July 14 FT South China Sea, UK Huawei, HK Security Law, Softbank, Japan Developers, India and more

16 Jul

July 14 FT  South China Sea, UK Huawei, HK Security Law, Softbank, Japan Developers, India and more

Markets opened lower following the US sell off on rising covid-19 cases and the potential for the re-introdcution of lockdowns.  As at 1:15pm HK Time:
JAPAN Opened lower and trended lower, Industrial production data out around lunchtime was broadly in line with forecasts  Currently -1%
S KOREA Opened slightly lower; Kposdaw did make it back to flat but then sold down again, Kospi has traded sideways for the lower open. Currently Kospi -0.7% and Kosdaq -0.4%
TAIWAN Opened lower and traded sideways currently -0.2%
CHINA Opened lower tried to rally initial but sold down heavily ahead of the trade data which showed Export and Imports beat forecasts but the surplus narrowed more than expected (although it widened MoM with the US) Market bounced before easing back into lunch Currently CSI 300 -1.1%. Still think Team China at play
HONG KONG Opened lower but initially squeezed higher before selling down ahead of the China trade data. Small bounce follow the data but then sold down into lunch currently -1.3%  
EUROPE Expect markets to open lower following Asia on covid-19 concerns.
US Futures opened Dow +70pts, S&P +0.25%, NDX +0.34% initially crept slightly higher but now have eased back to Dow +50pts, S&P +0.15% and NDX +0.4%.

US hardens stance against China’s claims in South China Sea. Ratcheting up the rhetoric. Sec State Pompeo said that China has offered no coherent legal basis for its ambitions in the South China Sea and for years has been using intimidation against other South Asian coastal states. “We are making clear: Beijing’s claims to offshore resources across most of the South China Sea are completely unlawful, as is its campaign of bullying to control them,” He said the US was aligning itself with a landmark 2016 tribunal ruling which rebuked China over its claims to waters inside the so-called “nine-dash line” that encompasses roughly 85% of the South China Sea.
Previously the US had welcomed the ruling from 2016 but not legally endorsed out to make it harder for China to accuse the US of interfering but not it has it will enable it to apply more pressure on China with regard to Chinese actions in the South China Sea.
The US also brushed off Chinese sanctions against US Senators and others saying it would continue to hold Communistic party officials responsible for the abuses in Xinjiang.
Most investors remain cautious until we see Trump’s formal response to China’s imposition of a new security law on Hong Kong. There have been a number of rumours but until we the actual response it is difficult to take a position. It’s reported that the White House will hold further discussion on possible actions later this week; another overhang on the markets.

Up to 200,000 Hong Kongers forecast to move to UK after Beijing crackdown. That is what the UK Foreign office estimates for the next five years, that’s about 2.7% of Hong Kong’s current population. The UK has also said that up to 3m Hong Kong citizens could become UK citizens that is nearly 40% of Hong Kong’s 2020 population. The article points out that the UK has a poor track record when it comes to making predictions its still a large number but one that has created little controversy in the UK with many welcoming the idea. It quotes Also Mak MP of Chinese descent “It would be a very big boost to the British economy if they did. Hong Kongers are very industrious and entrepreneurial.”
China has said the offer amounts to ‘gross interference’ although I think as a signatory to the hand over agreement I think the UK is vlid in taking some action. The article also notes notes that Australia will offer 10,000 Hong Kong passport holders permanent residence.
It is also worth noting that local migration offices in Hong Kong have noted an increase in inquiries.
Many others probably already have alternative arrangements in place. The worry for Hong Kong is that it will be those with good qualifications that are likely to be amongst the first to leave; a ‘brain drain’. That could accelerate Hong Kong’s demise.

