July 1 FT HK Arrests, New Law, Taiwan tightens regs, India/China, Sony and more

09 Jul

July 1 FT HK Arrests, New Law, Taiwan tightens regs, India/China, Sony and more

opened slightly higher but trended lower through the day to close around the lows. Closed -0.75%. Tankan data was mixed. Manufacturing PMI improved to 40.1 from 38.4 in May and was better than forecasts but recent covid outbreaks outweigh the data.
S KOREA opened higher and the Kospi trended higher for much of the session but sold down at the end to close -0.8%. Kosdaq opened slightly higher and trade sideways just above yesterday’s closing level for much of the day but sold down in the last hour. Closed -1.4%
TAIWAN opened higher and trended slightly higher for most of the day and eased back slight at the end but closed +0.7%. Manufacturing PMI improved to 46.2 beating f/casts.
CHINA Opened higher and traded higher through the day with a small hiccup around lunch. Manufacturing PMI was better than F/Cast at 51.2. CSI 300 closed +2%
HONG KONG Market closed today. Re-opens tomorrow. New law in effect and a number of arrests have already been made and the public defy the law and protest

SUMMARY of the New National Security Law
The law defines four crimes: separatist activity, state subversion, terrorist activity and collusion with foreign forces.
* The security law overrides existing Hong Kong laws.
* Crimes of secession, subversion, terrorism and collusion with foreign forces punishable by up to life in prison.
* The activities of a new national security agency and its personnel in Hong Kong will not be under the jurisdiction of local government.
* Mainland authorities will exercise jurisdiction in “complex” cases such as those involving a foreign country or issues that pose a major and imminent threat to national security.
* Companies or groups that violate national security law will be fined and could have operations suspended.
* Property related to crimes under the new law could be frozen or confiscated.
* Damaging certain transportation vehicles and equipment will be considered an act of terrorism.
* Anyone convicted of violating security legislation will not be allowed to stand in any Hong Kong elections.
* Authorities can surveil and wire-tap persons suspected of endangering national security.
* The law will apply to permanent and non-permanent residents of Hong Kong.
* The management of foreign NGOs and news agencies in Hong Kong will be strengthened.
For me the fact that the punishment is life in prison is a significant increase but in line with Chinese law and the fact that it allows for the confiscation of assets which many will be worried about. It was the same with the failed extradition law last year; many think this is about the ability to seize assets from those that upset China. -VE for Hong Kong

On Line
HK begins crackdown under security law despite foreign condemnation

Police arrest protesters gathering to mark anniversary of city’s handover to China Notes that the first arrests have been made. The first it appears was for holding banner with the words Hong Kong Independence on it, procession of such an item is now illegal in Hong Kong.
Despite the ban on marching and warnings from a number of the groups associated with the marches saying that arrests were likely, many people have turned out to protest.
The Police banners now warn people that they might be committing a secession- or subversion-related crime by joining the demonstration.
I fear that for all the condemnation by world leaders it has no impact on China; as Zhang Xiaming of the Hong Kong and Macau Affairs office is quoted as saying ‘We Chinese will not be scared by anyone’. ‘Gone are the days when we had to take cues from others’
With statements like that I think those in Taiwan will be worried.

PRINT Edition
US and EU condemn Beijing for tightening grip on Hong Kong. 
China’s NPC, as expected, approved the National Security Law for Hong Kong and it went into effect last night drawing condemnation from a number of nations but it is difficult to see what they can do as China is not going to back down.
As the details were released it was seen as being more oppressive than many had thought it was going to be.
The ability for the Chinese security services to operate in Hong Kong in secret without any judicial oversight will be for many particularly worrying. Also the fact that assets can be seized is also a concern. As with the failed extradition law the ability to seize assets means that much of this could be about money.
Read also Hong Kong pro-democracy groups disband after security law passed Leading activist fears Beijing-imposed legislation threatens protester safety but says struggle continues. The parties have been disbanded to avoid obvious conflict with the new law. The fact that the new law says that it applies to people outside Hong Kong too may cause an issue for those parties the have only closed their Hong Kong operations. Also Read Hong Kong security law will stifle research, fear investors which I covered yesterday see website for yesterday’s edition. Now the details of the new law are out I think there will be increased concerns. A few weeks ago I was less concerned about the impact now I can see it is going to be an issue.

Taiwan to toughen investment rules for Beijing. Comes as Taiwan is worried about Mainland China trying to exert influence by investing in key companies. In this instance the company is Tatung which at the AGM yesterday banned certain shareholders from voting because of suspected mainland influence. The case is being investigated, but it appears that she of those trying to get control of the board are backed by mainland money. The importance is seen in the fact that Tatung handles sensitive government and military data. It also says that it will be more strict with background checks on companies applying for public contracts.
The government has always been wary of the influence of Mainland Chinese money but is now tightening up the regulations. The threat is real as Chinese companies have been accused of stealing technology through executives and engineers and that the government is now looking to bar people from visiting China during and for a certain period after their employment if they deal with high end tech.
I would imagine that they will want to be even more careful now that China has imposed a new security law on Hong Kong which give the Mainland more control over activities in the City.

