July 8 FT Visa's, Meat, Training, HKEX, TikTok. My view of Team China

10 Jul

July 8   FT Visa's, Meat, Training, HKEX, TikTok. My view of Team China

Opened lower although pre market data was mixed trended higher to flat but then sold down in the pm session
S KOREA Kospi opened higher but dipped into the red and traded sideways before the flat level for most the session. Kosdaq opened higher, has found support at yesterday’s closing level but no trending higher.
TAIWAN Opened higher and trending higher.
CHINA Opened higher and a small rally but then sold down into the red but trending higher after lunch although support seems tone waning.
HONG KONG Opened higher despite -VE ADR’s and then sold down into the red. Rallied back into the green. After lunch more selling but support at yesterday’s closing level. Lighter volume
EUROPE I would expect markets to opened with concerns over covid-19 and a lack of Marco data to influence the markets.
US Futures opened flat

The trouble with Team China and even the calls from the Chinese government, for a managed bull market is that it distorts market operations and usually ends up with inexperienced retail investors getting hurt; usually the ones that can least afford it.
The key point of free markets is that capital gets allocated to the best companies. Calls to buy the market don’t necessarily do that. Selective buying by Team China focused on certain names with the aim of raising the market are even more dangerous. They usually buy key index stocks, which puts unreasonable pressure on short sellers, but usually drives the index higher, that sucks in retail momentum players and Team China is happy to sell its recently acquired names back to the new buyers. Minimum risk, usually a small profit and the government is able to put a positive spin on the news.
But when Team China doesn’t turn up to play or there is so much negative news or sentiment then Team China becomes the market put; except that they only focus on the main index stocks; those that were riding on the coat tails and buying cheaper secondary or penny stocks find there are no buyers and incur large losses. Worse still if they are trading on margin or using derivatives. That can cause real harm to the economy. Previously, after President Xi encouraged people to buy stocks, the market crashed due to market forces. Despite that the government tried to save the market by pumping money in. That failed people lost money and complained (as much as they were allowed) and the government blamed the ever present fall guy ‘hostile foreign forces’. The truth is that neither free economies or command ones can fully control global markets. Patriotic buying of markets or products can have short term positive impacts but they rely on people being able to afford to carry out such practices and in the case of stock markets that means able to bear the losses. Many Chinese investors are desperate for income, especially as covid-19 has put jobs under pressure.
Markets, when they are rising always seem like an easy way to make money, brokers are keen to lend margin; to help investors make money so what could go wrong? Rarely do those investors ask themselves if this is such a good deal, then why isn’t the broker investing the money; if its such as easy way to make money?
The truth is that is isn’t easy, the risks are high and it's more profitable to lend to others and let them take the risk. Carpe diem…. But maybe remember Semper inops quicumque cupit ?

On line edition has
US imposes visa restrictions on Chinese officials over Tibet

Move follows similar efforts by Trump administration over Xinjiang and HK policies. Although it has not listed the officials that it has targeted.

China scales back meat imports over virus concerns
Restrictions against processing plants in US, Europe, Brazil, and Canada to push up food prices. Interestingly the article says 'WHO and various governments insist there is no evidence of coronavirus transmission via food or food packaging, but Chinese customs officials from several cities said there was a “good chance” that the virus could stay alive in a frozen container.’
One wonders if their ‘good chance’ is based on some knowledge they have about the source of the covid-19 virus?
For investors it means that pork prices and other meat prices in China are rising and of course frozen salmon is off the menu too. So adding to inflationary pressures in China which is a negative.
Also importers costs are rising and with a lack of storage space that means keeping containers on ships for longer; which is a slight +VE for the shippers.

Security law jeopardises HK democrats’ hopes of election victory
Activists fear Beijing will use national security legislation to ban anti-government candidates from September poll.
I would think the risk is that they use the new legislation to harass any anti government candidates. Before last Tuesday it looked very likely the pro democracy candidates would have good chance of winning the Legco elections and could have secured a majority and with that the chance to force Carrie Lam out as Chief Executve. Many think that Being would not allow that and hence the rush for the new legislation.
Whilst local elections are unlikely to chance anything it could provide a clear view of what Hong Kong feel. I say could because many worry about the freedom of the vote and whether there will be any tampering of the results. (It is said that China doesn’t mind elections, as long as it knows the result before the first vote is cast.)
The article says that the only powers capable of checking Beijing’s actions in Hong Kong were the US and its allies. To be honest Beijing is not going to reverse its course of action. The only action that would prompt that in my view is fro Trump to bar US pension and investment funds from investing in Chinese stocks, an action which at present I think unlikely but possible.
Also worth noting that is clamping down on TikTok, Facebook etc in Hong Kong I think that Beijing has under estimated the feeling of the youth in Hong Kong and their ability to organise in retaliation.

