FT Weekend looks at the deteriorating US/China relationship with HK being caught in the crossfire and suffering collateral damage. In focus was Trump’s scripted press conference (which didn’t allow for questions) on China. It lacked detail but the broad takeaway was that HK lost its special status and that the US would impose further measures. Investors, and I expect Beijing; will be waiting for more details and so the market reaction is likely to be muted as ’the sword of Damocles’ continues to hang by the horses hair.
There are also a large number of articles asking whether the rally in equities since Mid March is overdone; I still think there is a risk of more downside although how much downside is questionable; as cash balances seem to be high.
I’ve also added a couple of articles from the SCMP on the HK situation; one on how money changers are seeing locals changing HK dollars into US ones even as the the HKMA says its not seeing cash leave HK. The other about how China’s security ministry will fully advise the HK police on dealing with the unrest in HK.
Watch for news of more protests in HK, although the thunderstorms are having a dampening effect.
Donald Trump to revoke Hong Kong trade privileges in China escalation Key being that Trump was light on details; which makes it difficult to determine whether China will feel its need to retaliate.
What he did say the was that US would revoke special trade privileges for Hong Kong and sanction officials in HK and China regarding the imposition of a new National Security Law on Hong Kong. He said that would include banning some Chinese nationals with links to the PLA from entering the US in order top protect scientific research and national security. Hong Kong no longer qualifies as a separate travel territory from China; which impacts visa free travel. He also said his team would examine the practices of Chinese companies listed on US exchanges to protect US investors.
The article says “Investment firms should not be subjecting their clients to the hidden and undue risks associated with financing Chinese companies that do not play by the same rules.” That to me, suggests more restrictions on US pension and investment money being invested in Chinese companies. That could have serious implications for Hong Kong. He has already been successful in restriction Federal pension money investing the Chinese companies. The next step is to restrict US investment funds from doing the same. Whilst relative to the overall size of US pension funds; Chinese investment is small it is still a significant amount of money in terms of Hong Kong’s daily turnover.
One commentator said of Trumps actions 'it’s the equivalent of shooting the hostage — but in the leg.’
Markets will now wait to see if more details are forthcoming on specific actions and whether China responds or not. In broad terms Trump’s statement is in line with expectations are hence Beijing may just accept them without retaliation; which would be a slight positive for Hong Kong but long term its a downward slope.
At the same time Trump announced that the US would be withdrawing from the WHO linking that action with what he called the 'malfeasance of the Chinese government,’
Read also WHO probes TV man’s envoy role. China journalist involved in airing of businessman’s alleged forced confession. Looks at James Chau who may have ‘involved’ in in human rights abuses by “packaging and airing forced confessions on television” in China. More bad news for the WHO and China.
In the same theme China vows fresh measures for US attack on HK security law. China on Friday accused US, Australia, Canada and UK of meddling in Hong Kong affairs; following their condemnation of China imposing a National Security Law on Hong Kong. The article points out that China would have expected such a reaction and had taken it into consideration ahead of making the decision. I think it is watching for the reaction from other countries to gauge how far it can push on Taiwan. The SCMP today quotes Li Zuocheng (chief of the PLA Joint Staff Department) who says collusion between independence and foreign forces is a ‘great and realistic threat’ to peaceful development of relations. He went further and said that taking Taiwan by force is an option for Beijing and it will take steps to “resolutely smash” any separatist moves made by the island.
Chinese people do believe the Party line that Taiwan is part of China. Disregarding the fact the to the rest of the world it is not. Republic of China (Taiwan’s official name) replied by saying it denounces such comments, saying threats of war violate international law, and Taiwanese ‘will never choose dictatorship nor bow to violence’
The FT article notes and other media sources have highlighted that the UK has increased its offer to those eligible to hold BNO passport in Hong Kong, they now have the chance of possible citizenship in the UK. The offer was originally to the over 300,000 people who hold such passports but have been increased to to around 2.9m people who are eligible to hold such passports, I’m guessing the on-line application service is going to busy in the next few days. If all those were to apply then Hong Kong would likely to see a major upheaval, that about a third of the popualtion. I suspect though that many will immediately not take up the offer because their jobs; homes and families are in Hong Kong. But it may become increasingly appealing as the details of the national security law become known.
