see as new markets for growth as their home markets become quickly saturated.

US duopoly rides the lockdown boom in DIY projects. Sales soar at Home Depot and Lowe’s as households press on with repairs and maintenance. Homes in the US are now even more important and many people are having to adapt them to being home offices too. That is in addition to the odd jobs and small projects that were suddenly possible because of home lockdowns. Home Depot and Lowe’s benefitted from being able to stay open as suppliers of ‘emergency essential items’.
A good read and again gives support for Techtronics (699 HK) which looks set to test HK$100 shortly.
Not mentioned but worth noting is that the business these two gained will be at the expense of the smaller Main Street stores many of whom will have been forced out of business by the lockdowns and loss of business to their larger competitors. For Techtronics it probably helps with sales more focused on these two groups. The generally strong US housing market also benefits Techtronics. I have like the company for many years but it is difficult to see it maintaining the current levels of growth. If you have held it for sometime I think it is time to take some money off the table

K-shaped recovery spotlights over reliance on tech giants. S&P 500 smashes record highs but average stock in the index is 28% below its peak. A new expression K recovery; tech and stay at home beneficiaries on the up but many companies where they were or down. It notes that consumer discretionary stocks as a group are +23% but that is mainly due to Amazon. Reflecting the divide in fortunes. Key going forward will be whether thatch companies can keep delivering. On the other leg the worry is about the companies who were loaded with debt pre covid and have been further hit; there is a question over whether they can service that debt.
Fund managers will prefer to have expensive tech which at least some vision on future cashflow rather than companies with uncertain cashflows.
But that does mean the market rally is reliant on those big tech names.

Read also Wall Street’s record run owes a lot to flattened bond yields. Which notes that because the US T10 is at about 0.6% the equity risk premium which makes share and credit markets attractive. But again it notes the reliance on Tech and Healthcare. There is also the risk that markets fail to deliver and that the wider economy falters; a concern raised in the Fed minutes this week. Along with the need to restructure some sectors of the economy which could also slow growth.
Invesco notes that means PM’s should stay with risky assets on the basis '“We believe that betting long term against credit and equities now would be akin to betting against medicine, science, human ingenuity and the direction of monetary policy,” they wrote in a note.’
It also mentions how Citi have noted that on interest rates: 'The suppression of nominal and real bond yields through quantitative easing has been accompanied by rising expectations of inflation, albeit from low levels. Typically, higher inflation expectations boost industrials and commodity stocks while, in global terms, the trend tends to favour US and emerging market equities.
To Citi, this is a sign of investors seeking hedges against price rises as corporate dividends can be generally expected to match inflation over the long run.'
In summary 'Fanning expectations of inflation by keeping a firm grip on bond yields is certainly the objective of central banks for the foreseeable future. The stock market has got that message, loud and clear.'

Rebound in eurozone hit by Covid spikes. European PMI data was weaker than expected although the UK data showed a strong rebound. The weaker Eurozone PMI’s (although mostly above 50 indicating a positive outlook) coupled with rising covid cases in Spain. Prompted the Euro to weaken.
It comes as layoff in France are on the rise and the mixed German data was despite job cuts there easing. Commerzbank’s economist saying that there will be no V shaped recovery.
In contrast to Europe the UK’s PMI data was stronger than expected.
I think the prospect of a V shaped recovery is still in question especially as we don’t yet have a vaccine or cure for covid and in many aspects we are still struggling to understand the virus. The other worrying aspect for investors is that the recovery of the stock markets is in stark contrast to what is being seen on the high street. The key being that much of the stock market recovery has been driven by big tech companies giving a somewhat misleading impression. Many of the non tech names are still struggling. At some point there will have to be a reconciliation of the two.

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