May 29 HK but also Tencent, HKEX, CK Hutch, Nissan, Huayou and Tweeter/FB


Markets in Asia are struggling/muted today as investors anxiously await to see what Trumps going to do in response to China’s imposition of a National Security Law on HK.
Japan opened lower and has traded sideways; it had mixed economic data out today; unemployment better than f/cast, Tokyo CPI better but Retail Sales and Industrial Production worse. Consumer Confidence, Housing and Construction slight better than forecast but still weak.
S Korea opened lower and has traded sideways around flat
Taiwan opened lower and has traded sideways/slightly higher and just crept into the green at 10,952 a close above 11,000 would be a big positive.
HK opened lower but has worked higher but still -VE on the day
China opened lower but rallied and currently trading around yesterday’s closing level.

Britain opens door to citizenship for 300,000 Hong Kong residents In addition to calling on China to reconsider its action of imposing a national security law on Hong Kong and circumventing the established legal framework the UK will offer potential citizenship to 300,000 Hong Kong citizens. A gesture but not going to make a significant change for the lives of the 7.5m population. Even the offer of British citizenship whilst nice does not alleviate the fact that for most people just leaving is not an option. Hong Kong is their home, where their job, family and friends are. The territory reverts to China in 2047 and then China would have the ability to do whatever it wanted with the territory, to circumvent the agreed framework suggests that the move is about statements to the people of China. That said, it will be important that the international community make a stand on the issue if not for Hong Kong then for Taiwan. A clear signal that aggression and the attempt at a forced unification with Taiwan will not be accepted. So far many countries have not been prepared to say anything because they are more worried about their trade links with China. This is what China considered when it made its move. Trade is obviously very important, especially now as covid-19 has closed down a number of economies but trade is always a two way street. China has made clear that keeping its commerce going and ensuring its people have jobs is the key aim for the government. China is going to need companies to continue to invest and set up within its borders. It’s going to need third party technology in order to maintain its climb up the added value ladder, so now is the time for countries to make their views on China known and clear. Yes to trade and commerce but within the globally established ground rules. Which means that Taiwan is off the menu… forever.

Hong Kong business takes US umbrage at China in its stride Measures likely to have little commercial effect but bigger fear is what comes next. Looks at the impact of the imposition of a national security law on China, not least that the autonomy that was promised for 49 years will not last. It looks at three key areas; trade, financial markets & the dollar and the business community.
Trade key here is the special status that Hong Kong has with the US. As Hong Kong is no longer a major manufacturer then sanctions on trade are unlikely to have much impact. But it could mean that importing tech equipment from the US becomes harder which could have an impact.
Financial markets and the US dollar. Hong Kong gives China access to US dollars through its capital markets. It also provides an internationally open exchange for Chinese companies to list and raising money for investment into building companies in China. It is also a conduit for legal and other financial services. Those have been key to Hong Kong’s success. Investors still want contracts written in Hong Kong with its common law system so that they have certainty. The article does not see major changes to the arrangements or restrictions on capital flows. I agreed this is what China is banking on (no pun intended). I think this is an area that Trump could upset by placing further restrictions on the investment of US pension money into Chinese companies. I also think that whilst we may not have seen capital outflows so far I think wealthy investors are going to be far more cautious about having assets or structures to protect their assets domicile in Hong Kong. One only has to look at why rich Chinese mainlanders try and get their money off-shore. The ability of China to strip them of their assets because they fallout or upset party official is well documented. China already has the ability to request financial information with regard to criminal investigations internationally but it has to provide reasons and justifications. That I suspect will no longer be the case for Hong Kong. It was interesting that all four major Hong Kong developers supported the proposal when previously they had remained low key. But in the face of the inevitable they are now strongly endorsing the move; they know not to bite the hand that feeds them.
The business community; it notes that in 2018 Hong Kong was home to 290 regional HQ’s for US companies. Last October the AMCHAM said that more than half of those had considered moving out of Hong Kong; much of that due to the protests. Many in the business community are employed in sectors that are connected with Hong Kong’s special status. Those professions are under threat.
I also think that a number of companies are now considering the security of their IT networks and whether to move those out of Hong Kong and beyond the reach of the Chinese. Journalism, which has already been under pressure since the FT saw one of its editors have the renewal of his visa declined because he moderated a discussion with someone China didn’t like, is also likely to come under more pressure.
Lawyers will be particularly keen to see the detail of the new law to see whether it will impact contracts written in Hong Kong and those could have far reaching ramifications over time.
All that said until we see the detail of the law we just don’t know, although the fact that China would not release the draft is a worry in itself.

Also see Finance leaders willing to swallow Beijing medicine Multinationals and banks reluctantly accept legislation in return for end of turbulence. I am not sure that profession people that a national security law will result in the end of turbulence. It may well see a rise not only in the turbulence but in the force used to end it. The head of the PLA in Hong Kong has already endorsed the legislation and said his troops are prepared to act. The use of force to suppress a protest would I think prompt many multi nationals and exits to leave. Which would leave the local Hong Kong people at a loss and for no fault of their own except for believing China when it said it would allow Hong Kong to draft its own Article 23. I think worth noting that the Article 23 that has so far been proposed hasn’t really been Hong Kong’s it has been drafted by the administration that is supported by China. Part of the reason they are acting now is that their is a real chance that pro democracy legislators win a majority in the September elections and then draft an Article 23 with the backing from free elections that gets passed but that Beijing will not accept.
Also worth noting that the Hong Kong police have already said that the annual Tiananmen Square commemoration cannot go ahead because of the covid-19 legislation barring gatherings of more than 8 people which Carrie Lam has said will end after June 4. She said it wasn’t kept in place for political reason but many will doubt that it is just a coincidence.

