Oct 26 FT Thoughts China Plenum starts, Fertility in Japan, and lunchtime updates HK Closed

30 Oct

Oct 26 FT Thoughts China Plenum starts, Fertility in Japan, and lunchtime updates HK Closed

MARKETs @ 1:20pm HK time
JAPAN opened flat and traded sideways in a tight range (23,573/23475) during the morning session and closed flat. PM session opened lower and traded sideways ahead of the Leading Economic Index and Coincident Index data Currently -0.1% @ 23,499
Leading Economic Index Final Aug 88.4 vs 86.7 Jul (F/cast was 88.8)
Coincident Index Final Aug 79.2 vs 78.3 Jul (F/cast was 79.4)
The Leading Economic index  which is a gauge of the economy a few months ahead and is compiled using data such as job offers and consumer sentiment, rose by 1.7 points in August 2020, the highest since February. The improvement in the index followed the reopening of business units amid the loosening of coronavirus pandemic restrictions but was short of forecasts.
Coincident Index which consists of a range of data including factory output, employment, and retail sales, was at 79.2 in August, compared with the flash figure of 79.4 and a final 78.3 in July. This marked the highest reading since March, with the government upgrading the assessment for the index moved to "Halting to fall" from "Worsening", the first time since May 2019, suggesting the economy stops contracting following the COVID-19 shock
S KOREA Kospi opened higher @ 2,367 and saw a small uptick before reversing and trending lower for the rest of the session currently -0.5% @ 2,349 drifting lower
Kosdaq opened flat but trading down to a low of 785 before support, a small uptick and now trading sideway’s currently -3.1% @ 783
TAIWAN opened higher (12,923) and initially rallied to 12,971 but then sold down to flat at about 9:45pm. Since then it worked back to 12,940 and then has drifted lower currently +0.15% @ 12,918
CHINA CSI 300 opened lower @ 4,684 ahead of the start of the Fifth Plenum of the Nineteenth Communist Party Congress. It initial sold down to 4,639 before working higher to 4,713 just short of Friday’s closed and then eased back into lunch. Ticked hihger initially after lunch Currently -0.45% @ 4,497
Shanghai Comp traded in the same pattern currently -0.7% @ 3,255
Shenzhen Comp traded in a similar pattern but broke into the green and upto 13,242 before easing back into lunch Currently +0.4% @ 13,179
ChiNext traded the same way as Shenzhen currently +0.8% @ 2,622
HONG KONG Market Closed re-opens Tuesday.
EUROPE Seeing a surge in covid cases with Spain ordering a curfew, Italy announced more social distancing measure. -VE for sentiment. I would expect the markets to open lower. Earnings in focus.
US Futures opened -150pts and have slipped to -180pts with the S&P and NDX both -VE as US covid cases hit 83,000 a record high. Earnings in focus and hopes remain for news of a stimulus deal.

On line
China reported a cluster of asymptomatic coronavirus cases in Kashgar
following extensive testing after a 17 year old tested positive during a routing test. The City was isolated whilst further tests are undertaken.

Chinese leadership meets to set policy direction for next 5 years
. The meeting runs until Thursday and will draft the next 5 year plan and discuss the board plan for the next 15 years.
So far hints suggest that China will broaden its focus on economic growth to include targets for environmental protection, innovation and self-sufficient development with key areas being food, energy, and in chips. Most expect significant attention being given to chips and tech; because of the currently sanctions being place on China by the US.
Also expect more on detail on the ‘dual circulation’ economy.
Markets will also be watching to see how President Xi looks to further consolidate his power.
Whilst we may get sound bites and an outline of the plan it is not usually made public until the next meeting of the legislature next March.

Japan PM floats fertility treatment to help birth rate Suga offers support for IVF to be paid for by national health insurance. It is a least a new tack to address the problem of the low birth rate and the declining population. Although some still say the real problem is 'economic insecurity and gender inequality that discouraged marriage and raising children.’
But even so the key will be in the detail and particularly in the level of funding available.
The article notes that whilst PM Suga is keen to raise the birth rate there is no suggestion of state interference with the private decision about having children. It notes the subject is taboo in Japan 'since the militarist government of the 1930s suppressed birth control and made an ideology out of increasing the population.’

Cenovus buys Canada rival Husky Energy in $7.8bn deal. Key for Asian investors will be the impact on Hutchison which holds Husky Energy and will end up owing about 27% of the new company. Husky shareholders will receive 0.7845 of a Cenovus share and 0.0651 of a Cenovus share purchase warrant in exchange for each Husky common share, representing a 21% premium excluding warrants. Key will be the potential cost savings after integration of the two companies.

Alibaba’s Ma rails at global financial regulations (was in my piece FT Weekend Thoughts) Basel regulations are not relevant for China’s phase of development, says Alibaba founder. Calling the Basel rules and old peoples club. He suggests that the rules focus on the risks and not the opportunities. Suggests that lending should be based more on a credit rating system than a requirement for collateral.
The article notes that whilst Ant does operate a credit scheme its own experts question the success of Sesame Credit for predicting loan repayments and notes the company has predominantly stuck to traditional banking data for making loan decisions. It also notes how the PBOC’s attempt to set up a nationwide credit scoring system encountered problems when Tencent and Ant refused to share user data with it.
It will be interesting to see if Ant does move further in that direction, its currently profitability would suggest that it has the means to do so but it could prove to be an expensive experiment.

China puts its chips on the table. (Again was in FT Weekend Thoughts) Beijing’s push to build sector takes on added urgency as Washington sanctions tighten.
Beijing’s plans for the sector in spotlight as Communist party develops next five-year plan. Notes the stranglehold the US currently enjoys over the machines needed for making chips. So China will need to need to build from the basics to become self sufficient. A priority will be boosting its prowess in electronic design automation (EDA) the software used in chip design and in making the machines deployed in chip fabrication plants.
It suggests that in semiconductor equipment and EDA, China is today where Huawei and ZTE were in the late 1990s, a low-cost provider still lagging behind overseas peers in technology. Part of the issue is that it is not just about money it is about building up experience and talent.
It also points out that China may have to reappraise the way it makes its investments to support the development. 'The industry has also suffered because of inefficiency. Over the past three decades, hundreds of chip projects have failed because of investors lacking the required technical knowledge or after having redirected subsidies into unrelated property projects.’ So greater scrutiny of companies is required and tight control over the how the money is spent. It notes that 'In the first nine months of 2020, more than 13,000 Chinese enterprises registered as chip companies, even though many have no prior industry experience.’
This will be a key area for government going forward and it will need to be careful in how and where it invests its money. But it will still take a long time to catch up and in the meantime the industry leaders will keep making advances.

For Interest
Opinion Big Tech collaborates to conquer. Takes a look at the DoJ case against Google and notes that the big tech firms have a habit of working together for their mutual benefit in much the same way that at the turn of the 20th Century the oil, steel and railroad tycoons often worked together. I am sure we will see many more articles in the case and that there will be more revelations to come. The key will be for the DoJ to win the case in the law courts but it will be interesting to see if the revelations that come out move public option to Puch the companies to change; that could be even more effective.

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