July 28 FT & Asia update Taliban & China, Xi's curbs and what happens next

This and previous notes can be found at Substack ( Asian Market Sense )
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Uncertainty over China remains with many seeking safe havens.

News of extending lockdown in Sydney -VE and raises concerns about the impact on GDP
Market opened lower coming off Monday’s high; initially traded sideways but then sold down  7,370  at 2pm on news that lockdowns would be extended. Currently trading sideways.
Materials, technology, financials, and consumer discretionary stocks dragging.
Q2 CPI data came out with a 0.8% quarterly increase, slightly higher than expected, an annual inflation running at 3.8%, above an expected 3.7% rise
Nikkei opened lower @ 27,675, saw an initial uptick but then traded sideways until 10:45am when selling increased, down to 27,600 before bouncing into lunch.  PM opened lower and trending lower currently testing the support at the 27,500 level
Topix trading in a similar pattern currently -23pts (-1.2%) @ 1,915
Remeber Topix re balance on the close Thursday.
Softbank -16% with volume 50% more than normal getting hit badly due to its exposure to Tech and many pre IPO tech companies in China
Data out at 1pm
Coincident Index May 92.1 vs 95.3 Apr (F/cast was 92.7)
Leading Economic Index May 102.6 vs 103.8 Apr (F/cast was 102.6)
S Korea
KDCA announced 1,896 new covid cases
Kospi opened lower but worked higher to 3,243 in the first hour but then reversed back to trade around flat until 12:30pm when selling increased down to 3,220 level.
Kosdaq traded in a similar pattern currently -16pts (-1.5%) @ 1,030
Taiex opened slightly lower and sold down to 16,900 in the first 30 mins. Tested the support before working bouncing and then trading 17,000/100
CSI 300 opened lower and traded sideways around 4,700 level for the first hour and 15 minutes; then rallied as State media said the sell-off was due to policy misunderstanding and downside would be muted. Market traded sideways around flat going into lunch.
Pre market opened @ 25,357 +270pts vs +133pts ADR’s
Ticked higher in early trades but was short lived and sold down to 24,950 before bouncing back to 25,200. Traded around there for most of the morning but then sold down into lunch. PM opened lower and trending lower; currently -200pts (-0.8%) @ 24,888
Expect markets to open lower following the weakness in Asia and uncertainty over China policy.  Add to that earnings and the Fed decision.
Ahead Germany
Consumer Confidence, Import Prices,
France Consumer Confidence,
UK  Nationwide House Prices 
US Futures
Opened  Dow -91pts, S&P -0.3%, NDX -0.4% eased back to Dow -55 pts S&P -0.14%, Nasdaq -0.20%.  NOW Dow -113pts, S&P & NDX -VE
Ahead MBA Mortgage Applications and 30yr Mortgage Rate, Goods Trade Balance, Wholesale Inventories, EIA Oil report, Fed Interest Rate Decision and Press Conference.
Earnings due from Pfizer, McDonald’s, Qualcomm, Facebook, Ford, PayPal and others.

FT Front Page
Biles pulls out of team event
Citing mental health for her decision to withdraw, she said through tears at a press conference yesterday that she had yet to decide whether she was in the right frame of mind to compete for the remaining five individual gymnastics titles, which begin with the women’s all-round final tomorrow. 

Vaccine access ‘faultline’ will split global recovery in two, IMF warns

• Scarce supplies impede emerging economies • Growth forecasts upgraded for rich nations.
Covid and vaccinations are likely to remain significant with regards to economic performance for sometime to come. The IMF also highlights how the delta variant is becoming dominant and its impact was not fully known yet.
It also warned that inflation might be more persistent than was currently being predicted by some. Only time will really tell and in the meantime investors will remain divided.
The IMF put forward ‘There is a risk that this could prompt a more aggressive normalisation of central bank policy, which would hit emerging economies particularly hard, it said.
The fund’s projections for inflation and employment suggest that US interest rates will start to rise in late 2022 or early 2023, Gopinath said — more quickly than the Fed has predicted.’

US defence chief says Britain ‘more helpful’ closer to home than in Asia 
The US defence secretary has said Britain might be more helpful as an ally if it did not focus on Asia, highlighting US concern that forays by European nations into the Indo-Pacific could weaken defences closer to home.
An interesting comment in the light of the UK’s deployment of the HMS Queen Elizabeth and then announcement that it would deploy two warships to Asia. But it makes sense considering that the UK should focus its carriers closer to home as it does not have enough ships to deploy a full carrier group. The presence of two warships in Asia will I think be seem as a positive contribution and will probably help the UK’s desire to join the TPP.

Putin woos Taliban to restore Russian sway
Kremlin aims to re-establish itself as security guarantor for large chunk of Eurasia.
As ever Afghanistan looks like it will once again become a hot bed of activity as various parties step in as the US leaves. Russia stepping up to fill the vacuum and the potential for China to be involved as it seeks to protect its Belt and Road interests. It seems there is little support for the existing Kabul government from either Russia or China and the Taliban is using the circumstances to take territory.
Unfortunately the expectation is that the country will be controlled again by the Taliban. How it will interact with China remains to be seen. It is also noteble that China does not seem to be interested in supporting the existing, elected government in Kabul.
An interesting quote about Russia’s involvement ‘Dubnov suggested that, this time, Russia could offer “advice” to the Taliban on how to rule, although whether this would work was unclear. “These people are hard to teach with advice, they much prefer money, and Russia is not ready to help with money,” he said.’
It will be interesting to see if China is more willing in order to protect its Belt and Road assests.