FT print
Cut wage subsidies to shift workers from shrinking sectors, says OECD.
It makes sense but no politician who is seeking re-election is likely to want to be associated with such a policy. Interestingly The White House recently called for benefits programme not to be renewed because in its view they were encouraging people not to work. That did not glowing general support. But the reality it that some of the benefit programmes are creating ‘zombie’ jobs and there have been a number of recent articles in the FT on this. A better solution would seem to be re-skilling programmes; especially for those in low skilled jobs that were amongst the first to be cut.

Merkel accused of going soft on China over Hong Kong law Political hawks urge chancellor to condemn security legislation in territory.
She is under pressure from both within the government and opposition. The article mentions comments from Norbert Röttgen, head of the Bundestag’s foreign affairs committee and a leading figure in Ms Merkel’s Christian Democratic Union. Who commenting on the new travel warning that Germany released on travelling to Hong Kong just wasn’t enough; in fact he said it encouraged self censorship. The article also mentions how she is also under pressure for failing to rise Chinese human rights abuses in Xinjiang almost other things.
It reflects how even now most western governments whilst wanting to condemn China’s actions over Hong Kong don’t want to risk retaliation from China. They still hope for access to Chinese markets for trade. I think that they should be presenting a more united front and realise that China’s access to global markets for its goods is equally important to China as western access to Chinese markets. In the past China has benefited from the West tolerance as its slowness to open its home markets whilst accessing those the west.
That is changing, an article in the SCMP today points out that with western markets locked down China is hoping that its domestic market can take up some of the slack. Personally I doubt it, I think consumers in China are a lot more cautious than those in the West. But the key point is that; if you want a level playing field now is the time to negotiate for it. The west’s markets are very important to China in order to keep its export economy thriving. That is a big leverage, especially now.
I also think that the Western leaders should make clear to China that they are not seeking independence for Hong Kong from China. I still do not think most Hong Kong people want that. I think they want the basic law as it was prior to 11pm on June 30. The five demands were
1 The withdrawal of the extradition bill; which has happened.
2 An investigation into alleged police brutality and misconduct.
3 A retraction of the official characterisation of the protests as ‘riots’. I think that is now obvious to all after the recent event in the US.
4 The resignation of Carrie Lam
5 The introduction of universal suffrage.
Some would say the release of all protestors was a demand but I think that anyone who broke the law needs to be accountable.

Hong Kong’s bourse reaps benefits of China blue-chip ‘homecomings’. Exchange emerges from US tension as a winner but Beijing’s encroachment sparks concerns. New secondary listings from companies currently listed in the US but worried about the potential fall out from the stand-off between the US and China plus winning the MSCI franchise from Singapore have been a boom for the exchange. But it’s not a guaranteed winner. The article notes that Trump could still target Chinese companies listed in HK as he did when he ‘encouraged’ the Federal Retirement Thrift Investment Board, not to invest in Chinese groups. I think he could go a lot further I’ve been saying that there is no point in forcing them to delist in the US to ‘protect US investors’ and then allow investors to buy them in Hong Kong. Weaponising pension money is just the next step in weaponising the USD.
On the positive side the new listings move the HSI towards being a more new economy index, rather than being focused on Financials and Property.
The key for HK EX success will be the ability to keep western investors and the Chinese government’s interests alined and that will be no easy task. Stock is trading at a five year high; it's up 64% since the March low. It is going to be tough justifying the valuation.

TikTok to quit Hong Kong over national security law. Reconsidering its presence in HK along with a number of other social media names like Microsoft and Zoom.
For TikTok it would, I imagine, already have been under pressure from the number of video’s that had been put up about the Hong Kong protests. TikTok would also be aware of the importance of its US business having just lost India. Although the US looks tone under pressure anyway; following comments from Sec of State Pompeo.
Two things that stand out, first being that a key freedom in Hong Kong is likely to be lost. The second is the likely back lash against China from the youth element of Hong Kong. TikTok said it only had 150,000 users in the city. I think that is probably an under estimation but the general use of social media by the under 30 year olds is significant and they will be the key voters in the forthcoming Hong Kong elections. Upsetting them could be a major mistake. But I guess when you aren’t used to free elections its not something one would consider.

