July 25 FT Weekend Chinese Education, covid, the office and more.


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

European and US markets closed higher on Friday, despite a resurgence of covid cases. Earning remain in focus and as ever the results are surpassing analysts expectations.

Hedge funds retreat from Binance in fear of global ‘regulatory attack’
• Crypto exchange feels heat • Summer of watchdog scrutiny • Group says no drop in trading
Interestingly Bitcoin closed higher which suggests that investors are largely supportive of the increased regulation of crypto exchanges. The key seems to be that regulators globally are looking to become more co-ordinated in their approach to crypto exchanges and how they operate within juristrictions; although so far there hasn’t been a global accord but I would hope one was coming.

Billions wiped from Chinese education companies as Beijing weighs profit ban.
On Friday the sectors got smacked. The key takeaway for investors must be the increased doctrinal risk from China. The clamp down on private tutoring and educational companies. Key being potentially making them non profit organisations. The rational seems to be trying to stem the educational disaprity that they fear could stoke social unrest. They also hope that it will ease the cost of bringing up childrent and so prompt increased birth rates to stem the population decline. It also is looking to ban foreign involvement in the system.
A quote ‘“The government decided to kill the sector because it had created too many problems, ranging from education inequality to low birth rates,” said Li Chengdong, founder of Dolphin Think Tank in Beijing.’
A regime that believes that education is a problem I think is grasping at straws to try and explain why there is disparity in society.
In addition to the need now to be more aware of doctrinal issues when investing in China I think it shows how detacted from reality the top echelons of the party are becoming. The people in China believe in education, it is the reason that so many are prepared to leave their families and work in factories living in the associated domitories and seeking to work as many hours as possible. They want their children to have the best chance to have a better life.
The problem with birth rates has more to do with the previous party doctrine that one child was the right thing. With a regime that doesn’t admit errors trying to pursaude the people that now its right to have more children having told them for years it was not it fraught with problems.
The other disconnect is that the parents will still find ways to get their children educated, which will now probably mean schooling overseas which would undermine the hope the party has of having more control.
It also highlights an element of hypocracy when you consider that President Xi’s daughter was educated in the US. It is also interesting to note that she prefers to live in the US rather than China.

INSIDE
Eurozone booms while US and UK slow
Rising infection rate and shortage of workers weigh on transatlantic recovery.
Looks at Friday’s flash PMI data, where the US and UK slowed thought to be due to labour shortages caused by covid and the recent resurgence. Also there is evidence that material shortages were also contributing. It concludes by suggesting that the Eurozone recovery may be seeing early signs of losing steam.

Subdued but spectacular Games begin
Olympics like no other start one year late in a stadium silenced by global pandemic.
Key are the implications for PM Suga’s re-election hopes; with the general local reaction somewhat dour with regard to the games it may be that his hope for goodwill from going ahead and holding them will backfire.

Climate experts warn extreme weather has veered ‘off scale’
Scientists fear increase in severe events is exceeding current models’ predictions.
An interesting read it shows how scientists have managed to model events but they are occuring faster than expected. Which really underlines how little we really understand and our inability to reduce the effects. It notes these events are excessive even taking into account the effect of global warming. Which suggest that this is not just about global warming.
The article looks at the impact of the jet stream; it suggests that changes in the jet stream operation are due to climate warming. More worrying would be if the changes to the jet stream are due to other factors that we are currently unaware of!

Hong Kong dispute  China strikes back at US with sanctions
Beijing targets former commerce secretary Ross and human rights officials.
Tit for tat sanctions mainly no doubt for show. Whilst the US sanction could have slightly more impact on Chinese officials it is difficult to see how Chinese sanctions will affect Wilbur Ross, Carolyn Bartholomew, chair of the US-China Economic and Security Review Commission, and Sophie Richardson, China director at Human Rights Watch.
It should however alert companies and others more directly involved with China that the new law counter-sanctions law could be used against them. I think that will be counter-productive for China, in that in it will make them less prepared to site production in China. That could benefit other Asian economies.