Xi’s education curbs offer harsh lesson in party supremacy
China leader targets tutoring companies to reassert authority, say analysts.
Key is that the current crackdown is consistant with President Xi’s mission to strengthen ideological control over all sectors of society. That mission seems to have no ‘sacred cows’; the willingness to undermine a successful and profitable sector endorses that thought. It is all about showing that the party is predominent.
It notes that over the past 20 years the focus has been on development and advancement but as many of those goals have been acheived now their seems to have been a change of tack to reverse the extremes of inequality.
Thinking back 10 years one of Xi’s first admonishments was about conspicuous consumption by cardres and their families along with earning the right to lead. So in some regards it is not new but what has changed that over that time whilst most in China have become better off; some have become a lot better off and it would appear that undermines the basis of his understanding of communism.
The willingness for the rich to pay for education is in the spotlight. Partly becuase it gives advancement in society and partly I would imagine that there is some concern that the tutors were not necessarily teaching the party doctine but maybe more liberal free speech. That will now be more rigorously controlled. It remains to be seen if that will stop the rich paying for tutors. I would expect a rise in the number of ‘nannies’ whose duties might include schooling duties.
The other big element of social disparity has been property. Historically that has been a tool to promote growth but it has also promoted disparity and so Chinese developers will no doubt be concerned. The link between property and banks make it unlikely that there will be such a harsh crackdown but no doubt they will as ever be looking closely at the sector.
With regard to the big picture though; the crack down on the private sector will hurt job creation and foreign investment and that could have serious implications for long term growth. One reason that fund will be reviewing their China policy and including ‘doctrinal risk’ into the equation.
But it makes you wonder about tension in the social contract.
See also Chinese tech stocks sink as regulatory fears mount
Key is that the selling has been unprecedented, my colleague Jeremy Weemhoff pointed out the Southbound out flows are at record levels as traders try to work out the implications.
LEX China stocks: winner’s curse
‘Trying to second-guess regulatory changes is unavoidable when investing in China. But rarely have crackdowns been so broad as in recent months. What appeared at first to be a plan to tame fast-growing tech giants is turning into a much more extensive overhaul.’
Concludes ‘Despite the rapid market value rise, China’s markets are less than a third as large as the US by size and are more vulnerable to shocks. Investors should expect crackdowns to spread to other sectors that have outperformed. Property, healthcare and insurance, the last boosted by an ageing population and the pandemic, could be next.’

Also Beijing crackdown triggers panic on Wall Street
Ban on private tutoring industry accessing the legal structure required for a US listing dents stocks and raises spectre of wider curbs. Key here is Beijing’s crack down on the use of VIE structures to get around China’s strict rules about foreign ownership in certain sectors. In theory, under VIE US shareholders are entitled to the economic benefits flowing from a Chinese company while limiting their operating control of the business. But it is theory only. The recent US crackdown on how US listed companies report has raised concerns in Beijing and could see the structure banned or changed.
'But the developing battle between Beijing and the US over Chinese overseas listings has knocked the trust on which they depended. “VIEs are inherently risky and unenforceable — foreigners suspend disbelief to participate in the Chinese growth story,” said Tim Clissold, an experienced China investor.'
It makes the point “The ball is in the Chinese government’s court. The US is reacting to this but they’re not driving it.”
There is a possible positive outcome; that the structure under which Chinese companies are allowed to list overseas becomes more defined and then investors can have more certainty.
At this stage though there is no certainty and hence a lot of funds are either nervous or judging by the volumes being traded deciding to sell now and watch developments from the sidelines

First national security law case finds man guilty of terrorism
‘Tong Ying-kit, a 24-year-old former restaurant worker, rode a motorbike bearing a black flag emblazoned with the words “Liberate Hong Kong. Revolution of Our Times” towards a line of police on July 1 last year, the first day the law took effect. He will be sentenced later.’
The case has raised many concerns; the loss of trial by jury and the use of three ‘picked’ judges. It raises also the question of freedom of speech and the independence of the judical system.
This is the first case and there are many more to come, how they are handled will I think influence how a lot of companies view having their office in Hong Kong.

Brazil penalises residents dodging Chinese vaccine
With many questioning the effectiveness of the Chinese vaccine the government has introduced a new law to penalise those that are not vaccinated within the alloted time. A negative for the Chinese drug industry because reputation is such a key to the successful marketing of drugs.

Evergrande tumult renews liquidity crisis fears
Worries mount over indebted Chinese developer after credit downgrade and pulled payout.
A interesting read and most investors will be well aware of how the developers have historically enjoyed favoured status with the banks and local governments. But as with Education it could be that Property could see a reset. Evergrande may be exceptional due to the high level to which it is leverage and whilst it is unlikely to go bust it will be under more pressure to dispose of non core assets to meet new government restrictions on lending levels. Worth a read.

For  interest
Retail investors take a shine to bespoke portfolio model

BlackRock among providers tapping burgeoning demand for direct indexing products.
‘Unlike an equity mutual fund or an ETF, in a direct indexing portfolio the investor owns the securities in their account, rather than a share of a pooled fund. Software ensures the portfolio tweaks weightings to replicate the performance of the index, and to customise holdings towards investment factors such as growth and value stocks.’
Worth a read for how you might be running your portfolio.