FT Weekend HK, China PMIs & Team China, Ping An Good Doctor, Silver and more


09 Jul

FT Weekend  HK, China PMIs & Team China, Ping An Good Doctor, Silver and more


Party enforcer to head HK security office Hundreds arrested during protest as first case under new law comes to court. Looks at the appointment of Zheng Yanxiong as head of Hong Kong’s National Security Office; which has powers over HK residents and businesses (local and foreign). Known for overseeing the suppression of 2011 protests in the southern village of Wukan and his distrust of foreign media; '“Pigs will climb trees before the [foreign] media become trustworthy,” Mr Zheng told Wukan villagers, according to a video shared online.’
It is expected that he will suppress the pro-democracy protests. The article also mentioned that HK brought its first prosecution under the new law yesterday with a man being charged with 'inciting secession and terrorism’ having driven a motorbike through police officers displaying a flag with a banned slogan “Liberate Hong Kong, Revolution of Our Times.” It reports that up to 370 people were arrest on Wednesday; with at least 10 for offices such as carrying a Hong Kong independence flag.
It reports that some were surprised with his appointment, with his experience in '“managing public sentiment”, as opposed to someone who had worked in the police,’ But the article quotes a sources as saying '“This indicates that the Communist party’s hopes for Hong Kong are not only about sending people to conduct suppression, but also about hoping to soften the attitudes of Hong Kong locals,” the official, who did not want to be named,’
Whilst Beijing may hope to soften the attitudes of the Hong Kong people I think its actions to date are more likely to cause resentment even if there is the outward appearance of acceptance. All most Hong Konger’s wanted was for their opinions and views to be listen to.

Territory’s youth adapt to defend the cause Protesters expected to become less openly confrontational while urging support from US. Looks at how the protesters are changing their tactics in reaction to the new law. Notes that prior to the new law there have been more than 9,000 arrests since the protests started; over Carrie Lam’s (although most think it was Beijing’s) attempt to introduced a bill which would have allowed Hong Kong people top be extradited to China to stand trial for crimes. The article makes the point that the youth are those who are most at risk from the new law because ' they have embraced the idea that is most reprehensible to Beijing, independence from China.’ I am not so sure they seek independence from China but I do think they want to enjoy the freedom of speech and information that they grew up with. The youth in China have never known such freedom and so have presented less of an issue to the Beijing. But the taking away of freedoms will, I think, will be rather like trying to 'put the genie back in the bottle’. It is also possible that China has instigated a Gdansk moment, forcing the protests underground; time will tell.The article interviews a number of youths and they all know the cost of getting caught is higher now, they know the police are better organised at present due to the social distancing regulations but they still feel they need to continue. They also know that US support is crucial, without it they are lost. It was the same at Gdansk. They are prepared to give up their homes and become political refugees if necessary. The article notes that some have already left Hong Kong whilst others have disbanded their organisations in order to comply with the new Security Law. It interviews a young professional who notes that many of her colleagues have resigned themselves saying to the notion that it is out of their power to influence change. She worries too for the younger protesters who do not fully understand the longer term consequences of their actions. It further notes that press and academic freedom will not doubt be tested in the days to come. It also mentioned the the independence of the Hong Kong civil service, although I think that has already seen in the Head of the civil service saying that it would not tolerate people in government service protesting. Which I think could lead to an obvious future issue in the future of who is going to want to join the civil service if doing so means giving up your freedom of expression. It is interest to note that since the disturbances started recruitment to the Hong Kong Police force has declined. Research shows since June last year, when the city's protests started to February 2020, a total of 446 police officers have quit the police force, +38% YoY. In terms of recruitment 766 people have joined, down from 1,341 (-43% YoY) and far fewer than the target of more than 1,800.The article in summed up in the final paragraph
“The free Hong Kong we know, I’m afraid we may not see it again,” Prof Yep added. “But the future very much depends on what Beijing will do next and . . . how the international community and particularly the US will respond to that.”

