July 21 FT Ant lists, PBOC better options, Line test, Australia/China, Can negative rates save us
Markets as at 2pm
JAPAN Market opened higher as the Inflation was in-line. Market then traded sideways through the day Nikkei +0.8%
S KOREA Markets opened higher, PPI was better than expected Kospi worked slight better to +1.3% and Kosdaq worked better but then eased back slightly late in the session +0.9%
TAIWAN Opened higher and worked higher +1.8%
CHINA Opened flat but spiked higher the trended slightly higher in very choppy trading day high was around 10:30am (4,714), then sold down lot the low of 4,661 before a small bounce into lunch. PM initial selling back to the morning low and then bounced but effectively trading sideways. Currently -0.2%
HONG KONG HSI Pre Market +369pts @ 25,427vs +105 pts ADRs @ 25,162. T/O was HK$7.38b With E commerce names in focus on the new Hans Seng Tech index and the IPO news which saw HKEX +5.7%. Market continued to work higher in choppy trading. PM saw initial selling but then rebounded currently +1.9%
EUROPE Expect market to open higher as EU leaders reach a ‘deal' over the EU Recovery Fund. Obviously not going please everyone but +VE
US Futures opened flat (-30pts) then rose to slightly +VE and trending higher on news of an EU recovery fund deal.
Alibaba’s Ant payments group set for one of Asia’s biggest flotations Dual listing in Shanghai and Hong Kong • Company’s implied value exceeds $200bn.
It’s going to be a big deal and no doubt has the full support of Beijing who will use the listing to try and encourage other major companies away from the US. I think the timing has been carefully selected.
The article notes that at this stage the exact timing hasn’t been finalised and the neither has the valuation but the recent transactions in the secondary market seem to indicate a value in excess of US$200bn. That would put it on a par with PayPal which is currently valued around US$204bn.
The recent name change was to stress that Ant Group is a tech company not a financial company. But the evidence would suggest that it is very much linked to the Chinese financial system, with over 600m users depositing funds into its Yu’E Bad money market fund, its provision of financial services like Wealth Management (have just tied up with Vanguard Funds a few months ago, and having on-line lending and insurance facilities.
The article notes that Ant, formally known as Alipay was transferred out of Alibaba in 2011 which triggered a dispute with Yahoo and Softbank two of Alibaba’s largest shareholders at the time by Mr Ma; who said at the time it was to comply with Chinese regulations.
The IPO will no doubt be closely watched. The opportunity to invest in the growing Chinese digital retail opportunity is likely to be highly sought after. On other exchanges there might have been questions over the handling of personal data by Ant and the government but that will not be an issue here. It might raise some ethical questions for some funds but the reality is there will be plenty of investors who will not be concerned over that.
China’s central bank has better stimulus options than US Fed. Compares the two and says that whilst the Fed is portrayed as 'as sophisticated and proactive, while the latter is portrayed as reactive and bureaucratic.’ Ed Cole of Man GlG says though these preconceptions are wrong.
He notes that the Fed has used its balance sheet to support the markets which have subsequently rallied. The PBOC however has resisted traditional QE.
Instead it is using more traditional methods, he says by 'not using unconventional policy’ that the PBOC is avoiding 'the moral hazard that come with it’.
He looks at the historical background of what happened in 2014/15 and the expansion of credit in 2016 and then subsequently withdrawing the credit from 2018 by clamping down on the shadow banking sector.
He notes that 'Before the onset of Covid-19, I was starting to get more optimistic about a cyclical recovery globally and one component was the diminishing drag from a shadow banking crackdown in China.’
But since covid the PBOC’s policy has been to use the policies that have served it well in the past and free up credit. He also points to the fact that '“total social financing”, a broad measure of liquidity and credit in the economy, has expanded again.’ He notes non-bank financing is growing, which should give a boost to the economy.
He accepts that some critics say the PBOC is pushing on a string. Also the three months ago many were saying the Fed was out of options.
He now thinks the PBOC has more options than the US especially if it does more than just use the credit channels. He accepts that use of shadow banking does little to resolve the structure of the economy but as far as getting the country over covid and minimising economic impairment that doesn’t matter.
An interesting read. But I’m not sure whether the PBOC isn’t using credit because it lacks the real balance sheet options of the Fed. Equally the fact that the regional banks are under threat and rumour of collapse I think suggests that there are more fundamental reasons for the PBOC having to use credit. But worth a read.
UK suspends extradition treaty with HK as Beijing ties strained. As expected and also extends an embargo on lethal weapons and equipment that was in place against China to include Hong Kong. He linked the move China’s actions over Hong Kong saying 'the measures were a “reasonable and proportionate response” to China’s “failure” to live up to international obligations in respect to Hong Kong.’