Former HK leader fires shot at HSBC in UK row. Looks at comments from previous HK Chief Executve, CY Leung , calling on HSBC and by implication other businesses in Hong Kong to make a declaration about their stance on the imposition of a National Security Law on Hong Kong.
The article notes that 'While Mr Leung stopped short of saying that he was calling for a boycott of HSBC in its most lucrative markets, he told the FT that he has “quite a few friends who are either closing the accounts or have stopped transacting”.’
It is notable that a lot of businesses have tried to avoid making statements about whether they support the latest imposition for fear of upsetting their customers over the issue which has divided the people Hong Kong and continues to do so. The most recent Hong Kong local elections would suggest that the majority of the people oppose this intervention by China. But as China will never allow Hong Kong to have a free vote or referendum on the matter we will never really know. But China has been seeking to get as many prominent local people to come out in support of its policy, in the hope no doubt that then people will believe what it is saying it true. The problem is that most ordinary people in Hong Kong see these as the rich elite of Hong Kong and for a large part beholden to China for their success. At the NPC this week the four major HK developers gave the bill their support; in my view they had little option in order to protect their businesses and for them the potential for customer rebellion is small. For other businesses it is not so clear cut.
But CY Leung who is Vice Chairman of the National Committee of the Chinese Peoples Political Consultative Conference is making a direct call on HSBC. That to me is an indication of how business will change in Hong Kong. Businesses, in my view, should not be involved in politics. They are there to provide services and hopefully efficiently use resources. Obviously in a command economy it is not the same. What CY Leung is implying is that if you don’t support China you can expect your business to become a target for boycotting or put another way; if you want to do business in Hong Kong you must support China. We have already seen China demonstrated how in disputes with S Korea and Japan it can incite its citizens to boycott company products. It did the same to Cathay Pacific and Swire when they allowed staff to exercise their right under the Basic Law to criticise the HK administration over the attempt by Carrie Lam to bring in an extradition law. I fear going forward we are likely to see more of the same and that is not good for efficient business or for Hong Kong. The irony is that Hong Kong currently allows people to express whatever opinion they want to express; and so CY Leung is free to make his statements. In the future that may not be true for all of Hong Kong’s citizens.
Head of SoftBank Vision Fund lands 113% pay rise despite loss. Likely to put Mr Son and the fund under more pressure. You really do have to wonder sometimes what these companies are thinking and whether they have any concept of responsibility to shareholders. Investor reaction will be evident on Monday when the stock trades. Personally I dislike the stock and for me this is just one more reason why. It sold off from the day high into the close on Friday. Currently at Yen 4,832. The 52 week high was Yen 5,886 back in August 2019. Excluding the March sell off, the stock has seen support around Yen 4,000 level since then. I still think the outlook remains tough, especially as it looks to sell off profitable assets to reduce debt, what does that leave investors except hope. Awarding large pay rises I think gives away that hope.
Graduates’ dreams lie in tatters as pandemic scars domestic job market. Economic fallout from crisis is disproportionately hitting young people. Looks at the prospects for this years graduates in the US. But it's not just US graduates but globally and also school leavers. It will be of especial concern in China, not only because with more people out of work and discontented the fears of social unrest rises but also because the university graduates are usually where the party recuits its membership. Although for those who have already attained party membership a party linked job probably comes too. But for the rest a lack of a jobs could result in educated questioning od the party and the social contract and hence a much bigger problem in years to come.
FT BIG READ. HONG KONG A stormy future under Xi’s watch The city’s unique role as a halfway house between China and the rest of the world is under threat. With Beijing intent on imposing a new security law, Washington could withdraw some of its trading privileges. Another summary of the changes taking place in Hong Kong. A good read; points out that many local Hong Kong people cannot understand why this is an issue. Whereas for many it is a huge issue.
Notes that in the short term some company’s will re-designate their Asian headquarters as being in Singapore rather than Hong Kong. More US executives may be concerned about their personal safety under the new law considering that two Canadians (Michael Kovrig and Michael Spavor) are still being held in China (since 2018) in what is seen as a 'tit for tat' detention after Meng Wanzhou, a senior executive at Chinese Huawei was detained in Canada and is pending her possible extradition to the US. That could, presumably now happen in Hong Kong, with charges or explanation apart from 'national security'.