Reckitt’s Dettol plant in China shapes up fast. Hubei factory proves a model of how to keep vital products flowing as it increases daily capacity from 40 tonnes to 400. An interesting read about how the company overcame multiple difficulties to keep things going. Key points were willingness to adapt and having staff that wanted to work. It is interesting that so many of the staff lived so far from the factory. One forgets that a lot of factories in China are not operated by local workers but migrant ones. These are lower paid jobs but as the covid-19 crisis has shown often essential ones. It also raises the question about what jobs China needs going forward to get its economy going and keep it going. In the coming months China is going to be tested. Will its exporters see demand return that allow them to resume full operations. How is the service sector going to adapt. At the NPC Premier Li outlined tax cuts and other measures to help businesses get back to work. But the essential is end demand. China is hoping that domestic demand will return quickly although in my experience the Chinese consumer only spends when they are confident and building that confidence in the short term could be difficult and easily undermined by a second wave of infections.

Tencent launches $6bn debt deal amid record Asia fundraising rush. The issue has been well received despite the tensions between US and China and all investors are looking for good companies. See also LEX Tencent/dollar bonds: get ’em while they’re hot Looks at the deal and at how Chinese issuers have been rushing to foreign debt markets recently. The Chinese regulators are more wary; fearing increasing offshore liabilities. But notes 'Notably, 80 per cent of Tencent’s bond offering was for maturities of 10 years or more, with $2bn in 30-year paper and $750m in 40-year debt.’ That is unusual. It also notes the weakening RMB which raises the cost of relaying US dollar debt is also a concern. All that said its still says 'Issuers and bond investors should load up while they still can.'

Ill winds of trade war fan hopes of HK exchange. Looks at what will be required from Charles Li’s replacement at HK EX. The article see the prospects for the exchange as being more promising; the current US/China tension could see more Mainland Chinese companies look to/be force to list in Hong Kong. But that would raise liquify issues for the Hong Kong which it might not be able to meet; Citi estimates that the 200 mainland companies listed in New York have a market cap of $1.7tn. That excludes those already with a secondary listing or considering a secondary listing in Hong Kong.
It notes that
'In the recent past, Beijing regarded Hong Kong with ambivalence. It looked askance at listings in Hong Kong that enabled mainland insiders to cash out, considering it a form of capital flight, as these fortunate executives received their proceeds in hard currency outside of the reach of the tax office back home.’
Again the new security law could impact China’s ability to ‘tax' mainlanders gains.
The article also assumes that the US doesn’t restrict US money from investing in Chinese companies; it makes little sense to force Chinese companies to delist from the Nasdaq if you are then going to allow US investors to invest in them in Hong Kong!
It also notes that China’s attempts at new bourses have had limited success; Star Board and ChiNext are still slowly developing. As well as acknowledging that Shanghai can’t match Hong Kong’s capital raising abilities yet; not least because the Rmb is not fully convertible.
The article says 'For Mr Li’s successor, these positive factors must be set against the threat to business as usual posed by Hong Kong’s political crisis. For HKEX, striking the right balance between its own needs and those of Beijing is only getting harder.’
That could be made a lot harder depending on what Trump says at his press conference today.

EU block of Three-O2 merger annulled. Rationale for stopping UK telecoms deal in 2016 was based on ‘several errors’ Good news for CK Hutchinson although the parties still have the ability to challenge the decision. It should, if unchallenged, result in some more mergers within the European mobile networks.

Nissan’s global number two handed US revival task. Looks at the new plan from Nissan to revive its business with a four year plan. A radical change from the strategy of Mr Ghosn; only time will tell if its the right one.

Huayou halts buying from individuals in DRC. Looks at the decision of China’s biggest cobalt producer to stop buying on concerns about child labour and informal mining due to pressure from its customers. But its a two edged sword because many of the individual miners makes the situation worse. As with many of these industries in Africa and the world’s poorer economies proper oversight is required so that the industries operate in a safe, sustainable way and that the benefits are properly shares amongst the population. Unfortunately that is unlikely to happen in the short term.

Zuckerberg and Dorsey lock horns in run-up to Trump fact-checking order. The two have different views. Zuckerberg’s view is that private tech companies '“shouldn’t be the arbiter of truth of everything that people say online”. Dorsey is of the opinion that whilst everyone should have the right to say that they think there is a responsibility on all media outlets to direct people, when something is clearly wrong, to further information so they can make their own minds up. The further fact is that really the President of the US should not be spreading what in his own words is fake news and the administration around him should be preventing him from doing so too. The fact that that isn’t happening is an even more serious concern than whether private media companies are arbiters of truth. Read also Tweeter-in-chief Trump has handed Facebook and Twitter a gift and the Editorial Fact-checking the president’s Twitter feed Social media site has been over-cautious in tackling misinformation

FT BIG READ. CORONAVIRUS Insuring against the next pandemic Under fire for not paying out claims to struggling businesses during the lockdown, the industry is already planning for the next crisis. The threat of a second wave of infections means it might be only months away. An interesting read.

I hope you found it useful, feedback and comment always welcomed