UK urges security allies to help replace Huawei Ministers consider curb to Chinese group’s role in supplying equipment. Now it has become a political matter its no longer just about whether the equipment is a threat to security. But it is fraught with problems because there are no easy and similarly priced alternatives. It really reflects how good Huawei/China was on dominating the market. Just as China is behind in the chip sector so the world is on basic 5G equipment. China must be frustrated though by the fact without the chips its dominance in the 5G arena could be undermined. The article makes clear that there are still a number of political hurdles to be overcome before the ‘Five Eyes’ develops into the ‘D10’ (G7 plus India, South Korea, and Japan) but it is moving that way.
The UK it points out is looking to help strengthen Nokia and Ericsson and bring new vendors to the party and its looking to invest in open source tech like ‘OpenRAN’ to allow Telcos to buy of the shelf hardware rather than more expensive tailor built systems. As the article points out something that should have been done years ago. But there are still questions over whether it will actually work. If it does it would be a radical step forward; an industrial policy alliance and one that would have a lot of influence. It notes that the US is trying to implement what the UK is proposing in its ‘Blue Dot Network’ a 'joint public-private sector initiative with Australia and Japan to certify infrastructure networks around the world for transparency, sustainability and development impact, widely regarded as a rival to China’s Belt and Road Initiative.’
Another example of a two track world developing.
Lex Huawei/telecoms: security hang up. Notes that the winners are likely to be Ericsson and Nokia.
See also The Big Read China-UK Tensions

China imposes sanctions on US lawmakers over Xinjiang dispute. Retaliation for human rights action on Chinese officials with Senators Rubio and Cruz and others included in restrictions. China gave no details about what the restrictions were but I doubt it is going to impact them very much. Equally the US restrictions should not impact Chinese officials very much as they should not have overseas interests in property or large sums of money. Although the US sanctions could have an impact on the banks they bank with in China, if those banks interact with the US banking system. As many have already noted the new two track world order is developing. The article notes how on Friday the US government brought in a requirement that companies doing business with US departments have to prove they have no ties with Chinese companies the government has blacklisted (can one still use that phrase?) like Huawei and Hikvision.
In reality it is difficult see how many of the Chinese companies are ever going to be allowed to grow into truly global brands if they are excluded from the US market under this current thinking.

Hong Kong security law spooks US businesses. Beijing legislation forces some companies to rethink their operations. Looks at the Hong Kong American Chamber of Commerce survey conducted in July where 76% of the 183 businesses surveyed said they were concerned about the legislation. Almost a third said they are considering moving part of their business out of Hong Kong. Many said they could live with the law if it was aimed solely at activists. The largest number of responses evidently came from financial services and tech companies who were directly affected by clauses in the new law.
55 companies said they were thinking of downscaling Hong Kong operations but not leaving the city. Only 7 companies said they were planning to leave in the short term but 88 said they were thinking of leaving in the medium to long term. Key is, just as with the offer of UK citizenship, it suggests that Hong Kong will be losing talented people. With
Other interesting stats from the survey:
60% concerned about how the law could undermine the judicial system,
40% worried about the effect on data security
51% feel it will jeopardise the city’s status as a financial centre.
It also says business people were hopeful it would quell protests but only one said they were threatening business opportunities.
I don’t think the peaceful protests were impacting business significantly but they were highlighting the failings of the administration in Hong Kong. Unfortunately I don’t think the new law can do much too improve the quality of people we have running Hong Kong.
Everybody will be watching the September Legco elections very carefully.

SoftBank sets sights on deals after shares soar. Japanese tech conglomerate rebounds from troubles with plan to profit from ‘incredible investment opportunities’. The stock is up by 143% since Mid March says the article, now at a 20 year high and its looking to get back into the deal game; although it says it will be more cautious. I’m sure a few investors doubt that it could be less cautious that it was before. It is in this position because of the radical actions that it has taken over the past couple of months like Sprint/T Mobile deal getting done, selling Alibaba stock along with other actions. Some think that the stock is under valued and that investors have yet to price in debt reduction and buybacks; so there could be more upside ahead.
It also mentions about changes at Arm Holding and restructuring taking place there, with its ‘Internet of Things’ focus being transferred too a new entity. The COO didn’t mention the standoff between Arm and Arm China.
The COO did acknowledge there had been mistakes including the Wirecard investment and WeWork; although he noted that was being turned around. The article quotes the COO saying '“I think the beauty of SoftBank and this management team is that we can learn from our lessons. We are going to be better the next time we do it,” Mr Claure said. “Sometimes things work out the way you want it to work out and sometimes these things don’t work out. One big issue is to learn from those mistakes and be sure we never make them again.” I guess that only time will tell on that last one.

