July 16 FT China Data: Recovery? SMIC +245%, IRON or GOLD, HK ACTIVISTS and more ,

20 Jul

July 16 FT  China Data: Recovery?  SMIC +245%, IRON or GOLD, HK ACTIVISTS and more ,

MARKETs as at 12noon HK time
Opened lower effectively traded sideways for most of the morning but sold down into lunch. After lunch it opened lower with the Nikkei 225 currently -0.84% and the Topix index -0.6% having followed a similar pattern
S KOREA Opened slightly higher but initial sold down into the red before trading sideways then sold down late morning and now again trading sideways Kosdaq currently -0.8% and Kospi -0.6%. BoK left interest rate unchanged.
TAIWAN Opened lower initial trended higher into the green but again sold down late morning, currently -0.6%
CHINA Opened flat but initially rallied after the in-line House Price Index pre market and news that Trump would not impose more sanctions ‘for now’. House prices rose but the pace is still soft by Chinese standards; this was the softest since May 2018.Then the market sold down on the other economic data mainly on the drop in Retail Sales which suggests that domestic consumption remain weak and will not make up for the loss of export business. GDP growth was better than expected but discounted due to the global rise in covid cases since the data was collected. Market then traded sideways, in choppy trading for the hour, but then stepped lower followed by a small bounce into lunch. Currently -0.9%. T/O eases again suggesting less activity by Team China BUT SMIC +245% on its open in Shanghai
HONG KONG Opened flat but initial sold down. Bounce back, just into green ahead of the China data but then sold down with support around 25,200 level and traded sideways into lunch. Currently -0.9% with T/O easing again to HK$82bn; suggesting Team China less active.
EUROPE Expect markets to open lower; China data whilst mainly showing improvements there are causes for concern, not least the weakness in the Retail Data showing a lack of consumer confidence and the increases in Covid-19 cases since the data was gathered.
US Futures Opened +85pts but have eased on the China data

CHINA DATA released this morning
House Price Index Jun +4.9% YoY vs +4.9% May (F/cast was +5%)
GDP Growth Rate Q2 +3.2% YoY vs -6.8% prior (F/cast was +2.4%)
GDP Growth Rate Q2 +11.5% QoQ vs -9.8% prior (F/cast was +10.2%)
Industrial Production Jun +4.8% YoY vs +4.4% May (F/cast was +4.8%)
Retail Sales Jun -1.8% YoY vs -2.8% May (F/cast was +0.5%)
Unemployment Jun 5.7% vs 5.9% May (F/cast as 5.7%)
Industrial Capacity Utilisation Q2 74.4% vs 67.3% prior (F/cast was 75%)

China recovery prospects dimmed by post-Covid uncertainty. Return to growth expected in Q2 but questions remain about health of economy. Looks ahead to the economic data out today but the key is that fundamentally people in China do not feel financially secure. They, like me, think that hopes that domestic consumption will make up for export slowdowns will be disappointed. Most seem to expect a mixed bag of data although the data overall was slightly better except retail sales. It notes that infrastructure projects are being used again and that ’special purpose’ debt is again being raised BUT many worry that it will not be enough because of the lack of domestic confidence. Without confidence the Chinese in my experience tend to save more and spend frugally. That seems to the reflected in the slow Retail Sales data. The article notes the fact that this is a global crisis and one for which we have yet to have a vaccine to contain the impact of civid-19 which underlines how difficult it will be for China to navigate its way out. Especially as there are doubts about the containment of the virus within China. Add to that the deterioration in relations with US, UK, Europe, Australia and a number of Asian partners and the outlook does not good. The data this morning provides a snap shot and shows some improvement but with a resurgence of cases in the last few days the data in some ways irrelevant because of what has happened since it was collected.

Chinese chipmaker SMIC launches Shanghai’s biggest listing in a decade. The stock listed in Shanghai today and was quickly +245% The article points out how many investors see it as a safe bet because it is China’s best chip maker. As many Chinese companies are denied access to western chip makers because of US sanctions SMIC is set to benefit. Although there are questions being asked because it uses US technology it will be barred from supply Huawei officially. Huawei is currently SMIC’s biggest customer. No doubt the US will be watching closely to see if that happens. Additionally although it is seen as China’s leading chip maker as China seeks to develop that sector but it usually takes many years to build up that business and its competitors are not standing still and allowing it to catch up. China State Funds along with 'Singapore’s sovereign wealth fund and the Abu Dhabi Investment Authority are among institutions backing the listing ‘ according to the article.Unlike other bourses in China the Star board has no limits on how much stocks can rise or fall in the first 5 days. Even after that the limit are +/- 20%.Prior to the Shanghai listing the HK entity had not done well. Prior to the Shanghai listing it was listed in New York. The expectation is that more US listed Chinese companies will seek secondary listings in Hong Kong or China. Today’s move by SMIC is likely to give executives some encouragement.

Iron ore outshines gold for top spot among year’s leading basic resources. Up by 21% vs +19% for Gold. The main driver being demand from China, which links to the growth in infrastructure projects being undertaken to try and reboot the Chinese economy. It is interesting to note that despite China’s anger at Australia over the request for an investigation over the source of Covid, China has been reliant on Australian iron ore because of the impact on covid on Brazilian production. Obviously Iron ore prices could see some weakness as Brazilian production comes back on line but the total downside is likely to be limited as many countries look to undertake new infrastructure project to re-start their economy’s. At present the Australian names are holding up well.

