FT 9 June EM's shrinking, Hedge Funds escaping, Chinese threats and more
Markets are mixed
JAPAN opened flat but has trended lower, pre market April Average Cash Earnings came in much lower than expected at -0.6% YoY vs +0.1% March (F/cast was +0.5%). Market has trended lower through the day. Caution ahead of PPI and Machinery orders tomorrow)
S KOREA opened higher but again the markets had trended lower after 7 days of gains; news that it's top 100 companies posted a 10 percent on-quarter decline in their overseas earnings in the January-March period due to the new coronavirus impact on industries, has nit helped
TAIWAN opened lower but worked into the green and then traded sideways around flat
CHINA opened flat and slowly working higher
HONG KONG opened higher in line with the ADR’s and saw a short squeeze and worked higher. Initial trading after lunch showing another squeeze higher.
EUROPE looking like a flat lower open
US Dow futures indicating a flat open -30pts
Emerging economies to shrink for first time in decades The latest World Bank warning as covid-19 spreads from developed economies to the big emerging ones, where it is set to have a greater impact; tipping up to 100m people into extreme poverty (an income of less than $1.90 a day). Latin America and the Caribbean expected to see the biggest drop.
It also expects the global economy to shrink 5.2% this year vs the 3% forecast by the IMF in April reflecting the growing impact of covid-19.
Hedge funds hatch their Hong Kong escape plans Threat to flow of information and risk that Beijing will target sector put managers on edge. Says that some are worried that the new national security law might mean that some of their corporate actions are taken as “subversion of state power” or “interference” from foreign countries.
A key is that hedge funds can move home quite quickly and are able to work from a number of locations with ease. It's also a big business the article notes
'At stake is Hong Kong’s status as the premier destination in Asia for hedge funds. More than 420 such funds are based in the city, according to data from research firm Eurekahedge — about 80 more than in Singapore, the regional runner-up.
Funds in Hong Kong manage assets worth almost $91bn, more than is managed in Singapore, Japan and Australia combined.’
That represents significant income flow for the HK administration to say nothing of the taxes it generates and the good jobs that are created, not just at the funds but at the support services that administer to them.
For the funds a key item is the possible restrictions on information which could just start with restrictions on social media, free internet but then slowly extend those into other areas. It doesn’t mention but I think of equal concern would be the security on information of company servers situated in Hong Kong but which could give access to hedge fund activities in other countries. That I think will be a concern not just for Hedge Funds but for many businesses.
It mentions that the Carrie Lam along with Beijing has tried to dismiss such fears and should wait to see the details of the law. But it is strange how few people are convinced by her statements.
But most will adopt a wait and see but prepare a plan B too.
I would also expect US funds to move out more quickly given the tension over the Canadians being arrest in China after the Huawei CEO was detained in Canada. Another factor mentioned in the article is that Mainland regulators often target foreign institutions with probes after market sell off and often fine them.
Currently there is uncertainty and people are exploring 'what if’ scenarios. But one thing is for sure and that is that if China proceeds Hong Kong will be changed and many feel, despite what Carrie Lam and Beijing say, it will not be in a good way in terms of the freedoms that are currently enjoyed by businesses and individuals.
When expediency dictates support for Chinese repression looks at how Standard Chartered Bank’s boos Bill Winters talked about the “scourge of racism and discrimination” laid bare by the George Floyd killing and in the same week endorsed China’s imposition of a National Security Law on China. He was not alone with HSBC following in the same vein. The article sets out that such double standards are logical from a business perspective. Regarding George Floyd’s killing it notes, that in the past, businesses would not have commented on the killing of a black man or the response but times the changed. ESG is a rising trend and key will be whether the rhetoric is implemented; like better staff diversity. Regarding the National Security Law, week it depends on China for its licences to operate and so commercially can’t take a stand and the same can effectively be said for everyone business in Hong Kong that has endorsed the legislation. The amazing thing is that nearly everyone who has endorsed the imposition of a National Security Law has not endorsed the Law 'per se' just China’s right to impose it on Hong Kong. It’s another rubber stamp because they know they don’t have the freedom to object, that is the price of doing business with China. For large businesses its an easy choice agree with China or don’t do business. They calculate that whilst the stance may upset some investors and some bank clients the majority will understand. Going forward though if ESG is really to be taken seriously then it could be that firms are forced by shareholders or other to stop doing business with China. That was the case with South Africa under apartheid. The article also notes that after Mr Winter’s published his blog a follower then posed the question about Standard Chartered’s operations in the Middle East and China.
It highlights the dilemma is it better to stay in what the article calls 'markets that do not espouse liberal western values and moral standards.’ Or leave? It says 'A more pragmatic approach, which could both protect profits and effect change, would be for companies and business leaders to use their influence more effectively.’
It sets out that that can work at some levels with companies but it won’t work when you are dealing with China because the corporate licences, especially for Standard Chartered and HSBC, are a licence to print money.