It quotes Johannes Chan, a legal scholar and former dean of the University of Hong Kong’s law faculty, who says official assurances about the law are short-sighted. “From the beginning, Beijing’s understanding of ‘one country, two systems’ has been ‘one country, two economic systems’, and they don't want anything else,” he says. “But Hong Kong’s economy doesn’t work like that. You can’t have economic success without also political freedoms and all the basic values that flow from that.”
It notes that the confrontation between the people and the administration is likely to enter a new phase. Remember the Chinese Communist Party was 23 years ago, happy with some form of limited democracy (even allowing village elections in China) but that trend has been reversed since President Xi took power. The party cannot accept that people just want more say. I don't believe that most people in Hong Kong want indepenence from China; just more say in how they are trreated. A few may want independance, just as in the protests a few are violent but the majority just want Beijgin to listen to their view. Beijing however, labels anyone with a view that in not in line with its views as someone who cannot be trusted, someone who is not patriotic and so someone who should not be trusted with a vote in the election of a Hong Kong Chief executive who is acceptable to Hong Kong. Hence the fact that Hong Kongs chief executive is not elected by the people of Hong Kong. But rather by the elite of Hong Kong who are already pro the party. The key is that the Party doesn’t want free expression, it sees its role as knowing what is right and imposing that on the people.
This means there could be a problem with the free elections due this September for the election of the Legoc. The current system is made up in part of free votes by the general public of Hong Kong its citizens, but some of the votes are from professional groups. In the past the pro Beijing camp could rely on those professional groups aligning with the them to ensure they had a majority in Legco. But last years over whelming defeat of the pro Beijing groups has put that it question. It will be interesting to see if the voting this September is subject to any amendments.
I believe it was the prospect of losing that September vote that forced Beijing to move now.
Editorial Market rally is based on optimistic assumptions. It notes that globally brokers have seen more accounts opened by customers wanting to trade shares. It is unclear as to the driver but says 'Whether this was a symptom of optimism, boredom or households having cash they would otherwise spend on the daily commute, eating out, or gambling,’ but the result seems to have helped the recent rally in most major stock markets (HK being a notable and understandable exception). It sets out that the optimism may be based on some fragile assumptions. It notes the high level of unemployment and other bleak economic news which seems to be being ignored by investors, whilst hopes of a vaccine are being exaggerated. Whilst the rise of equities should be seen in the context of the amount of stimulus that has been announced by central banks and governments. That coupled with low interest rates and the expectation that they will stay low (or only rise when economic growth resumes) gives 'even fundamentally pessimistic investors good reason to buy into the rally.’
For PM’s they are paid to invest funds, not for the main part to hold cash. So given the choice between negatively-yielding assets or equities; share look better.
BUT the risks remain; poor data and potential second wave infections could trigger a further significant sell-off. Whilst Asia, US and Europe are easing lock-down restrictions other countries are seeing covid-19 cases rise and there is the risk of inflation. Although EU data yesterday pointed to deflation, I think inflation remains a big risk.. There is also the increasing US/China tension; another risk to the global recovery
In summary, it is likely that the global economy is in the first stages of an economic downturn. More twists and turns will occur and equity valuations are plausible as long as the assumptions are right .
I agree with the article, my feeling is that, as we saw in late February/early March; equities were priced for perfection. Everything was going well, the virus was just a China issue…. and then it wasn’t. There was a massive sell-off. For many it was a knee jerk reaction and meant they had cash. But there were few safe haven assets to invest in or alternatives except maybe gold. Normally markets would rotate but all asset classes were under pressure. Some people needed to sell liquid assets to fund illiquid assets adding further downward pressure. It is interesting to note that PE and VC funds are still very quiet; trying to assess the position of their current portfolio's and hampered from new investments because they are unable to travel and carry out due diligence. Which is possibly another reason that equities are doing so well; the lack of alternatives. Something that Warren Buffett mentioned; government/central bank action has meant that opportunities seen it previous crisis have not arisen this time.
Those with cash were cautious as they sought to following the established pattern from previous crashes. But this time has been unique, we have never had a government lead shutdown before and so there is no playbook. As the editorial points out, equities have rebounded because they are the easiest game in town. But the future as ever is uncertain. I think caution is still a good watchword and I would not be chasing stocks, stick to attractive valuations, low debt and brand leaders.