Beijing urged to stop forcibly returning N Korean defectors 
Beijing is coming under more pressure regarding human rights this time regarding the repatriation of N Korean refugees. Unlikely to have any real impact on policy in Beijing but another negative mark on China’s international reputation. China is in an awakward position; it is propping up N Korea to provide a buffer; it risks a wave of refugees if it were seen to be open to N Korean refugees. With would no doubt not only destabilise N Korea but also the border regions of China.

Fully vaccinated remain at risk of catching virus
‘Breakthrough infections’ have occurred but numbers are small and symptoms mild.
Makes it clear that no vaccine is 100% effective across the whole population. But also notes that whilst vaccinated people may contract covid it is significantly less severe than in those that have not been vacinated.
I remain suprised at the resistance to being vaccinated; although I think the fact that initially doctors thought that that the virus was only dangerous to the older members of society may be in part responsible. Just like China with its one child policy, people them to believe the first thing you tell them.
Worth reading Republicans shift stance and call on supporters to be jabbed  Illustrates how some policies whilst protecting peoples rights can also give the wrong implications.  
Personal I believe that whilst there may be some relatively small risks, the greater risk to the individual and society is from non vaccination. Worth also reading

FT BIG READ. GLOBAL ECONOMY
The dangers of whiplash economics
Ten days ago, markets were spooked by rising inflation. But the rapid spread of the Delta variant has forced some countries to reverse plans to reopen their economies, denting hopes of a swift recovery.
Clearly the recovery is not going to uniform whilst the covid virus continues to evolve and so many people remain at risk. For investors I think the key thing is be alert and nimble. But everyone is in the same boat; as Mr Powell said there is no play book for this. Central Banks are erring on the side of accommodation. With the possible exception of China which seems to be continuing to tighten. Additional China’s zero tolerance to outbreaks and its insistance on immediate lock downs is hurting its continued recovery. I also remain surprised at its opposition for more investigation into the source of the original of the virus. As an ambassador at the UN said regarding access for the UN into Xinjiang ‘if you have nothing to hide why aren’t you allowing free access?’

Obituary  Steelworker who turned pioneering stockpicker
Yang Huaiding Chinese investor 1950-2021
A good read about the man who did more than most to bring stock investing to the ordinary people of China. ‘His style was the antithesis of Gordon Gekko,’

What the new Beanie Baby bubble tells us about the future of markets.   Makes the point that current stock valuations seem to be pricing in all the good news and potential but not the bad. Recommends ‘If you are getting divorced and find yourself invited to pick first from the asset pile, don’t pick Maple. And don’t pick the handbag. Pick the least expensive stocks with the most obvious income-producing potential — Japanese, British and emerging market equities over US equities, and value over growth. It might not feel great immediately. But long term you are unlikely to regret it. History is pretty clear on this one.’
I don’t think you have to be getting divorced to heed that advice.

Companies & Markets
China Telecom heads for $8.4bn Shanghai share sale after US ban
The decision was the latest sign of Beijing’s efforts to minimise the fallout of any financial decoupling of the world’s two largest economies.’
The expectation is that there will be more companies relisting in China or Hong Kong going forward. The key with China Telecom is its size will test the depth of the market in terms of liquidity. Will we see significant selling down of other stocks to buy the new issue or will it draw more money into the market. As ever China Telecom is fortunate to be the first only time will tell if domestic Chinese investors have the ability to support the domestic need for money to finance development.
For those looking to list in Hong Kong there is also uncertainty as Beijing’s increased control chips away at the attractivness of that bourse to international investors.
LEX China Telecom: off the hook  Has a +VE outlook for the company.  ‘That should mean higher demand for safer, defensive sectors less likely to come under scrutiny by authorities. More funds would also be available. The trend is already in evidence. Two new mainland listings, an apparel maker and a local publisher, rose by their daily limit of 44 per cent.
State-owned China Telecom fits the bill. It is growing, adding 43m new users this year — the most among local companies. Even after this year’s gains it trades at 9 times forward earnings, in line with global peers.
US delistings of Chinese companies may have provided them with an early start on the path towards stability.’
I still wonder how many will be so well received and what happens to the existing market players.


