July 22 FT & Asia Update China in focus; diplomacy, flooding, inflation, decoupling and more

This and previous notes can be found at Substack ( Asian Market Sense )
Check out ERI-C.com  for your research needs

Asia markets risk on although some weakness after the initial short covering rally. Japan closed until Monday.

Market opened higher and tested 7,380 (a July high) in early trades but failed to break above, eased to 7,535 level mid morning  before working higher to retest 7,380 around 2pm. ZIP weak despite good results, hearing being heavily shorted. Afterpay also weak.   BHP +VE after striking a deal with Tesla to supply nickel.  Covid remains a concern with more cases being reported.
Market closed for Marine Day, closed Friday for Health Day and re-opens Monday.
S Korea 
KDCA reported 1,842 new covid cases; a new high but includes 270 cases on the Korean Naval vessel. Large buying of Kospi futures, looks to be short covering. Earnings in focus; Naver numbers inline. Tech, Financials and Auto leading.
Kospi opened higher initially testing 3,240 and then traded sideways, ticked higher around 10am after the Financial Minister announced support measures for 3 sectors, which the market liked and ticked higher to test 3,250. Failed to break above but trading sideways, currently +35pts (+1.1%) @ 3,250
Kosdaq traded in a similar pattern; tested to 1,052; currently +8pts (+0.7%) @ 1,050
Taiex opened higher and worked higher to 17,650 in the first hour but then eased back to 17,540 level which is providing support as it trades sideways. Currently +122pts (+0.7%) @ 17,580 Day traders active in tech laggards and still seeing some profit taking in shippers after their recent rally.
Typhoon In-Fa turned more northly and likely to hit China Sunday around Jiaojiang.
CSI 300 opened higher, and after an initial dip spiked to 5,170 but then trended lower over the next two hours to 5,140; which it tested acouple of times before bouncing into lunch. +8pts (+0.2%) @ 5,152
Sentiment weak after Henan flooding with concerns over industrial production and food prices as crops and swine herds being impacted.
FT has run a story about cash strapped SOE’s -VE and default concerns over Evergrande ripple through the market.
Beijing gives a briefing denying that covid escaped from a lab; comes as WHO want to revist Wuhan. Also gives ‘evidence’ of US cyber attacks.
Hong Kong 
Pre market opened @ 27,464 +240pts vs +309pts ADR’s. Market rallied to 27,690 in the first 15 minutes (signs of a general short squeeze) and then eased back to find support at 27,600 before working higher, resistance at 27,740. Closed at lunch +480pts (+1.8%) @ 27,705
E-Commerce strong rebounding after the news of a clamp down on inappropriate on line content. Evergrande (and associates) bounced saying dispute with local Chinese bank resolved.
Police arrest 5 people (leaders of the General Union of HK speech Therapists) accused of conspiring to incite hatred against govt.
Expect to see an rebound following Asia. ECB decision and earnings in focus.  
US Futures
Opened flat Dow +27pts, S&P and NDX slight +VE., I would expect them to tick higher as Europe comes in.  Key data ahead Initial claims and Existing Home Sales. 

Front Page
EU rejects UK plan to recast Brexit terms

• Sefcovic spurns NI protocol changes
• US doubts over London’s direction
The difference of opinion over the treatment of Northern Ireland looks set to remain an issue for UK and Europe.

China floods At least 25 killed after days of ‘once in a millennium’ rain
Subways flooded in Zhengzhou. Likely to impact on Apple production and other industries. Could also impact inflation depending on the damage to agriculture.

Novartis seeks to secure lead in $10bn cancer treatment developed at Cern.  
Still looking for a better treatment of cancer.

Top US official to visit China for talks
Two sides resolve latest diplomatic stand-off as hopes rise for closer ties.
It would appear that China has shown sense and decided that it would be a good idea for Wang Yi, China’s foreign minister, to meet Wendy Sherman, the US deputy secretary of state.
What would be encouraging is to hear that other meetings are instigated too, like on defence.
But the outcome of this meeting will be very important. The Alaskan meeting was Biden making clear that he would be tough and his subsequent actions have shown that but he and China are both aware that co-operation will also be needed.
The west for years hoped that China would come around to its way of doing things. China has made clear that it wants to follow a new path. Compromise by both is needed. The hope must be that this meeting prepares the ground for more talks that can achieve a workable co-existance.
Read also Markets Insight