Japan vows to cut funding of coal power in developing world. A radical change in strategy. Historically is has provided low interest loans via the Japan Bank for International Cooperation, to support bids from Mitsubishi Heavy, Hitachi and Toshiba for contracts. That now changes to only supporting 'the most efficient ultra-supercritical generators, which are power plants that operate at temperatures and pressures above the critical point of water, and only when the buying country has a decarbonisation strategy. Combined with the falling cost of renewable power sources such as solar, and the reluctance of banks to finance coal, that will make it difficult to get projects off the ground.’ Many had hoped for a complete ban but acknowledge it's a step forward.

LEX Japan developers: spaced out. As Japanese companies adopt plans for remitting working for staff -VE Mitsu Fudosan, Sumitomo Realty, Tokyu Fudosan and Ichigo whose share prices have already dropped significantly. Notes that commuting is also a part of the anti-office cult in Tokyo. Personally I think its too early to write off ‘offices’ as most I believe prefer working in offices rather than at home; in spite of the Japanese tradition of 'physical office presenteeism’. I would hope that Japanese office culture would change and make it better for everyone.

Google targets India growth with $10bn spending plan. India is the worlds second largest mobile market and with China effectively closed, one that the big tech firms are seeking to have a presence. Stocking points have been that India like China wants that 'government surveillance’ to take precedence over the kind of encryption that is becoming standard in US internet services’ So it will be interesting to see how that works out. But with firms like Google, Amazon and Facebook prepared to invest then the outlook is encouraging. The key will be ensuring that local firms are able to compete on a level playing field and not get squeezed out.

Investors braced for earnings season without precedent. S&P 500 stocks will show 45% plunge in profits after challenges of pandemic. The key is going to be how companies treat the unknown; how long the covid-19 pandemic is going to be with us and hence how deeply it will impact the core business and remember for some that will be bad (airlines etc) and some good (tech). So it will be interesting to see how many take provisions and how big and with what reasoning. For those benefiting it will be interesting to see how long they expect the good time to roll; you really only upgrade your home office once in a blue moon so will there be repeat business or was this a one off?
Additionally its made harder for analysts as most companies withdrew guidance last quarter leaving analysts to make their own decisions (another new for a number of them I would guess).
Debt levels, revenues and additional costs are going to be closely watched.
Bank report later today and they are also expected to give some indication of how the wider economy is shaping up but as we have seen from the resurgence in covid-19 cases there are few reliable trends at the moment.
A good article worth a read.

Remember the Fed’s sway when betting on Quicken Loans IPO. I have written about Quicken Loans IPO before and suggested caution. Here Robert Armstrong is doing the same; explaining why it looks great at the moment but highlighting that down the line things may not so good and not just for Quicken Loans but the sector. Worth a read.

US liquidators give stores low-price shock Key is that the liquidators are offering very low prices because the are aware of the risks of further lock downs that could see them being caught if further lockdowns are imposed. It also means that the manufacturers many of them in Asia will be facing a very tough time for months to come and possibly longer as the retail sector re-orgainises in the aftermath of covid-19.

The Big Read CHINA-UK TENSIONS. From a ‘golden era’ to the deep freeze
Five years after Xi Jinping’s triumphal state visit to the UK, bilateral ties have deteriorated over Hong Kong and cyber security. The decision on Huawei’s role in the country’s 5G plans could mark a new low.
Looks at the past five years of UK China relations and what drove them and what has resulted. The theme seems to be that China has done much better over the period.
It notes that post EU then some think that China should be the market the UK wants access to, especially as the US is becoming more protectionist along with Chinese investment in the UK. Others note that China has not really opened its markets up and apart from cash it has little to offer the UK, in fact it increasingly uses its cash to acquire technology which useful to China. A long article but worth a read.
A number of good quotes
“There was a misapprehension and a lot of wishful thinking about what China really was,” '“Chinese businesses are unlikely to bring technological or managerial advances that can improve the productivity of British economic activity or that can change the orientation of British industry,”’
'“Beijing still needs western knowhow, and access to financial markets,”’
'While China has snapped up UK assets, investing almost $80bn since 2010, around two-thirds of these acquisitions have been in low-tech areas, such as property and logistics. Meanwhile, high profile ventures such as the Sino-British stock connect system, a mechanism that allows UK-based investors access to trade in large Chinese stocks, has fizzled. Only two companies have listed on it since it launched last year.’

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