India’s retaliatory strike at Chinese coffers threatens to backfire. As with all trade actions there are always pros and cons. In boycotting Chinese goods India risks cutting off a wide range of items it currently imports from China; like antibiotics and raw materials for its pharmaceutical industry, solar panels for renewable energy, low cost components for smartphones, car parts and more.
It notes that some think decoupling is not possible because consumers want the products. They key will be whether the 'Nationalist spirit’ in consumers decide to boycott Chinese goods. That is the key factor in the equation. China has in the past used that card, it will be interesting to see whether India can too.
Read also India invites blacklisted China app groups to dispute ‘data stealing’ claims. India will carry out its investigations into data security and then ask the companies to explain the government findings. The key being that by then many of the apps will have lost market share. -VE impact on Tencent and Alibaba but +VE for the local Indian app makers.
Also LEX India/Chinese apps: national insecurity

Sony’s subtle name change marks a big shift in thinking. Just as the first name change in 1958, made Tokyo Tsushin Kenkyujo into Sony Corporation and opened it to the world. So this week’s name change from Sony Corporation into Group marks a new change. The article makes the point that it marks an internal levelling of all divisions. It also thinks that there is another change that ‘..t is done with the vogue for divestments that leave only the slim “core” of once tubby corporations, Sony is making clear it is a conglomerate and proud.’
It wonders whether now that the cash level at Japanese companies look prescient rather than wasteful whether other aspects of the Japanese business model could move back into favour with Sony as the trial blazer and can it the defy the conglomerate discount.
The article points out that Japan has been under pressure from activists over the past few years and Sony was the subject of such actions; like the pressure to sell its majority stake in Sony Financial; it actually bought out the minorities; showing its determination to act as a group. Recent market moves have helped investors to be able the various parts of Sony more easily and those have benefitted from the covid-19 premium. It music business vs Warner Music’s listing. Nintendo valuation vs its games, Streaming content etc.
It still faces risks like the tendency to cling to businesses that have negative returns and the propensity for internal silos that prevent a company cohesion. The challenge is there for Mr Yoshida. The stock has rallied back nicely from the March sell off and is back to close to the January 2020 all time high. Worth watching, a stock to accumulate on pull backs

Bankruptcy filings in US hit quickest pace in 7 years. Worth noting that rate as the number YTD is similar to that in 1H 2008 just before the surge after the GFC. Many of those would have been companies that were struggling anyway, more of a worry is those that come in the second wave; those that were health before the lockdowns. It to me is another reason to be cautious of the optimism in the markets.

Towering debts are a big threat despite low servicing costs John Plender notes that one explanation for the markets bouncing back is that investors are looking past the covid-19 impact. Another explanation is that investors believe that Central Bank will exercise control over asset prices for the foreseeable future and do whatever it takes to counter the current crisis. That could decouple equity prices from ailing economies. Support for this is the thought that the Fed might resort to yield curve control. That is a form of financial repression that allows the Fed to control the high level of government debt by keeping nominal interest rates below the nominal growth in GDP to cut the debt to GDP ratio. But he notes that requires markets to have patience with the high government debt level, it that patience fails then money outflows are the norm; to countries that have more sustainable debt levels. That could cause the Fed problems akin to those seen in the 1970’s. There are also the side effects it causes like zombie companies, mis allocation of capital and negative impact of economic growth. He notes the hazards
'The morally hazardous consequence of ultra-low interest rates would be a rise in private sector debt even as the public sector leverage ratio is falling.
To the extent investors discount future corporate earnings using these artificially low rates to calculate equity market valuations today, those current valuations risk being artificially high.
This approach to economic management would create a perception of an enduring reduction in systemic risk as liquidity would be so abundant.
The mispricing of assets, a feature of capital markets for 20 years as central banks have bought more bonds, would become more extreme, as would the search for yield regardless of risk.
A further complication is the adverse impact of ultra-low rates on bank profitability, though this is less of a problem for the US — where the banks have relatively high returns on equity — than for Europe and Japan.'
But the biggest issue is the credibility one, committing to low interest rates for a set period. Sounds easy but if overheating occurs and inflation arises it has to make a choice between inflation or low rates.
He notes
'A pick-up in inflation is a far more probable outcome than markets allow. It is, moreover, part of the solution to countries’ excessive debt burdens.
The likelihood is that greater resort to direct monetary financing of spiralling government deficits will have a big impact on inflation, which will also be encouraged as the labour force gains bargaining power and governments face pressure to reward key workers.
Politicians and central bankers may feel they have had little alternative to fiscal expansion and financial repression. But in doing so, they have thrown caution to the wind.
The prevalent belief that rising debt is manageable, because servicing costs are low, will ultimately prove toxic '

Technology. Solina Chau Zoom’s success shines light on star investor HK billionaire Li Ka-shing’s companion is the unsung hero behind many blockbuster deals. I covered this in yesterday’s piece see the website for details.

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