China services activity hits 10-year high but job losses still a worry. Also read the on-line Chinese shares hit 5-year high on growing optimism over economy Looks at the Caixin data which was better than expected and as Caixin points out suggests an accelerating recovery. Others are less optimistic and point out that many private services businesses have still not opened or are running at low capacity. Others point out 'consumption of services, which depended on human interaction, was weaker than that of physical goods as concerns over a second virus outbreak lingered. “Things are far from getting back to normal,”’. Also the employment part of the survey showed people were still losing jobs, which is inline with the official unemployment stats out of China. Plus with school and university year ending there will be a new batch of students entering the job market. The second article makes the point that the PMI’s are a relative survey, they compare the situation month on month as getting better or worse; May was a depressed month. It also points out that the last time Chinese markets were at this level was June 2015 just before the market slumped in a turbulent period with strong state support (what I usually refer to as Team China). At the moment I believe there is again strong government support for both the Chinese and Hong Kong markets; which explains the outperformance recently. It suggests that the increased tension with the US, India and other nations is not reflected in the pricing. Almost everyone’s assuming that the phase 1 US trade deal is set in stone and that could be a mistake. I also think that the recent uptick in covid-19 cases both within China and globally are not reflected in the survey. Hence I am not as confident as the market appeared on Friday.

Opinion Beijing’s Hong Kong takeover is a masterclass in creating fear by Isabel Hilton. Sets out that in the official Chinese media the new security law in Hong Kong is a great success.
'The People’s Daily published a graphic to illustrate Beijing’s strategy: it showed three interlocking gears in which the largest, the law, drove two smaller gears, which represented the economy. Critics on social media pointed out that, as drawn, none of the gears could turn. But as a symbol of politics’ predominance over economics, the since-deleted graphic worked — maybe better than intended.’
She notes that the HSI has risen since Wednesday, when the law was enacted. Supporters say this shows the law is working. Sceptics she says say this is just Beijing using government money to boost the market (I’m in this camp and in my notes refer to it as Team China). As I wrote last week though it works until they aren’t there and as she says cannot erase the growing doubts over Hong Kong’s future as a global financial centre.
Whilst the city means less to China than it did in 1997 it is still crucial for investment flows into China; she says 'Its success has rested on a combination of mainland access, an independent legal system and the free circulation of information without fear of reprisals.’
She says the new law is about creating fear. Since the new law was announced in May prominent Hong Kongers were ‘encouraged’ to support the new law; despite not knowing what is said. Then when the detail was announced they had no option but to continue supporting it or stay silent; both work for Beijing.
Those opposed pointed out the numerous provisions that were inconsistent with Hong Kong’s Basic Law; importantly 'the loss of freedom to conduct research, publish and access information without fear’. She notes the relevance of that in recalling how in 2013 President Xi encouraged citizens to invest in the Chinese stock market; which they did enthusiastically and the market doubled. But when the market went bubble burst, authorities halted trading and pumped in money. When that didn’t work the collapse was blames on ‘hostile foreign forces’ (although with restricted market access its difficult to see how) and censors banned the term ’stock market crash’. In more recent times stock market influencers on social media have come under government investigation and in some cases forced to resign from their jobs. The article says 'Chinese politicians may struggle to command markets, but they insist on commanding what investors know.’
She notes have in recent years even the limited freedoms that analysts, journalists and even citizen bloggers had have been curtailed. She sets out that Beijing thinks that ‘hostile foreign forces’ are behind the Hong Kong protests and that was their justification for action but they didn’t set out clear lines in the law preferring ‘grey’ areas to heighten fear. Whilst not saying it, the inference is that Beijing would prefer to hear anything but the truth that most of the people in Hong Kong actually just wanted the Basic Law to continue as it was.
She makes the point that Hong Kong’s now limited franchise will continue but only for those prepared to accept the new rules.
'This Potemkin version of autonomy chimes with Beijing’s vision of the future in which Shanghai replaces Hong Kong, Macau substitutes for Taiwan, and the Pearl River delta, rechristened the Greater Bay Area, becomes a high-tech economic driver. In Hong Kong, those who can relocate will; those who cannot must conform.
Mr Xi’s vision of China’s next 20 years also includes an end to poverty this year, China as technological superpower by 2025, Taiwan “recovered” by 2049, multilateral institutions reshaped or replaced in China’s interest, and global trade patterns reordered by the Belt and Road Initiative.’
She doubts that this achievable because for Hong Kong to work are flows of capital and information are crucial as is the independence and oversight of all activities of its judiciary; no secret, unaccountable groups. She notes that ‘It’s own internal arrangements depend on censorship, capital controls and cronyism. Beijing talks about internationalising its currency. But that cannot happen without reforms the Party does not want to make. Shanghai and Shenzhen are large financial centres, but lack the same international confidence that Hong Kong has had. For now, Beijing counts on having enough weight in the world to prove its critics wrong — or if that does not work, to enforce their silence.’
The international response so far has been limited and I think unless there is more substance then Taiwan will be very much under threat. Having seen Putin manage to annex Crimea, China is testing the water with Hong Kong and if that goes well Taiwan is without doubt next. Especially is some prominent Hong Kong ‘political’ refugees take sanctuary there. Taiwan is the jewel for China, not so much on the ideological victory but the access to technology that China has little hope in developing itself and then it can hold the world to ransom.

