July10 FT CHINA increased global pressure, Sanctions impact on Banks
Before looking at the paper today I am surprised that there is little mention in the press about of Trump stopping Federal pension money again.
China must appreciate the turmoil that the US could cause by restricting non government US funds investing in Chinese companies. ZTE on steroids!
It may be for that reason that the Chinese press today announced that some major state pension funds were selling and it published a list of firms that are not allowed to offer margin finance. I think it wants to keep it in the state run brokerages so that if things go badly wrong it can directly compensate retail investors.
Overall I think they are still trying to ‘manage a bull market’ but that could get more difficult as next week we get new loans and other social financing data and earnings season kicks off again.
Plus we still haven’t seen the full US retaliation yet. Yesterday there was talk of maybe undermining the HK/US dollar peg as an option. I still think the threat of weaponising US pension money is a far stronger negotiating lever.
Also note the SCMP has news of a new virus in Kazakhstan that is more deadly than covid -19 the authorities say.
Any feedback or comment? Let me know
Markets as expected opened lower
As at 1pm HK time
JAPAN opened lower despite good PPI data the concerns over the rise in covid-19 cases and news of a new virus in Kazakhstan capped the upside. Currently trading sideways just below Thursday’s closing level.
S KOREA opened lower and saw some further selling initially before a small bounce back. Kosdaq bounced back to flat but now drifting slightly lower. Kospi less of a bounce back but trading sideways.
TAIWAN Opened flat but sold down not working slowly back towards flat
CHINA opened lower tried to rally but upside capped, having failed to break higher sold down to support and bounced into lunch. I would expect further selling in the PM ahead of the weekend, China New Loans data next week and Q2 earnings season starting.
HONG KONG Opened lower (in line with the ADRs) but on huge volume and whilst there are 6 IPO’s today I still think Team China putting in some support. HSI initially worked higher but failed to regain yesterday’s closing level and sold down to below the opening level and traded sideways into lunch.
EUROPE I would expect to open lower
US Futures opened flat but initially trended higher.
Investors move in on China’s housing lottery scheme. Looks at how developers are using housing lotteries to promote sales. It looks at how one investors, who already owns three apartments won a lottery to buy a flat at a discount. Shows how President Xi’s call for property to be for living in is falling on deaf ears. Also show how developers and local authorities are able to manipulate the current system of price controls.
Worldwide bike shortage slams brakes on cycling revolution Buyers left frustrated as manufacturers struggle to meet surge in demand during Covid-19 crisis. +VE for GIANT and MERIDA in Taiwan
Global allies step up retaliation for China crackdown in Hong Kong Summarises some of the actions that are currently being levelled against China for its imposition of a new security law on Hong Kong.
China admits relations with US at lowest point since 1979 Some are saying that Beijing is trying to ease tensions. The article quotes from a speech given by the Chinese Foreign Minister yesterday.
'“China has never had the intention of challenging or replacing the US and has no intention of entering into total confrontation with the US,” he said, adding that Beijing’s policy had not changed despite deteriorating relations in recent months.’
I am not sure that everybody would agree with that. President Xi’s recent policies seem to be very much about challenging the US. The Minister also said; “Every issue is on the table for discussion . . . so long as the US does not set limits,”
Coming after weeks of diplomatic outbursts it suggests the China is realising that the consequences of continuing on this path could be very bad. I think the implication of Trump again ’steering’ federal pension money away from Chinese companies is beginning to register that the US does have the ultimate trade weapon at present. Having weaponised the international bank clearing system and USD transactions the next logical step is to weaponise US pension money. Even though Trump does not have the legal authority currently to stop US funds investing in China I don’t think would take much to get support for such an action.
The article makes clear that whilst some in China would like diffuse the situation there are others that believe China must be tough and that it is up to the US to back down from what they see as an untenable position.
It also quotes from Jia Qingguo, dean of international relations at Peking University who says
'China has signalled its willingness to hold to the phase one trade deal. But other issues, such as rising tensions over Taiwan, could “torpedo” the process, said Prof Jia. “To challenge China on the Taiwan issue is playing with fire,” he added.
That to me highlights another huge worry that if China decides that’s action of forcing a new security law is successful and that the international fall out is not too bad then Taiwan is squarely in the firing line.
That is why the international must send a very clear signal to China that mounting action to ’take’ Taiwan will not be accepted under any circumstances.
