June 26 FT China Trusts, Evergrande, Pinduoduo, Softbank, Biden/China and more


June 26 FT China Trusts, Evergrande, Pinduoduo, Softbank, Biden/China and more

Markets China & Taiwan closed for Dragon Boat Holiday
JAPAN 
Opened higher and traded slightly higher through the day. Tokyo Core CPI was in-line although CPI missed.
S KOREA Markets opened higher but Kosdaq sold off initial and then worked its way back into the green but sold down to close flat. The Kospi initially sold down but not as much and then worked higher into lunch before trading sideways into the close.
EUROPE I would expect to open lower after the US bank stress test results
US Futures currently -175pts after the US Bank stress tests and news of share buyback being banned and dividend payments at current levels. Also poor results from Nike.


Sichuan protest raises fears for China’s $3tn trust sector ‘Bursting bubble’ highlights stresses in shadow banking after years of credit growth. Article notes that
'Dozens of disgruntled Chinese investors protested this week in Chengdu’ 'after Sichuan Trust …. said the firm would struggle to make principal and interest payments on at least Rmb13bn worth of “trust of trust” vehicles due by the end of the year.’ I don’t think it is the only Trust facing that problem. Trusts have become an important source of funding from companies that do not have access to the the big SOE banks. Investors have flocked to them because they offer better rates of return than regular bank deposits but most require an investment of RMB1m although the Sichuan Trust has lowered this to Rmb300,000. The key problem has been disclosure with the trust companies often being able to issue new products to offset losses incurred by old ones; rather like a pyramid scheme.
The article notes that in the past many investors have said they got their principle and interest back with no problem. But problems started to occur in April when the regulator restricted the sales of new trusts; suspecting misses of funds. The trust was then unable to maintain payments and meet redemption calls.
As in other investment schemes investors believed that the politically well connect trust meant it would have implicit guarantees even thought the prospectus mentioned the risks.
Also pressuring the Trust will be the fact that a many of the assets it has invested in have fallen in value due to the covid-19 downturn. It has said it will sell its office building and equity stakes to raise capital but many are unconvinced. One investor mentioned the trust has failed to keep investors informed; which is a common problem.
All this comes at a time when the regional banks in China are also under pressure to prone to rumours about a lack of liquidity. I think there are a lot more banks and trusts on the edge. The government has show a that is reluctant to bail them out expecting investors to bear the risks. Which is fair as long as the regulator ensures that the Trusts make those risks very clear and prevent the Trusts from giving the ‘impression’ of being well connected and hence an impression of a ‘guarantee’.

LEX Chinese developers/ Evergrande: short end Looks at why shorting Evergrande, despite the prospect of it credit rating downgrade is a bad idea. The recent results show a good couple of months recently for sales. Its share price has recovered from the March sell off. But the detail are not so good. Step discounting has driven much of the recovery which in an industry already heavily leveraged is not good. Evergrande is indebted to 300x shareholder equity. Meeting debt obligations is getting more difficult. Another risk is that the founder holds 77% of the common shares and he has been involved in leverages acquisitions in other sectors (football, bottled water, electric cars). Reducing debt is difficult for structural reasons due to the reliance on pre-sales often years ahead of completion. But that means it does have cash from recent years sales. Not least the fact that the property sector in China is resilient to downturns and the prospect of lower mortgage rates ahead will support that. Not mentioned in the article is the ability of the the founder and major share holder to get his friends to buy his stock at times which can be the ultimate weapon against short sellers; even it the fundamental reasons for shorting are correct! As LEX says there are better short opportunities.

Scientists discover high-risk Covid genes Variations in human DNA offer clues as to why only some become seriously ill. As I’m not a scientist I’m not going to comment more that to say worth a read and it highlights that we can still learning about covid-19 but it is a lot more complicated than, I think, people initially thought.

Asia-Pacific cautiously reopens to travel. Notes that Japan will be ultra cautious when 440 Japanese business passengers take special flights to Vietnam over the next three days. Other countries such as Thailand, Vietnam, Japan, Australia and New Zealand are all looking for ways to safely resume international travel. Which is in contrast to Europe where countries are looking restart tourist and business travel.
In Asia discussions are ‘work in progress’ for the main part; with concerns over ‘fear of importing new cases, the impact on virus-testing capacity, and how to reimpose restrictions if cases rise.’ Even in Australia and New Zealand recent second waves have put free travel plans back. It’s going to take much longer in Asia I suspect where the threat of covid-19 seems to be being taken a lot more seriously than in Europe or the US.

Pinduoduo defies gravity with spending spree China online retailer’s rapid ascent sparks concerns over whether it can wind back lavish subsidies and stop burning cash. The company is 'the most valuable company in the world never to have made a quarterly profit’ and its share price is still rising. The founder attributes its success to 'a magic formula mixing bargains and entertainment — he has said he wants his company to be both “Costco and Disneyland”.’ The model is to connect suppliers with buyers and take a small commission on sales and charges merchants to boost their presence on its app. It has seen a huge uplift in business, in five years it has achieved what it took others like JD.com 14 years achieve. But there are concerns over reporting of order volumes, corporate governance and the cash burn required to buy growth. An interesting read that reminds me of many of the companies we saw in the the dot.com era when burning cash to achieve growth was seen as a positive thing. It’s interesting that a couple of those interviewed seen the company as having a ‘cheap image’ and that is difficult to change. I think there are a lot of warning signs around the company but for the moment, with covid-19 and on-line shopping its seeing good momentum but I have my doubts about the business model and the very thin margins that are available. I would view it as a short term play not a key holding.