LEX Telemedicine/Ping An: the good doctor. Thinks that as a result of the covid-19 pandemic Ping An Good Doctor China’s largest online healthcare platform is transforming the the sector for patients and doctors. Business sign ups have grown ten-fold, sales up 100% pa for the past three years and share price has quadrupled in a year. But its hasn’t been good at making a profit. Marketing costs have been high and competing with a state run medical system has made paying fees for a consultation unattractive. The change has come from growth in online consultations in the pandemic and high margin online drug pruchases; contributing almost 60%. Its currently trading at it highs on the basis that even after a vaccine and cure for covid-19 are found, demand for its services will remain strong. Trading at 'an enterprise value-to-sales ratio of 21 times. That is a discount of a fifth to smaller local peer Alibaba Health and US rival Teladoc.’ As a result Lex thinks that the years of scaling up will pay off.

Prospering in the pandemic the other winners In the latest part of a series on businesses that have defied the gloom, Tom Braithwaite looks at smaller champions; looking at successes in gaming, cloud computing, pharmaceuticals and ecommerce.
Also read Hunt begins for retailers’ perfect fit Stores explore blends of online and physical models as they size up potential shape of the market. Looks at how some small businesses were forced on-line and that has helped them but the question is getting the right balance going forward. The big question that remains unanswered is whether showing habits have permanently changed or when a vaccine or cure is found we go back to our old habits. I suspect it will be a mix. The article notes that even on-line may change and become more personalised '“If one of our regular clients is purchasing something online that I just know is not going to work for her, I’ll say: ‘Hey, I’d actually rethink this — what you should be wearing is X, Y or Z’,” she said. “I’m very proud of the fact our return rate is relatively low.”
‘Some people are going to want to buy online and pick up in store. It’s not going to be separate, either online or offline’’

FTfm Don’t bet on the silver boom The industrial metal will not be dragged up by gold. Outlines the fundamental differences between Gold and Silver and hence does not expect Silver to do as well as gold. Key being the there is a lot of silver that has been already mined and stored as bullion or artefacts that could be easily melted down. He does make the point that there is rising interest in nickel, copper and cobalt, much of it in connection with electric vehicles and their need of batteries.
For me I believe that Gold is setting up to push to US$1,900 because I do believe inflation is coming as a result of all the central bank/government stimulus. Because of the amount of cash in the system and I think governments will need inflation to bring government debt levels down.

Marshall Wace targets $1bn for new green hedge fund Plans show firms warming to environmental, social and governance factors. Whilst not an ESG fund it will focus on 'how companies address environmental, social and governance issues. The new fund will buy stocks with strong ESG characteristics and bet against stocks with poor ratings.’
It will depart of the TOPs programme; where sell side analysts make recommendations and are paid on how well they perform; constant under performance or not making changes usually results in contributors being asked to leave. The key to the TOPs system for the Sell side is being quick to cut under performers and make early calls on potential winners. Marshall Wace, by monitoring the good calls (be it to buy sell or cut) are able to identify market trends. There are a number of other similar systems in the market too. It also notes that Caxton and Man Group are looking at ways to identify stocks with good ESG traits to outperform.
Other funds looking to raise funds mentioned in the article are DE Shaw and Baupost.

For interest
Republican resistance gets under Trump’s skin
Party opponents take to the president’s pet platform in support of Democratic rival. Looks at how Republican critics of Trump are trolling him on line and baiting him with TV aired video’s. Worth a read just because is shows how easily it appears for Trump to be riled. Not I would have thought a good trait for a president.

America’s Cup buffeted by fraud and spying allegations Amazing how the sport of sailing, which I love, has become mired. As St Paul said in his letter to Timothy ‘…For the love of money is the root of all of evil: which while some coveted after, they have erred from the faith, and pierced themselves through with many sorrows.’
Seems Team NZ was victim of an email scam; which resulted in a payment of NZ$3m to a Hungarian Bank account; lets hope they aren’t so easily fooled on the water.

FT BIG READ. PROFESSIONAL SERVICES Time to audit the auditors? The Wirecard scandal is the latest to focus attention on the failure of company auditors. Often seen as the poor relation of the accountancy profession, critics say it is time for the sector to be overhauled.

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