May 21 CHINA Calls on Beijing: Social unrest, Taiwan, Debt standing, Biden. And more


Markets
Japan opened higher but drifted lower and has traded sideways around flat
S Korea opened higher and traded sideways but in the green
Taiwan opened higher and worked higher to test 11,000 in early trading but failed to break out, it consolidated lower but worked higher but unable to find the driver to retest
HK opened +128pts @ 24,528 vs +59pts ADRs as recent shorts covered but then sold down to the morning low (24,208) round 10:10am before climbing back to yesterday’s closing level and trading sideways into lunch. Currently drifting lower.China followed a similar pattern and drifting lower in the afternoon session
Europe looks like opening lower ahead of Eurozone manufacturing and services data.
US futures currently indicating lower Dow -127pts S&P and NDX also lower.

Chinese business calls for more support ahead of congress Looks at the calls from business on the Chinese government as its show case party conferences take place.
Many are saying that Beijing has not done enough to help; either via direct support or support for the economy. They and a lot of businesses are looking for more from the NPC. The question is what will that stimulus be? It note that it is unlikely to be a building boom as seen previously. Its already cut taxes, extended loans and handed out shopping coupons. New Loans were are a record in the early months of the year (although who benefitted from them is unclear but more likely the SOE’s than the SME’s). It's already called on local governments to do more especially regarding jobs.
But for all that it has done it has not been enough, local governments are still experiencing financial stress.
I think it will focus on programmes for job creation because social unrest is the party’s biggest fear and with the backlash that has been seen in some quarters over its handling of the covid-19 outbreak it is very aware of its precarious position. The article mentions the setting of an economic target, noting that the risk of not setting one will make people think the economy is in real trouble. The reality is that the economy is in real trouble and the setting of a growth target has historically lead to a misuse of scare resources, which now are in even shorter supply. It’s SOE’s don’t create jobs and no longer have the capacity ‘shelter’ workers. So it should be looking to the SME’s but over the last few years apart from giving them ‘lip service support’ President Xi has actually made it harder for them to operate. Now it the time to offer them real support.
China will need more new jobs in the next coming months as this years school and university leavers hit the market. A failure to find university graduates a job will hurt the core recruiting ground for the party’s future members and raise the prospect of social unrest. But creating jobs is difficult with the back drop of a tariff war with the US, covid-19 and a global slowdown. Most important will be detailed proposals rather than grandiose statements. Investors will remain cautious ahead of the announcements; whether they are convinces by the proposals remains to be seen.

Taiwan calls on Xi to stabilise cross-strait ties Looks at President Tsai’s inauguration speech at a time on increased tension between the two independent countries. Tsai called for co-existence and reiterated the ‘one country two systems’. Despite her calls Beijing immediately rejected such action and said unification was inevitable. President Tsai noted that the ‘1992 consensus’ had not worked and hence a new approach was needed. The problem is that China and Resident Xi specifically want Taiwan and will resort to military action to get it. The fact that so many countries including major nations have sided with China in the past have given it the confidence to think it can take it and ignore the will of the 23.78m people who live there. More countries need to side with the rights of Taiwan and recognise the country for what it is. Many countries rely on Taiwan for their Tech, they should be grateful and recognise it sovereign rights not least to be represented at the WHO.
At a time when China is facing big economic problems at how the potential for an attack on Taiwan are increasing. It will be too late for the world to then react. Remember Russia’s annexation of the Crimean peninsula in 2014. Nobody though Russia would actually do it.
The Chinese have a stronger reason for action now, the US is staving them of chip technology. The acknowledged leader of the tech they want is in Taiwan, separated by just 2,100km of water. If the US and the World want peace then now is the time to tell China to step down and give up its claims. The WHO and effectively many countries are still holding to a decision made in 1972, many things in the world has have changed since then and its time that the Status of The Republic of China, to use Taiwan’s official name, was acknowledge for what it is. A free country.

Americans splash out on bikes, TVs and DIY materials. Looks at what American’s have been spending the money and time doing during lockdown. For Asian investors some of the key details are for Target Clothing sales are -20% in Q1 so -VE for garment makers; many of whom are in Asia.
The other key for me was Home Depot who reported a SSS +7.5% which I wrote about yesterday and overnight Lowe’s saw good sales too. It also mentions that Walmart CEO said 'Families had been “looking to improve their indoor and outdoor living spaces”, Doug McMillon, Walmart chief executive, told analysts on Tuesday. “Our home categories, in stores and online, took off.” Also if you watch TikTok the number of home improvement clips is significant.
All of which I think is good for Techtornics (669 HK) which has recently seen significant shorting. The stock is off its March low of around HK$50 and nearing its Feb high of HK$71.00 but I still think outlook is good. Short term post covid many people are not going to be able to afford to move and so DIY will continue and Housebuilders are going to resume operations another +VE. I would suggest accumulate slowly on down days.
Key for Walmart and Home Depot is that they were designated ‘essential’ and so
remind open whilst other were forced to close.