Banks in HK start screening clients at risk of US sanctions Whilst at present the names of those to be sanctioned by the US has not been revealed the banks are considering their options. It may also hit fund managers and other investment advisors. The additional issue is that some lawyers are saying that Hong Kong’s new security law 'makes it illegal to comply with US sanctions against Hong Kong and China.’ Evidently the issue has been raised with the HK Monetary Authority but without resolution at this stage. As the Ft quotes '“Who is going to tell [Chinese President] Xi Jinping ‘your law needs a bit more clarity’?” said one person at a bank who was familiar with the matter.’
-VE for all the Hong Kong banks
Rise in margin lending stokes fears of China bubble. Growing concerns that the current rally carries a number of the hallmarks from the last time China stokes a rally back in 2015. Notes that margin financing reached Rmb1.27tn on Tuesday after a week on consecutive rises; couple with a rush to open new broker accounts (85,000 new ones in June +33% YoY).
Whilst many have said this time is different because valuations are lower I think miss the point. This is a momentum rally with little to do with fundamentals or valuations. The people most likely to get hurt are the who can least afford it, retail margin investors.
As Q2 earnings season approaches it could be that there is a soldi recovery underway and companies start to re-introduce guidance. BUT that is not what I am expecting.
Renminbi climbs to highest since March on soaring stocks and broader recovery. The renminbi broke through 7 to the USD yesterday as Chinese stock markets pushed higher. Many think the recent activity is stat lead and designed to show the rest of the world China is doing well. Although part of the strength is due to the relative weakness of a number of big western economies. The test will come as we enter reporting season again and on whether the global indicators continue to point towards a global recovery. Also next week we are due to get new loan growth and other financial data out of China; which should provide another reference pint fro how well China is doing.
China’s increase in copper production signals ‘robust’ economic rebound. Looks at how China is restarting its industry although the article points out that rising copper ore prices are squeezing some smelters out of the market. Copper ore prices are high due to disruptions in Chile. But it shows how reliant China is on the rest of the world. Worth bearing mind in the context of Australia’s interaction with China
Australia Inc reaps bitter harvest of China spat. The shadow that has been cast over banks, agribusiness, property, airlines and other sectors underscores the need to diversify exports. The article sets out a number of sectors that are currently impacted by the reaction of China to Australia requesting an independent enquiry into the origins of covid-19. China’s actions can hurt them but Australia knowns that for certain things China is reliant on Australia. Politicians are going to have to become more skilled at providing a united front at the table in order to get a good deal for everyone.
Opinion China’s threats to UK are more than ‘loud thunder, little rain’. Similar to Australia the UK is facing the prospect of falling out with China but over Hong Kong rather than covid-19. It notes that both sides have negotiating points. The key again is using them the a mutually beneficial solution. Although the writer this both sides risk over playing their positions.
Google rolls back on cloud ambitions. Basically scraping a plan to roll out cloud services in China. China, the article says has the second biggest cloud services market according to Canalys. Beijing is planning new regulations to ensure that sensitive data is kept in country which means that multinationals will have to partner with local firms. It's market is dominated by Alibaba and Tencent and foreign participants are not being welcomed. Notes that Amazon sold its physical cloud assets to a local partner in 2017 and Microsoft and Apple work with local partners. Currently Googles cloud services are blocked in China along with most of its other services. The implication being that Beijing required too much control over the services to make it worth Google’s reputation to operate there.
I think this reinforces the growing concerns about a two track internet developing; one that is open and free and one that governments can control.
FT BIG READ. NEW SOCIAL CONTRACT The leveraging of America.
Even before the crisis, businesses in the US were creaking under the burden of a growing debt pile. The pandemic has pushed many to borrow more, raising the risk of a new generation of zombie companies. Looks at the growth in the use of debt and financial engineering in driving US companies. Key being
As the article says
'A number of incentives pushed companies to take on more debt. “Equity financing has double taxation: you pay corporation taxes, and then shareholders pay tax on the dividends.” says Markus Brunnermeier, an economics professor at Princeton University. “Whereas if you pay interest, the expense is tax-deductible. There is a huge distortion coming from the tax system, and economists have argued for decades that it is unwise.” ‘
Well worth a read, looks at the Hertz case as a case study.
WHO launches inquiry into pandemic. Investigation into global response coincides with criticism of UN agency. This is an EU proposal as the article says 'an “impartial, independent and comprehensive evaluation” of the international response to the pandemic, amounted to a more moderate version of the entirely independent and China-focused inquiry that Australia and the US had called for.’
Trump loses legal battle over tax returns. Supreme Court Justices rule president has no immunity from grand jury criminal investigation. So the court is allowing access for the Manhattan district attorney’s office to Trumps tax records. BUT in a second case the High court has blocked congress having access. It suggests that there will be more legal proceedings ahead.