The article also notes that PM Johnson has said he will get tough with Beijing but wanted to remain engaged with China. He also said: “China is a giant factor of geopolitics, it’s going to be a giant factor in our lives and in the lives of our children and grandchildren. You have got to have a calibrated response and we are going to be tough on some things but also going to continue to engage.”
As has been said before the UK, US and others should present a united front to the Chinese in order to be effective.
Australian mining and energy sales to China rise despite row. Underlines how China for all its power is still reliant other other countries for some resources. The current row has seen China impose sanctions on some Australian farm goods and there are fears in some quarters that China will target the resources sector too. In Australia’s favour on resources is the fact that other iron ore suppliers are currently facing problems due to covid-19. But as everyone knows dealing with bully’s is never easy, often costly and not always successful.
Investor anger at Line puts Japan’s merger protections to the test. Looks at the deal by Japanese WhatsApp rival Line, which is facing a potential revolt over the plan to create a $30bn technology group with Soft-Bank-backed Z Holdings. Key is that minority shareholders are unhappy with the low priced tender offer which has been delayed by covid-19. The deal was agreed last November and looks to test 'Japan’s “fair mergers and acquisitions guidelines”, aimed at strengthening protection for minority shareholders. If mishandled, they add, the issue risks curtailing progress on governance that was made before the pandemic.’ It may also put Softbank in a poor light have said it would improve oversight of its subsidiaries after WeWork.
Key is that the offer is too low, especially in the light of the recent internet rally
There are also concerns over the special committee set up to review the deal who are no longer independent, two having been subsequently appointed to the board of Z holdings.
Also whilst the minorities have been locked in at a low price the other parties have negotiated better terms.
How this is resolved is key to how doing business in also viewed. PM Abe in his early years stressed about the three arrows, now few can remember because so little seems to have really changed.
Battle is joined for SE Asia’s online shoppers. China heavyweights place large bets on Lazada, Shopee and Tokopedia. Another article looking at the competition between the firms and their different business models in Indonesia. Lazada is now owned by Alibaba having had a number of previous owners and largely relies on its own logistics and warehouses where as the other two are ‘market places’. Competition is set to increase as Amazon opens in Singapore and expands into the region. It will be interesting to see of Alibaba tech can make the difference one comment was that the Lazada model was too top heavy and sophisticated and that due to its multiple previous owners is seen as a foreign company. I guess time will tell.
Brussels pressed over leak inquiry into alleged self-censoring. Looks at an EU inquiry into the leaking of documents to the press, which then lead to pressure from Beijing to change the wording or face retaliation from China. People are now concerned that the inquiry should not be over just how the documents came to be leaked but also whether the report was toned down because of Beijing being alerted about what was to be said in the report.
Both seem to be worthy of answers and if the governing body wants to be be respected clear answers to both questions are needed. It notes that the person it interviewed left the EU diplomatic service because they were disillusioned by the EU’s response to Chinese pressure. Which raises the question of who is in control? Is it the leaders of the EU or the bureaucrats that operate it? A question to which we will probably never know the answer. But it does show the stark difference; in China everyone knows the answer to that question.
Negative interest rates cannot save indebted economies. By Jacques de Larosière a former IMF managing director, was governor of the Bank of France1987-93
A good read. A key point being that the proposal fails to appreciate the essential question; the value of money; which is based on trust. Trust that the token will be carry worth.
Also that negative rates have many other negative traits too which he outlines.
The final three paragraphs sum it up
'Everyone knows how excessive debt can lead to crisis. We have paid the price of this causality for decades. And yet negative interest rates open the credit floodgates to both governments and the private sector. They are a source of financial instability and help to create asset bubbles.
A more reasoned policy response to over-indebtedness is clear. Undertake, where necessary, debt restructurings with a co-operative spirit and a sense of market priorities. Scrutinise public budgets and prioritise certain future expenditures, such as education, health and research.
Last, undertake the structural reforms that have been postponed for too long but are the only measures that can deliver a sound, sustainable and better future.'
The last one being key every since QE was first introduced there have been calls for it to be unwound. But it has never happened. The ‘can being kicked downtime road’ a future generations' problem. Maybe it isn’t, maybe the reality is that we have to address the issues and take the pain now that everyone has been so keen to dodge? To do the restructuring, to endure the markets tantrums and to come out the other side offering the future generations a better opportunity rather than having to pay for their parents mistakes.
LEX Cadbury: honey, I shrunk the chocolate bars. Looks at the reality of shrinking chocolate bars and many other things too; shrinkflation. Worth a read nice fishing quote on the subject 'On the plus side, a chocolate pick-me-up can be burnt off with a 25-minute run.'