US and China cloud vendors race for SE Asia crown Looks at the competition between Alibaba, Google, Amazon, Huawei and others means competition is fierce. Tencent and Mircosoft are also increasing their footprints in the region. An interesting read and an area that is going to remain important. For investors it means the outlook for the hardware suppliers remains good and probably a growth area for real estate developers who can provide locations that have access to good power supplies that these operations require.

Court case threatens to shake up trade in $100bn of China debt looks at the case of Peking University Founder Group, a state-backed technology group linked to China’s top university, they have said they will not recognise about $1.7bn in so-called keepwell deeds that back its debt. These are letter that give assurance to foreigners that the parent of a Chinese company will make good on US dollar denominated bonds sold by offshore subsidiaries. If these keep well deeds are not recognised then a billions of dollars of debt will need to be repriced. It estimates that there is nearly $100bn of debt backed by these deeds. In the past there have been challenges but eventually the debts were paid. This is different because its the first time the parent have fallen into administration. 'Founder defaulted on its onshore debt in February and was sucked into a rare bankruptcy case for a high-profile state group.’
If the court finds in favour of the administrator to Founder then similar debt will be repriced and potentially restructured. It would also mean another source of funds for China may disappear just at the time when China needs it most.

Opinion The Chinese Communist party will survive Covid-19 Puts the case that unlike the crisis in 2009 there have not ben stark warnings from Chinese leaders about the failure of growth leading to the toppling of the Communist Party. Much because President Xi has been resolute in crushing any dissent even in the early stage of the covid-19 crisis the doctor whistleblower was taken by the police and force to sign of false retraction or what turned out the be the truth. The article does not mention this but it is the skill of the propaganda machine in China that even that event has been ’spun’. But in addition to crushing dissent the Chinese registration system ‘hukou’ determines if you are urban and rural. The article does accept that the current rise in unemployment is a concern but the ‘hukou’ reduces the threat. Whilst rural workers can work in the cities that get no rights or benefits; for those they have to return home. The article points says that this effectively curtails uprisings. It also thinks that the middle class are the major beneficiaries of the recent growth and can ’be modified with further handouts’ so unlikely to rebel. It also notes that the Party has been helped by the disastrous way other countries have dealt with the virus and so whilst some in the west might wish for open rebellion they are likely to disappointed.
I am not so sure. The slow down in the economy is likely to hurt the middle class, especially if their sons or daughters can’t find jobs. The fact that we haven’t heard open calls from the leaders of the party is that President Xi will not allow dissent at any level, especially his high level party members. I think the Party is too worried but to say anything. That would give the public the public the wrong impression in the party’s view. Just as not setting a growth target could be seen negatively to mean the outlook was so bad. That's how investors have reacted to companies not giving forecasts. Another issue is that surveillance on the middle class is more difficult. They are educated and aware of the party apparatus but have developed means to circumvent it. Pre covid they didn’t need the internet they met at the school gate. They are adept at using analogies to get around restrictions on social media. I think the party is more worried now that every. The tariff war and attach on Huawei has revealed big flaws in China’s world aspirations. That could have been dealt with but add to that covid and a global slow down and then none of it becomes easy. The lack of alternatives for Huawei a Chinese and Party flagship company is a telling reminder of how fleeting things can be.
I think the NPC and CPPCC will see the Party seek to demonstrate that it is control and all is well. Just in holding the events it is trying to convey that it has covid-19 under control. It will set out its plans for stimulus which I think will have a large focus on job creation but investors, especially Chinese ones will be focusing on the detail. Whist we may not see rebellion the potential for widespread social unrest remains. Whilst Hukou may keep some of the rural migrants at home its worth remembering that China has 65 cities with more than 1million people (the US has just 10, with New York top with a population of 8.6m) China’s top10 cities have populations of between 17.5m people in Shanghai and 7m in Nanjing. That’s an huge number of middle class to keep happy even without the rural migrants.

Opinion Beijing has more to lose from a Biden presidency Looks at the politics of Trump and Biden and the implications for China. An interesting read and as the presidential election gets going I am sure we will hear more from both regarding China. The key will be that whilst Trump has got us to where we are it will probably need Biden to build a better future rather than Trump to keep trashing things.

LEX Capex cuts: the blight stuff. Notes that whilst most industries are cutting Capex tech is the exception but with other sectors cutting the recovery will take longer -VE

LEX Japan pharma: race to escape. Looking for winners mentions Fujifim, Mitsubishi Tanabe Pharma, I’rom Group and Takeda, and thinks Takeda offers the best chances. But 'Perhaps some profit-starved Japanese companies desperate for a cure to their woes will find an effective virus drug. But for most of them, their hopes — and share prices — are overblown.'

Oil industry faces stuttering move back to normality. Keep point is that the oil sector and others have yet to some to terms with the fact that the recovery this time is unlikely to be a straight line affair. I think it will be more like a spring oscillating back to its stable position.

FT Big Read on the Car Industry Is it time to buy a car? Carmakers are hoping for a coronavirus silver lining. As consumers shun public transport, health concerns are driving sales of electric and petrol powered models as well as take-up of subscription services. A generally up beat article on the sector. The real question will com e once a vaccine is available; will the current surge in demand reverse again. For the moment no one minds they are just happy that the important employment sector is seeing good demand for its products.

I hope you enjoyed the read, feedback welcome