It will only change if the International community decides to take a stance as it did with South Africa. The unfortunate thing is that China’s status and ability to bully as the UN means that is unlikely to happen. As in so many things China has taken the standards and institutions that the West set up for good and is now using those freedoms, which it will not allow on its own soil against the west’s moves for change. Such is the price of freedom.
HK eases quarantine restrictions for heads of top listed groups. It will allow two senior employees at the largest listed companies on its stock exchange to apply for exemptions from mandatory quarantines when travelling between Hong Kong and mainland China. The article notes that it is a strange criteria being linked to the stock market listing rather than business needs. So unlisted operators of factories or other businesses in China are still left to work remotely.
Shipping lines tackle crisis with skill but risk of vicious price war endures
Industry mood is sober as WTO forecasts that merchandise trade will drop by up to 32% this year. Follows yesterday’s article about crew being stuck either at sea of home. This one is more upbeat and notes that the industry is more nimble than it was before and quicker to take appropriate action. But the outlook remains tough.
It notes that Asian shipping lines then to have higher leverage which could lead to defaults.
Chinese investment in Australia falls 58% as political tensions over virus bite. Actually referee to the drop in investment that occurred as a result of Australia tightening its rules on Chinese investment. It was similar for a number of countries that start to prevent China buying into what were considered key sectors. It goes onto look at the current situation where China has taken umbrage at Australia, amongst others calling for a investigation into China and covid-19. First it responded with threats, then sanctions and most recently a travel warning to its citizens about travelling to Australia. All clear signs of bullying by China and to my mind suggest that China is hiding something; if not why not just agree to the investigation. As China has been telling people in Hong Kong; if you have nothing to hide then the new security law will not affect you. Maybe it is time for the world leaders to say to China if you have nothing to hide don’t worry about the investigation.
Nato chief warns on rising power of China Stoltenberg urges stance against bullying but denies Beijing is ‘new enemy’. He is urging a more global approach to China. China’s rise to being the second largest military spender in the world needs to be acknowledges and an appropriate response made because China has the ability to impact economics, technology, freedoms and peoples general way of life. He noted that China was now evident in cyberspace, the Artic, Africa and critical infrastructure. He also noted how China was working more and more with Russia; which could have a direct impact on Nato. The article also quotes Jeremy Fleming, director of British signals intelligence agency GCHQ, who said last week that the pandemic had put China’s rise “front and centre” in people’s minds. They key point is that China is taking bullying individual nations and that is where other countries need to act. China tries to isolate; the clearest example being Taiwan and the world has allowed it to. Here is a call to re-visit the situation.
It makes clear that China should be being taken more seriously on a global basis both militarily and on the business front. It also highlights once again that if Trump had decided to take a more united front with the US allies and friends regarding trade and China there might have been a better solution. We will never know. But that should not stop Countries coming together now to address the issues and seek an amicable solution rather than a new Cold War or worse.
Editorial EU curbs on Chinese state aid are overdue Action on subsidies is a sensible step but fraught with difficulties. Looks at how governments are seeking to protect their businesses that may be in trouble being bought by other businesses that benefit from home government subsidies. Whilst not mentioned directly China is seen as the key threat. Especially as the approach to China has hardened recently not least because the EU described it 'as a “systemic rival” intent on using its model of state capitalism to achieve industrial and technological supremacy, all the while taking advantage of Europe’s open market economy.’ As well as concerns that 'unfair Chinese competition and a lack of reciprocal market opening’.
The loop hole created by 'foreign subsidised entities or their subsidiaries providing goods and services inside the single market.’
To combat this there are two measures
'EU and national authorities would have the power to investigate alleged foreign subsidies to groups operating inside the EU and impose corrective measures if an in-depth probe found they distorted the market. Second, the EU would be given the power to screen, amend or even ban bigger takeovers involving possible foreign subsidies under a notification regime akin to its regular merger control. National authorities would look at smaller acquisitions.’
Whilst sounding simple there will be objections; some southern and eastern states that are benefiting from Chinese investment will not want to upset China. Also the definition of what a subsidy is will be hard.
'The EU may have to go further and demand full reciprocity to prise open Chinese markets for European businesses and investors. Action on state aid is a sensible first step. It will also help to maintain the legitimacy of the union’s competition regime, which is indispensable for spurring efficiency and innovation in the bloc. Unless foreign subsidies are controlled, demands in Paris and Berlin for dominant European industrial champions and, worse, political interference in antitrust decisions will become harder to resist.’
Worth a read
Opinion Pride and paranoia are a dangerous mix. Asks what is China up to? It is pursuing aggressive policies globally. It suggest China may feel emboldened while the rest of the world is seemingly distracted by covid-19 and US protests. But Gideon Rachman warns that we cannot afford to lose focus on Asia and China’s actions.
Referring to Wolf Warrior tactics he notes the slogan for the film was “Anyone who insults China — no matter how remote — must be exterminated”.
