FT 16 June Mark 6, Beijing Covid, US/China Cold War, Sales ladies in Japan and more


FT 16 June  Mark 6,  Beijing Covid,  US/China Cold War, Sales ladies in Japan and more

Markets Opened higher following the US rebound and US futures opening higher.
JAPAN opened higher and worked higher currently +4.4%. BoJ kept rates unchanged along with current policies. It expects to inject around JPY 110 trillion to the economy via its market operations and lending facilities aimed at mitigating the impact of the pandemic.
S KOREA Opened higher and has worked higher through the day although has now started to trade sideways
TAIWAN Opened higher initially dipped but rebounded and then traded sideways
CHINA Opened higher and traded sideways
HONG KONG Opened higher regaining all of yesterday's losses.

Not in the FT but wanted to mentioned
The HK administration is getting more confident that the worse is past as the HK Jockey Club Mulls Resuming 1 Mark Six Draw/Week in Mid-July. That would be a significant sign that the government believes the worst is over. As Mark Six is known to be a tax on lower income earners who spend, as a proportion of their earnings, more on Mark Six than others. Its early cancellation, which was not widely advertised, was seen as a way of helping lower income groups save money. So its return I think is a signal they feel the worst is over.
It does still leave the question as to why the HK racing season was allowed to continue with no betting shops open and race tracks closed; hence only on-line gambling? But maybe that has less to do with gambling and more to do with cash flows?

In the FT, to be honest little news on China or companies today, which reflects, I think, that the current market moves are more about sentiment than fundamentals.
Yesterday’s US rebound was thanks to the Fed announcing a new programme, once again don’t fight the Fed. However, although it has said it will do whatever it takes it makes you wonder how far it can go until we see unintended consequences. Worth looking at an article by Soc Gen’s Albert Edwards last Thursday The US has fallen into the deflationary abyss ahead of the eurozone 'Clearly investors can ignore many things, including collapsing GDP and profits on hopes of a V-shaped recovery and a return to normality. But one thing the market will find far more difficult to ignore is that for all the fiscal and monetary largesse, the US economy has already slipped into outright deflation. And this will not go away anytime soon.’

Today’s FT
Controls reimposed in Beijing following infections surge Looks at the authorities reaction to the latest outbreak of covid-19; basically that of taking no chances. For investors the worry is about the potential for second waves and in China consumer confidence. The data out yesterday underlined that China is focusing its recovery efforts on state investment, government debt and construction projects but there are concerns that domestic consumption remains weak. People, I think, are worried about job security and hence are not spending; potential new lock-downs will only heighten those concerns.
Also of concern will be the launch of auctions this week of a planned issue of 1 tn yuan (US$141 bn) of special treasury bonds to help finance recovery from the coronavirus pandemic. That is likely to drain more liquidity out of the system. The PBoC will be monitoring carefully how the banks package the resulting products because it is worried that some companies have been taking cheap government loans and rather than use them in their businesses they have been using them to speculate in markets, property and wealth products. That could be a further dampener on China’s recovery.

Opinion China is setting itself up to win cold war 2.0 its well summarised in the final paragraph that 'The irony is that China’s leaders may have learnt more from American history and its victory in the first cold war than has the US political class. Technological innovation is a national security issue.’
It looks at the potential for a new Cold War, this time between US and China and not about military hardware but tech. Notes that China will be a more formidable foe than Russia was due to its demographic weight and technological ambitions and I would add technical achievements to date. Notes how interlinked China ans the US are; via things like trade, Tik Tok, Chinese students at US colleges etc.
It sees the key area of conflict being the control of tech; internet of things. Whoever controls that is sees as having a geostrategic advantage; hence the row over Huawei and 5G. It's therefore interesting that on Monday the US said it was modifying the Huawei Bill to allow US engineers to interact with Huawei ones BUT only so that the US engineers can influence the international protocols for 5 and 6 G and internet of things; to try and reduce the influence that Huawei has already built up. Some think the conflict could just be the clash of Trump and Xi but most think it is more than that. It cites Orville Schell, one of America’s leading China scholars; he takes a bleaker view. The building hope of the past 50 years that China would become more westernised and open has died. Mr Schell’s view is that prosperity in China and interaction with the west has not resulted in democratisation. The later hope (in 2000) was that the internet would accelerate social freedom has also proved incorrect.
Now the world looks very different China is now the second biggest economy in the world and it has managed to secure its control of the internet in China and is even suggesting changes to the worldwide wed that would give it even greater control. At the same time it is a formidable force in international cyber hacking into other countries. The article notes that last week Twitter closed 23,750 accounts linked to Chinese propaganda; which shows that the Chinese leadership is not interested in Western liberalism except to undermine it and demonstrate that the Chinese Communist Party’s way it The way. It quotes 'Robert Atkinson, president of the Information Technology and Innovation Foundation, a Washington-based think-tank, argues that China has already overtaken the US in some advanced industries and is investing heavily to achieve technological supremacy. “China is becoming more powerful technologically and can easily surpass the US if we do not act,” he says.'
Mr Atkinson believes the US needs to develop a national strategy rather than just hope in the free market. He mentions that in 1963 the US federal government spent more on R&D than the rest of the world, now it spends less than it did in 1953.
Whilst I agree with most of the article I do think that it could be too soon to give up on the influence of prosperity in China. I think that Beijing’s biggest fear at present is the breakdown in the social contract that has allowed the Communist party to rule China; namely prosperity.
Covid-19 will bring into question the party’s ability to supply jobs, especially with President Xi’s oppression of the SME’s in recent years.
Also the affluent middle class have been tolerant of Beijing’s rules as long as they could spend their newly acquired wealth; so restrictions on that like with the buying second homes or third homes have been a negative. Also the lack of investment opportunities could be influential and the collapse of any Wealth Management Products, to say nothing of a stock market collapse would I think put the party under pressure. It was notable, last week, the fact that Beijing was facing a public outcry over its claim to have “basically won” the war on poverty after the premier admitted more than two-fifths of Chinese people made less than $140 a month. It has raised questions about China’s ability to meet one of it biggest policy goals, that of eliminating poverty. President Xi said that goal had almost been met in a speech back in March. More worrying for some is the growing income gap between rich and poor in China; FT quote ' “If these 600m people can’t make ends meet, the rest of the population won’t live an easy life.”’
Official stats show those in poverty dropped to 5.5m out of a population of 99m in 2012. It is also notable that China’s definition of poverty is per capita income under Rmb3,500 (US$500) per year. The World Bank sets it at Rmb4,800 per year. The prosperity in China is still not with the masses and I think it important to remember who put them into poverty in the first place. Whilst Beijing is trying to project on the world stage its doctrine is the right one for success the glaring truth is that in its own back yard it has failed. Whilst the propaganda machine in China can overlook this, it is visible to most people in the world ….. via the internet.