Hong Kong activists unite photo op on the front page after the unofficial pre-democracy primaries last weekend. It’s estimated that over 600k Hong Kongers turned out despite the Administration and the Hong Kong and Macau Affairs Office (HKMAO)saying that the primaries might violate the new security laws. More worrying were the comments: describing them as an "illegal manipulation" of the upcoming Legco elections. Accusing law professor Benny Tai, of being an agent of foreign forces and one of those hurting Hong Kong. It has earlier accused him of trying to seize power in Hong Kong and launch a colour revolution.Most revealing thought was that it said any attempt by opposition lawmakers to seek to control of the legislature to oppose and paralyse the government would amount to subversion. Effectively saying the if the Pro Democrats will a majority in the Legco elections in September and try and pass policies that Beijing doesn’t like, then pro democrats become subversives and will no doubt be prosecuted under the new law. For me that is a concern. It reveals why there was such rush for the billet be passed Beijing expects that even through the electoral system is rigged in Beijing’s favour, it could still lose. It's reaction, is appears would be to annul the election results by prosecuting even freely elected Legco members, representing the people of Hong Kong.Equally worrying is that the new security law will be used to bar many of the candidates who are looking to stand in the local election. The prospect seems that there is the potential for more unrest ahead which may not be good for investors. No doubt the rest of the world will be watching carefully. Whether they can or are will to do anything is another matter. Said after Trump decided against further sanctions on China at the moment despite having just signed the HK Autonomy Bill and promoted a more aggressive stance against China in the South China Sea. Trump’s fickle nature make investing in Hong Kong and Chinese companies more risky.HK activist urges western sanctions on China

Democracy campaigner calls for measures to be taken against officials. An interview with Nathan Law, a leader of the Hong Kong pro democracy movement, who is calling for western countries to impose sanctions on Chinese officials over the suppression of free speech in Hong Kong due to the imposition of a new security law. He is calling for sanctions on 'Chinese government officials and police officers who commit human rights abuses’. Whilst addressing UK MP’s he said the new legislation could lead to “a lifelong sentence or [being] extradited back to China, or being secretly kidnapped and tortured”.He said the for him ‘ “...it’s important that we get China to understand that the whole world is awakened towards its authoritarian expansion.”’ The reality is that China has acted and will not back down over its actions in Hong Kong over which it does have control. Even if the rest of the world were to present a united case that showed China’s actions are contrary to the Handover Agreement it signed; I still doubt it would change. If Trump decides to weaponise US Pension and Investment monies and not allow them to invest in Chinese companies that would probably see China reconsider.BUT the next big question then is, what is the world going to do about Taiwan. If it does nothing and ‘hopes’ that China will not act then I think it is deluding itself. The world has been vocal but that is really the extent of the action. China is likely thinking that it could weather that vocal criticism and take Taiwan, it saw how Russia acted over Crimea. The easiest way to prevent a similar outcome, is for the world to acknowledge Taiwan is its own country. Many countries are vocal in admitting that but don’t formally recognise it for fear of upsetting China. As Hong Kong shows China has scant regard for ‘vocals'; be they from its own people, which Hong Kongers are, or the international community. Read also Opinion The lack of debate about China is eerie looks at how hating China in the US is the consensus but the lack of debate means that policy is not being refined, tested or focused.

US big tech groups resist data sharing in territory. Google, Amazon Web Services and Microsoft decline to provide the SFC with clients financial data on their cloud platforms.Whilst the SFC regulations are separate from the new security law it would appear that the companies are putting their. Privacy obligations to clients first. Not doubt there will be further developments ahead.

Opec and Russia ready to unwind oil supply cuts The article looks at how difficult it is going to be for producers to managed that unwind in the light of a resurgence of covid-19 cases; especially in the US.

Goldman bond trading boom brings bumper second quarter. Looks at the good results but as LEX Goldman Sachs: glory days points out that was the last quarter and the next quarter could be more difficult. This quarter was driven by a near doubling of fixed income trading and equities trading to the best levels seen in a decade. But there are risks ahead; it still has the ongoing 1MDB case and took a reserve of US$900m towards Q2 litigation, it also increased its loan loss provisions The fact that its shares were only up 2% on the results seem to indicate that investors are aware that 'future outsize trading revenue is likely to be more ephemeral than constraints placed on Goldman by regulators.'

Also read ECB’s pledge to encourage bank mergers is falling on deaf ears. Whilst the theory of mergers is good the reality on the ground in Europe is not.

Lansdowne picks a questionable time to quit short game. Looks at the decision to close its short selling flagship just a many in the market are saying that good opportunities are bringing to present themselves as Central government stimulus has lifted asset values. I think the key for Lansdowne is that to be able to operate as a short hedge fund you can’t by huge because, for the most part there are many huge bag companies out there. Being small and nimble is the name of the game. Worth a read

Opinion Expect a bank-shaped recovery In this case the shape of the pitman shorthand symbol for bank. And how this time it is not the banks that are key recovery but the Central Bank; the Federal Reserve. The key being that the Fed has reacted quickly and in size. The question now being that with the resurgence of cases in the US and the prospects of a big political fight over the forthcoming election does the Fed have the scope to continue that policy; even the Fed has limits. As the article says 'the Fed cannot plug the ever-widening holes in the balance sheets of insolvent companies, replace lost consumer demand or reverse all job cuts. Even fiscal support can probably only delay, not remove, the pain.’ It illustrates that with the airlines that took fiscal support but have still had to furlough workers or encourage early retirement. Also the fact that the banks have decided to take such large provisions; fearing one assumes an increase in corporate and consumer bankruptcies.
The bottom line it says is 'central bank action can spark a V-shape rally in equity prices; but on its own, it cannot create sustainable growth after that. Therein lies the reason why the current economic rebound could run out of steam — and why that symbol for “bank” is both a portent for the future and an illustration of the plight US president Donald Trump faces as he tries to revive the economy.'

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