SoftBank’s founder quits Alibaba board after 15 years. Came as Jack Ma stepped down from the Softbank board. During the visual AGM Mr Son sought to reassure investors; he said “I have quite a lot of confidence in my capability,” I’m not sure that was the reassurance that investors were looking for. He plans to be in charge for the next seven or eight years. He noted that Softbank’s assets had returned to pre-covid-19 levels although that was largely due to the rebound in Alibaba. The article notes
'But Mr Son stressed yesterday that demand created by the pandemic had boosted Vision Fund investments in Chinese start-ups, including online healthcare group Ping An Good Doctor; ByteDance, the owner of video app Tik-Tok; and Zuoyebang, an online tutoring company.’

Pension funds set to dump stocks after fierce rally. Analysts expect funds to re-weight in the next few weeks at their quarterly reviews; due to the fact that the recent rally means they are effectively over exposed to equities. The March sell-off upset the weightings and prompted some equity buying; now the rebound has upset those weightings again. There is uncertainty as to what that will do to the recent momentum seen in stock markets. I think for the US it could have a significant impact, because as the article mentions, liquidity in those markets remains low. For some that will represent a ‘buying opportunity’. I would caution and prefer to wait for the next round of quarterly reporting before getting too involved.

US Treasuries will not always play haven role in times of stress by Sophie Huynh of Soc Gen Notes that the historical relationship between bonds and equities has been under pressure in part due to the sell off but also due to Central Bank action. She prompts investors to note that the historical relationship has changed (there have been several other articles on this recently, bonds yields have dropped and so are now less able to absorb the equity shocks that they once were). Hence multi asset portfolios now provide a better balance as Treasures move from being a hedge to a reserve of value. So what to invest in? She suggests Chinese equities especially since the RMB has been resilient. Also strategies based around 'green, social and governance criteria’. A good read, currently Chinese equities are performing well and the Chinese government will want that to continue. The overhang of US/China relations and covid remain the main concerns; although I think Chinese domestic consumption should be a concern too.

Covid-19 impact on trade unprecedented, data show Looks at a report from the Netherlands Bureau for Economic Policy Analysis. The April volume of global trade trade in goods was -12.1% MoM the biggest drop since 2000. All regions reported declines but the Euro region was hardest hit -20.1% MoM, which means its goods trade has contracted 28.5% YoY. US April Trade volumes -16.8% MoM, Emerging Asia (Inc India & China) -6% MoM, Chinese exports declined in April after a 'mild expansion’ in March.
Between February and April none of the regions was in positive territory; which is when the covid-19 caused the most disruptions both in terms of supply and demand.
ING estimates that these results mean global trade will be -10% plus this year and could be on a par to the impact seen in 2009.
The data follows the WTO data which estimated an 18.5% YoY drop in Q2. THE IMF also forecast a 12% decline this year and urged for countries “to co-operate to resolve trade and technology tensions that endanger an eventual recovery from the Covid-19 crisis”.
The Netherlands Bureau for Economic Policy Analysis report also showed industrial production has been hit hard with April output -12.1% YoY as factories shut again the Eurozone was worst hit with a nearly 30% contraction.
I think that provides scope for an initial bounce back as lock downs ease but after the initial bounce I doubt that the recovery continues in a normal way. The size of the contractions is likely to have knock on effects to smaller businesses and result in some failures which will have a knock on effect.

Small manufacturers across the US adapt to earn their daily bread Trials of a bakery equipment maker in Illinois illustrate the severe challenges faced. A case study of an SME in the US and the issues and problems it has faced and the uncertainty that is still pat of daily life. A good read and again I think another reason not to expect a V shaped recovery. Many SME’s are touch and go on survival. He it notes that the company only got the loan it needed from the government on the day it ran out of money, I suspect many others didn’t and so are not in such a healthy state.

Working-from-home fervour will fade, but change is here to stay. Looks at the how tech has leapt on the back of the work-from-home (WFH) movement which has provided a catalyst to changes that had slowly been occurring over the past decade. It highlights how Slack moved from being a channel based communications app to launching an inter-organisational real time discussion. Opening up the potential much larger arena. There are limitations an concerns over data and what can be shared but it opens the door to see what is possible. While many apps and part of the WFH experience will fade a die others will be the work practices to the future. Google and Microsoft are rolling out cloud suites to service what they see as client need and that will push a lot of companies to adopt their systems rather that individual new apps. But some apps will succeed and it is likely that apps will trailblazers for the more established firms to follow. I agree the whilst many jobs will return to the normal office the potential for many will be to WFH and it also means that marketing trips should become a lot more productive as staff are able to keep in better contact with the office.

For Interest
Opinion Beijing better than Biden. Looks at how Trump, if John Bolton book is correct, reached out to China to help him get re-elected; 'astonishing but also telling’ says the article. Trump see that China would prefer another four years of chaos and decline under Trump rather than Biden. Biden could rally and co-ordinate the US traditional allies ' especially in China’s backyard. Korea, Japan, India, Taiwan, Australia, Vietnam, Indonesia, Malaysia, parts of Africa, most of Europe and many other countries are deeply worried about China’s growing assertiveness.’
The issue for Beijing is that such a leader could do much more to constrain the China at home and abroad; which is unlikely to happen under Trump. Furthermore Biden could build the US’s soft power, seeking to show the Chinese people that ‘free democratic systems' are better than authoritarian ones.
The final paragraph sums it up 'As unbelievable as it may seem to his core base of supporters, from the perspective of China’s authoritarian leaders a vote for Mr Trump in November will be a vote to Make China Great Again.’

Opinion POLITICS Russia cannot afford a war with the west by Philip Stephens
Looks at how Putin intends the stay in power and how that benefits China but it may not be a beneficial to Russia. For China, Russia’s stance against the West means the West is distracted from seeing what China is really up to in East Asia.