Mixed with the pride of the growing nation is the paranoia. Xi has seen unprecedented threats and challenges over the past 12 months (I think longer, since Bo Xilai) but the recent ones , covid-19, US trade war, rejection of the HK extradition bill and pro democracy protests in HK and a landslide rejection of China in Taiwan’s re-election of President Tsai. In response China’s leaders have stoked up nationalism to rally the people to threats from home and abroad.
Boldly and aggressively; the national security law on Hong Kong (ahead of an expected loss local elections in September; unless the new law allows for the voting structure to be changed?). Increased military moves and rhetoric against Taiwan. More naval incursions into Japanese, Malaysian, Vietnamese and Philippine waters (in additional to militarisation of islands that previously it had promised not too). Increased skirmishes with India. As well as rebukes and economic action against countries that dare to criticise it, like Australia.
Whilst Xi may genuinely believe hostile forces are looking to act against it but the west cannot condone China’s actions. 'Even if Mr Xi and his cohorts firmly believe that China’s actions are “defensive” in nature, the system they are defending is a one-party state that seeks to repress criticism at home and abroad — while pushing forward with a series of unreasonable international demands.’
Beijing argues its case using legal, diplomatic and historical ground. But most of these fail, not least because they are based in nationalistic lies. He suggests that China's 'arguments will never convince democratic countries in Asia and the west to be anything but horrified by the sight of China threatening the freedoms of Hong Kong and Taiwan.’ Although I think the lack of a truly unified approach on Hong Kong and, in reality, a lack of any response to China’s threats to Taiwan just emboldens China further.
He makes the good point that China is a rising power and many smaller nations will feel under threat. Beijing clearly bullies countries it is ‘displeased with’ having found that policy to work and its a policy the rest of the world does not rebuke China for using, again emboldening China to keep using it as a policy.
He sums up by saying
'Changing that pattern of behaviour will require a more unified and principled response from the world’s democracies, perhaps through the formation of a permanent contact group to discuss policy towards China. Given the paranoia and nationalism in Beijing, there is clearly a danger that a tougher, more coordinated response will spark an even more aggressive reaction. But the bigger danger is that the outside world is too distracted, divided and intimidated to respond coherently. That may persuade Beijing to take one risk too many — plunging the world into a new and dangerous crisis.’
I think that is the biggest risk and that the move will be against Taiwan unless the world acknowledges Taiwan for the independent nation it is and accords it the status it deserves both at the UN and WHO. The situation in 1971 was very different to the one we are in now, except that China was a bully then too.
Fed keeps investors waiting on debt scheme Looks at the delays in the Fed launching its programme for buying corporate bonds. It could be the matter is covered in Wednesday’s FOMC press conference. Worth noting that from the way the markets have already recovered some will be questioning whether the Fed needs to go further than it already has. This scheme to buy individual company debts in the secondary is obviously facing some issues other wise there would not have been a delay. That to me suggests that it will have a significant impact on the way the existing secondary market works. These sort of interventions, whilst they start as short term measures to support the market, if they had too much market impact can then be very hard to reverse.
Opinion Rising markets and inequality grow from the same root Looking at the markets and Friday’s moves; asks was the market right all along?
Sets out pre Friday markets looked out of touch with the real economy. But the jobs data suggests the market was right. Robert Armstrong does not agree the market was reacting to one data point (with data errors). He notes 'Consumer spending has plummeted. The course of the virus is unknown. We need to see more swallows before we declare it summer.’
He also notes that 'it is wrong to dismiss worries about the disconnect between the stock and political unrest. Observers are shocked by the market’s insouciance not because they misunderstand how markets work but because they see it as a symptom of how society works.’ Especially as, in the US; 90% of equities are owned by the wealthiest 10% of households. He notes that the currently system is perpetuating th system of inequality and the rich getting richer.
'If this picture is correct, and if inequality helps fuel the political strains we see across the world today, then those strains are hardly irrelevant to the rise of the stock market. The two grow from the same root.
An unequal and unbalanced global economy should ensure that, for a few years yet, US stocks will remain a good bet. But it should also make investors wonder if, in the long run, political change could reveal their gains to be fool’s gold.’ Well worth a read
Pandemic tells us that EM countries have grown worlds apart. Notes that within Emerging Markets there are stark differences; especially between North Asia and the rest. Looks at how China, Taiwan and S Korea have reacted to covid-19 vs the other EM’s like S Africa, Brazil, India. It looks at three vulnerabilities of EM’s
Credit Health (sovereign and corporate)
Impact on fiscal budgets
Exposure to decline in global goods.
An interesting read.
LEX UK M&A/China: bamboo curtain call Looks at the UK’s muddled (or lack of policy) with regard to China
Social distance measures end New Zealand says it has eliminated covid-19 and so the measured to combat it will be lifted and it will now focus on its economic recovery. Which is good for New Zealand but it will still need to interact with other countries and whilst it is lifting restrictions internally the external ones remain.
FT BIG READ. SOCIAL MEDIA A muddled makeover Facebook’s decision not to censure Donald Trump prompted a staff backlash. Ahead of a divisive election, Mark Zuckerberg is finding it harder than ever to avoid being drawn into political arguments.
Comments and feedback welcome