Read also ‘Fear of missing out’ triggers U-turn by rally doubters Sceptics become reluctant believers as US stock surge wrongfoots veteran investors. Many feel that the rally is being driven by retail investors day trading. As ever time will time. Also read Traders’ happy return to work belies a long recovery phase ahead. Which notes that there are a number of reasons for optimism but there are also the economic realities; which paint a different picture. Key being that some business activity has been lost forever, some habits will have changed (eating out vs eating at home and remote vs office working etc etc). Most important is to realise that whilst governments can ease lockdowns, business recovery will depend on people feeling confident about resuming their previous activities; some of that will be about health issue others will be about financial ones. That confidence could take longer to appear than the markets are currently pricing in.
Read also Investors still wary of potholes on the road to recovery and If profits recover, governments are ready to tax them. Continues the theme of above but looks at the warnings from the Larry Fink (BlackRock), Luke Ellis (ManGroup), Patrick Drahi (Altice), Raymond McDaniel (Moody’s) that corporate tax rate will rise and the fact that markets seem to underpricing that risk, especially from those companies that have made super profits from the lockdowns and government stimulus.
In summary whilst many are expecting a free lunch; there is no such thing; to quote the FT:
'But this has been a broad-based equities recovery. Even as the bodies pile up, retail investors have piled in. The S&P 500 trades on a multiple of 23.5 times next year’s estimated profits, the highest valuation for 18 years. That rests on the heroic assumption that future earnings will not fall further. Those that do manage to navigate the crisis and report strong profits, will find governments want a bigger slice.’
Big brands sidestep retailers during pandemic. Kraft Heinz and PepsiCo become latest groups to take foray into direct delivery. Not that they are looking to sidestep retailers completely (delivery costs in most cases are currently are too high) but they are realising the benefits of the data that comes from direct marketing. I think it is likely that in the future there will be in closer co-operation between the big brands and the retailers in sharing customer information in order for each to benefit. One way I can see is in the more product tracking by the producers. Knowing how long products are in the warehouse or store shelf. Which ones go direct from warehouse to homes etc. There are likely to be again privacy concerns where the end user is concerned but if it means cost savings many customers will be happy. Its a progression of the fridge. First there were ones that warned you that you were low on milk. Now there are fridges that order the milk when you are low. Tie that into the chain back to the producer and there could be massive savings and avoidance of waste.
Why work from Wall Street when you can WFH? Looks at some of the issues. Notes that whilst we can work from home you do lose social capital, team communications, ‘water cooler moments’ etc. It does not mention the increase in failed trades due to working from home or the lost trades due to lack of back-up or of cross ideas. It also doesn’t mentioned that we are at heart social, for singletons then the office is a key part of like. For many whilst being around family all day is nice it does require having a large home. Hong Kong and Japan typically have small apartments, so its not going to work everywhere. Worth remembering people started working in offices/factories for efficiency as much as anything else. Lastly there is the matter of security; be it from outside hackers or internal theft. Whilst the office may change as a result of covid-19 I think it will remain essentially the same.
Sound the trumpet! Debt jubilees have arrived. Looks at debt forgiveness (or part forgiveness via cheap government loans) and the benefits that can result from that. It accepts that there is some inequity in the process as those who had been savers see those who had been profligate benefitting but that has always been the case. Notes that if government handouts result in inflation that too can be a help. An interesting read; love the tag line 'Flaws in the idea had made it more academic grandstanding than a real possibility’
Opinion Libertarian lockdown has growing appeal. Looks at both sides of the argument for a libertarian lockdown. Worth a read. Whilst we all hope that the covid-19 virus is a one off; a number of medics are suggesting that we could see more viral mutations in the future. Hence learning what has and hasn’t worked is going to be very important in the future.
From the SCMP
Rush for US dollars forces Hong Kong money changers to turn away customers in droves after supplies run out. The HKMA may say it's not seeing outflows from Hong Kong and that the ‘peg’ will remain the bedrock of Hong Kong’s financial system but local Hong Kong people are not taking any rises and are deciding to hedge against that possibility. It would be interesting to know how many people have converted their HK dollar savings accounts into US dollar savings accounts at their bank?
China’s public security ministry vows to ‘fully guide’ Hong Kong’s embattled police force in safeguarding stability and restoring order. Raises significant concerns about the implications of the proposed national security law. It quotes Hong Kong police commissioner Chris Tang Ping-keung who pledged to “adopt different measures” to enable the application of the law in the city, but did not elaborate.
I hope you enjoyed, feedback and comments welcome.