Doubts rise as US office workers await Labor Day return to ‘real life’
Delta variant and commuting concerns cool businesses’ enthusiasm for workplace comeback.
An interesting read; the question being how many people will return to the office at the end of the summer and the implications for the ancillary businesses that rely on commuters.
It notes that retailers are hoping that the normal back to school increase in spending co-incides with parents re-newing their wardrobes. It tries to estimate how much that increase might be by looking at google search data ‘Searches for “dress shirts”, the kind of collared shirt still expected in many workplaces, have returned to 2019 levels as Labor Day approaches.
Interest is even stronger in Botox wrinkle-smoothing jabs, Invisalign teeth-straightening kits and “tummy tuck” procedures, Google’s data show.’
Key is whether those shirts will be purchased on-line and from major stores or on-line operators. If by large stores, for instore collection, then for the most part, they would have been ordered months ago. Their sale will impact the scope for restocking. If from small on-line stores then it is possible that production might have only be a month ago. That will impact the production level for Asian factories. It will be interesting to see whether the retail model changes from large seasonal ordering to small batch ordering which will impact the profitability of the factories in Asia. That will also impact the sportwear and shoe makers listed in Hong Kong.

Trio of big US carriers back in black while Europe sector pain persists.
Domestic carriers are recovering much faster than European and I would venture many national carriers globally. Last week Qantas warned that lock downs in Australia would have implications. In China a covid cluster at a regional airport prompted more lock downs and flights being cancelled.
I still think the outlook for airlines is unclear, especially without a internationally accepted approach to vaccination, travel and quarantine. If governments believe in vaccinations then they should I think not require quarantine but follow up testing. In Hong Kong I not only had to quaratine, be tested during quarantine (2 weeks because I was vaccinated) but I then had to go and get two follow up tests.
Get business for the testers. I think governments have to accept that a zero covid goal is never going happen so a compromise is needed. Widespread vaccinating is key but to get reluctant people vaccinated I don’t think free gifts and bribes is the long term answer; showing real benefits is.

Leading investors stick with bets against bonds after painful run
‘Annoying’ rally amid jittery trading conditions not enough to derail Treasuries bears.
The bond market, said to be the bright end of the market is think facing a dilemia the article focuses on the fact that ‘Heavyweight bond investors are sticking with bets against US government debt, saying an unflagging rally paints a false impression of deep concern about the economic outlook.’
The other problem the bond market has is in justifying its presence in a balance portfolio as a hedge against the performance equities. Increasingly over the recent past they have not only failed to perform that role but been an expensive option. For years they not only balanced the portfolio but you got paid for having the hedge. Increasingly investors are looking for alternatives in assets that perform like bonds used to or in some cases hedging portfolios with equities that perform like bonds used to.
See also Movie horror scenario confronting US Treasuries lurks in plumbing of finance  By John Dizard
And The Long View Covid nerves puncture the calm. Get used to it  Brace yourself for bumps in the road, he says. “This is not a straight line. This was never going to be a straight line.” 

Russia raises interest rates to 6.5% in fight with inflation
Russia’s central bank has raised its key lending rate by 1 percentage point, its largest increase for more than six years and the fourth consecutive tightening of policy, to try to curb rising inflation.
A reminder of that whilst some Central banks are saying that inflation is just tansitory and I agree much of it may be, but there are elements that are not and inflation is a fickle thing that is not easily restrained once it gets hold. Especially in a world that has not experienced it for so long.

For interest
Hangover strikes after ‘epic’ Spac party 
Nice quote from Credit Suisse’s Niron Stabinksy, who has earned the nickname “Mr Spac” for his longevity in the market who said it has been “an epic party followed by an epic hangover”.

How working from home made suburbs sociable
It will be interesting to see if the return the office, sees things revert. An interesting read, unlikely to impact Asia as much as the US and UK where commuting is the norm.

Citizen of nowhere Mourning the expat havens By Janan Ganesh
Concludes ‘In their pomp, these cities put me in the mind of the French Foreign Legion: the homing beacon to those keen to shed an identity, the blend of harshness and openness. Just as legionnaires don’t swear an oath to France, membership of the city implied no wider loyalties. If even these places succumb to the great turn inwards, the loss will be more than commercial.’