Investors should heed Sino-US decoupling risk  By George Magnus; a research associate at Oxford university’s China Centre and author of ‘Red Flags: Why Xi’s China is in Jeopardy’.
A very good read that highlights the potential risks that investors face due to the current standoff between the US and China. He focuses on 3 areas:
1. Beijing’s crackdown on the ecommerce sector and ‘its determination to keep ambitious private companies and entrepreneurs in check.’ That clamp down means the pre clampdown valuations are now wrong.
2. Potential random politicial initiatives from the US; like not being able to deal with Chinese entities etc. He notes the repression of human rights is also raising ESG activists too. The is SFC legislation regarding the disclosure of information. Add to that the Chinese regulations too like the ‘Anti-Foreign Sanctions Law’ leaving investors between ‘a rock and a hard place’.
He concludes ‘As investors and businesses face more conflicts of interest and decisions about whose rules to obey and whose to flout, politics is likely to win out. Valuations don’t even begin to reflect this yet.’
I think the valuations reflect only the optimism that sense will prevail or maybe the greed to make money?

Beijing drives Japan to take growing military role in Indo-Pacific
Looks at Japan’s annual defence white paper whihc was released last week. Key being that Japan is looking at taking a greater regional role on security in reposnse to the more assertive actions that China has been taking.
It notes ‘Within the first five lines of the white paper, defence minister Nobuo Kishi accused China of attempting to change the status quo in regional waters. The document added that “stabilising the situation surrounding Taiwan is important for Japan’s security and the stability of the international community”, the latest of a recent string of high-profile mentions of the island that China claims as its territory and threatens to take by force.’
The recognition of Taiwan as an independent country is increasing and that will annoy China.
The key point is that Japan realises that it cannot contain China on its own but it is trying, like Biden, to build a consensus of like minded countries that together can stand up to China. Furthermore by acting as a group reduce the ability of China to bully them individually.
I think we will see more regional co-operation which no doubt the US will support too and use to demonstrate that whilst President Xi may say that China do not bully other countries or interfere that is not true.

Companies & Markets
Beijing fines platforms for explicit content

Alibaba and Tencent penalised for breaking rules on porn and violence.
A further tightening up on web content, interesting because of the lack of detail both regarding what suddenly annoyed the regulator and over the size of the penalty.
It would appear that content that was previous allowed is coming under increased scrutiny.
For investors it will be one more worry that the established business model is going to be under threat.

Chinese provinces rush to rescue debt-laden SOEs
Authorities commit $17bn to bailouts after defaults hit local economies and rattle investors.
I’ve been talking about this for a while and its also why I don’t believe the Chinese unemployment data because many of these SOE’s have not laid off staff….. they just haven’t paid them. It also highlights how patchy the recovery really has been in China and how the local authorities are either strapped for cash or had been instructed not to bail out the SOE’s. Or it could be both; which I think is the most likely. It is only now with defaults hitting the headlines and potentially impacting foreign investor sentiment that Beijing is acting.
The article notes that ‘President Xi Jinping sees state companies as the “bulwark of the economy”, in contrast to former premier Zhu Rongji, who in the 1990s took the approach of “keeping the big and letting go of the small” to deal with SOE failures.’
The reality is that SOE’s are large employers but not usually job creators, which usually falls to the private sector. So starving the private sector of access to funds is likely to create more problems in the coming years.
President’s defence of the SOE’s I think will continue to mean that resources in China will be mis-allocated.
The article also makes the point that the funds being made available are too small which illustrates the pressure the government is under. I think it is also putting Belt & Road under pressure, with a number of defaults or suspensions there and demands at home putting President Xi under pressure.

Foxconn and Nidec in talks on electric vehicle motor venture
An interesting read and it shows how important electric vehicles are becoming to the tech sector. Nidec has set aggressive growth targets and the auto sector is an important contributor. It will be interesting to see if the two help Apple in its ambition to enter the auto sector too.

US banks urged to take fresh approach towards fintech
A good read looks at Sheila Patel’s (former head of Goldman Sachs Asset Management) call for banks to think and look outside the box.
It concludes ‘Patel said finance innovation challenges were mirrored in healthcare, another area of focus for B Capital — and for Patel personally, who was completing cancer treatment when the pandemic hit. “If it weren’t for some of the telemedicine technologies, how would I have spoken to my doctors?” she said. “There is so much that can be made more efficient.”’
I think there are going to be a lot more changes in the industries and being open to them will be key. But as we turn more technical and digital a greater awareness of internet security will be required too.

Investors bet ECB bond buying is here to stay
Higher inflation target sets stage for lengthier period of loose EU monetary policy.
An interesting read ahead of todays ECB decision.

For interest

Chipmaking champion?

The EU wants to double its share of the global chip market by 2030 to prevent supply chain disruptions and insulate itself from geopolitical fights. But the risk is that it ends up squandering public money.

A good read, effectively Europe is facing the same problems China is. The reality is that the likes of TSMC and Samsung have made the entry barriers so high over time that even governments balk at the entry cost and risks. Worth a read.