Japan gains taste for buying policies online. Looks at how selling insurance is set to change in Japan from ‘door to door’ to online. That could to have a have a big impact on the employment levels for women in Japan, who currently make up 90% of the sales force.
I think it is likely that large sales forces will still be required by insurance companies because attracting clients on-line for insurance and savings products is difficult. Also the fact that a number of products can be quite complicated will leave the companies open to claims of mis-selling. So no doubt changes will occur, such as the acceptance of using video conferencing tools, but the outlook is less attractive than it was. As the article mentions online insurance companies have seen a rise in new customers during the pandemic.
For those with a large sales force they will need to change the model without decimating the business of their existing sales force as has happened in a number of other sectors that historically relied on ‘face to face’ selling. They should maybe read Crisis speeds up L’Oréal’s digital makeover Lockdowns prove value of virtual tools in shift to online sales, says group’s tech chief. Using virtual tools to reach the target audience?

ByteDance and Lee family plan Singapore bank launch. Bytedance best know for its video app TikTok is thought to be looking to expand into digital banking and looking to tie up with the founders of OCBC Bank. The tie up would help in its bid for one of the five virtual banking licences that Singapore is looking to award by the end of 2020. It is also reported to have applied for one of the three wholesale banking licences on offer too. The move into financial services would follow the path set by other internet companies. Whilst some question the ability of tech challengers to make in-roads into the Singapore banking sector I would noy underestimate the power of tech and youth that ByteDance has on its side.

Bond issuance binge by US groups nears total for 2019. Key point is that having bolstered their balance sheets a number of companies are now looking to opportunistically lock in historically low borrowing costs. An interesting read

LEX SoftBank/Credit Suisse: funnel vision. Looks at yesterday’s news about Softbank investing in funds that invest in the debt of companies that the Vision fund has stakes in. Notes the conflict of interest, lack of transparency etc. Sums it up by saying 'All of this should worry investors in the Credit Suisse funds, for all that some losses would be covered by credit insurance. SoftBank’s shareholders, many of which are private investors, should be concerned too. The shares fell more than 3 per cent yesterday.
SoftBank boss Masayoshi Son hoped the former traders and bankers he recruited to the Vision Fund would allow him to turbo-charge returns from smart investment in start-ups. Instead, their ingenuity appears to be concentrated on propping up returns rather than amplifying them.’

LEX Hertz share issue: demolition derby looks at the fact that it has been allowed to sell equity whilst in bankruptcy. 'In theory, equity capital can never be cheaper than debt. In the real world, that rule is violated all the time, often to the detriment of shareholders.’
'In the case of Hertz, it concedes something far more extraordinary: shares in the market today are unlikely to exist in the future because junior creditors will probably take ownership.
Payback from Hertz’s new shares is not even a long shot. Impossible is more accurate. Hertz would appear to be preparing to take advantage of the greater fools. It can hardly be accused of underplaying the risks.’

LEX Operating leverage: seats of power. Looks at the position of Airlines and Cruise operators. 'In the month between early May and June, American Airlines shares more than doubled, as passenger traffic rallied. Carnival stock at one point tripled. Even as travel remains depressed, increases in traffic help defray fixed costs. Both companies have taken out loans and issued bonds to bolster liquidity. Extreme financial leverage is being stirred in with operating leverage. Spectacular short-term equity gains — and potentially losses — are the results.’

Japan puts deployment of missile defence shield on hold. Citing technical and cost issues together with public unease. There could be some political fall out from the decision with America and it also means that the Japanese navy will have to maintain continuous patrols in the Sea of Japan in order that the naval Aegis system maintains Japan’s defence from missile attack, primarily from N Korea.

FT BIG READ. ASIAN DEFENCE America’s reliability under scrutiny Donald Trump’s dispute with South Korea reflects widening cracks in the US-built security order in the region. Some countries are building up their military capabilities while others could drift towards China. Looks at how Trump’s actions have upset some and worried others. Doesn’t mention about the increasing ties with Taiwan or attribute to Hong Kong. But does make the point that many are worried that the current policy will mean them having to make a choice between China or the US; when in reality they need a middle way. An interesting read.

Feedback and comments welcome