Also read LEX TikTok/Hong Kong: worlds apart. In summary a nightmare for Mr Mayer who has only recently taken up the post. But with revenues in China saturated and having lost India last week he must have reasoned that pulling TikTok from Hong Kong buys ByteDance time.
Lex notes that 'in the US-China commercial war, no group active across the two countries can expect to keep both happy for long.
Expect polarisation to deepen. Other global techs will quit Hong Kong, once seen as a financial hub.
For Hong Kongers, the new law signals that their home lies irrefutably within Chinese borders. That applies in technology, as in everything else.'

China’s support for dollar can no longer be relied on by Michael Howell chief executive of CrossBorder Capital and author of new book Capital Wars: The Rise of Global Liquidity.
Notes how 'Foreigners sold more than $500bn of US government bonds in the second quarter and perhaps one-third of that was unloaded by Chinese entities.’ Historically since 2001 when China entered the WTO it’s been 'behind-the-scenes role in pushing up the value of the US currency and suppressing US bond yields.’. In 20 yrs China’s share of the global liquidity tool (total saving + credit) rose from 6% to 25%. China invoices in USD, invests in USD and at times boosts fiscal and monetary policy for its economy. He says that 'Flows from China were most obvious in 2015-16 when an anti-corruption drive from President Xi Jinping — forcing capital out of the country — resulted in a spike in the dollar and a collapse in Treasury yields.’ So the influent of China is big but he says fragile. The key though for China is to decouple from the USA and invoice, invest etc in its own currency and currently that’s a problem. BUT it could change, it could switch part of it holdings into Euro’s, although I think relative to the USD market the Euro market is limited. However, even a small change in policy towards the Euro could have an impact on the USD and make it weaker.
Ironically in my view, that would probably actually help the US in the current environment, helping its exporters by making them more competitive relative to China’s.

US voters more pessimistic on rapid rebound. Looks at the results from a poll carried out by the FT & Peterson Foundation. Now 49% of those polled (likely voters) think covid-19 could get worse that compares with 35% a month ago. Now only 24% think it's going to get better.
On the economy 37% think the US economy will fully recover within a year down from 42% last month. Those that expect a recovery in a year or more rose to 63% from 58%.
It also shows the differences are regional with those in the North East being more optimistic than those in the south. An interesting read not least because it, I think, shows a marked difference between how the general public are viewing the situation relative to those that are making investment decisions. It suggest that those on Wall Street are detached from the reality of those on Main Street. Or maybe that the macro data they are relying on to make their investment decisions is not reflecting the realities of the ground level economy.

Airwallex is winning backers in its mission to shake up payments. An interesting read about a company that is looking to set up a foreign exchange system which could rival SWIFT. That would be of great interest to China and Russia because whilst SWIFT is not government owned and seeks to be neutral it has come under pressure from the US to hand over information about transactions that might be violating US laws. Worth watching.

Moore Capital founder backs top manager’s solo fund effort. Looks at how Louis Bacon is investing in one its managers who is leaving to go it alone. Key is that he is looking to tap the gains that hedge funds make in their early years before they get to big and lose the agility of being small. His intention is to allow a number of his traders launch funds that could in time be spun out. Whilst in most things scalability is key I think that for hedge funds to be truly effective size is a problem. Once they get big the problem is finding companies big enough to be able to take meaningful positions in.

For Interest
The world falls apart as the US withdraws.
An American administration that has dismantled its own government makes a stark contrast with China. Well worth a read. by Martin Wolf
He outline the failures in both systems and outlines that the reality is that there needs to be change and compromise on both sides. Unfortunately whilst the US may change at the next election there is no such mechanism within China. Therefore the hope is that if the US gets a new administration that the new team can repair what needs to be repaired and build on some of the good things that Trump has done. That the US can then as part of a united front effect a change for good for both the east and west.
It best summed up in the final paragraph
'On the one side, then, we have a rising despotic superpower, but one with real frailties. On the other, we have an incumbent superpower that has lost its way. I want western core values to succeed and flourish. I want China to prosper, but not at the cost of corroding societies that uphold those values. I want humanity to manage its relations peacefully and its fragile world wisely. If this is to happen, the US remains the indispensable power. The problem is not so much Mr Trump as that so many Americans want him to lead them. The western crisis is a crisis of values. We can overcome it. But it will be hard.'

FT BIG READ. THE NEW SOCIAL CONTRACT ‘It’s a matter of fairness’
FT series As much as $650bn is lost every year from tax avoidance. With the coronavirus crisis adding to their fiscal burden, governments are intent on squeezing more contributions from multinationals.

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