July 2 FT HK, Singapore, Chinese Chops, MSLF, Nokia & Ericsson

09 Jul


opened higher, initially traded down but tested yesterday’s closing level a couple of time and working higher.
S KOREA opened higher again initially traded lower but now woking higher.
TAIWAN opened flat but working higher.
CHINA continued to work higher
HONG KONG opened +137pts @ 24,564 vs -73pts ADRs and -102pts futures which prompted some further short covering. Market then worked slightly higher with resistance at 24,840 before trading sideways. A significant uptick in volumes; more than normal after a holiday.
It could be that seeing the new security law that investor are encouraged that it will be good for the markets and the good China PMI data although that was before the latest outbreak in Beijing. But I suspect that 'Team China’ is active today wanting to ’show’ that the new law is good for Hong Kong.
Expect a further rally a Europe comes in but then may see some selling into the close ahead of US Markets being closed on Friday.

Just want to mention GOLD which continues to test highs, and looks to be preparing to test higher from the graph. I still like the Australian miners.

FT Online Edition
Delistings threaten to spoil Singapore exchange’s challenge to HK. Corporate governance scandals and other challenges could mean ‘death’ of the bourse, says one analyst. The key is that Hong Kong has always had much closer links to China and a lot of those listings have been large Chinese companies. That along with English law, the US/HK dollar peg and its historic infrastructure from being a British colony have been significant advantages to Hong Kong’s. That critical mass will mean that it remains important but key will be whether under the new security law those remain. Chinese companies have always liked Hong Kong for it’s proximity. They may not always have liked its tough listing standards and analyst freedoms. The US option was mainly for access to capital that historically might not have been available in Hong Kong.
Singapore is always going to the pushed to compete on those terms. Recent scandals haunt helped Singapore but I doubt Hong Kong firms are going to move their listings because of the new security law.
The bigger question is, theUS weaponisation of pension money. Senator Rubio is seeking the cut off access to the US capital markets for Chinese companies linked to the government and PLA. Trump successfully got federal pension money not to invest in Chinese companies that were not allowed to operate in the US. The threat of delisting US companies to protect US investors seems hallow if you then allow US investors to own the stocks over seas? Bear in mind too that US investments into HK as a proportion of total US investment is relatively small, then it seems the next logical step for Trump is to ban pension money investing in Chinese firms. That might sound hash but to Trump I think it would make sense, especially if he assumed the money would come back to the US and help boost the US markets. There are lots of reasons he shouldn’t but then stats never stopped him before.

Print Edition
Police crack down on Hong Kong rally in defiance of foreign critics and Citizens assess exit strategies after imposition of security law. Also Legislation hardens fears for territory’s status as world city.
Editorial The era of one country, two systems is over Foreign powers must react to a profound change in Hong Kong
On line also has Hong Kongers look to the exits as China imposes security law A ‘tsunami’ of residents make plans to emigrate while others open offshore accounts
A number of articles today on the new National Security Law and the fact that despite the new law there were thousands of mainly peaceful protestors out despite the ban. The key point is that China is not going to change the imposition of the law; unless there is a significant response from the US which seems unlikely. The key questions now are how does Hong Kong adapt and what are the implications fro Taiwan.
A number of the articles make the point that ordinary local people are worried about the new law and looking for alternatives is they can find them; previously it was just the rich. There will not be an exodus but rather a slow drain. I also think that companies will act in a similar way. Looking to move staff or operations considered to be at risk out of Hong Kong. IT and servers are likely to be the first. I also think that whilst there hasn’t been a notable movement of money out of Hong Kong that could change as the new law allows for the confiscation of assets for those who break the new law. As with the extradition bill I still think its more about the money.
For Taiwan I think the threat of China mounting military action just increased significantly. Beijing may well take the lack of significant action against it as a signal that it can act with relative impunity against Tawian.
'In China, Zhang Xiaoming, deputy director of the Hong Kong and Macau affairs office, said Beijing would retaliate if the US launched sanctions. “Of course, we’re not intimidated. Gone are the days when Chinese people had to be at somebody’s disposal or rely on others for the air one breathes,” he said.’

US-China spat puts future of Hong Kong dollar in the spotlight. At present the HKMA is not concerned about pressure on the HK dollar / US dollar link; its not seeing significant outflows at present. THE Head of the HKMA says the monitoring systems are better than during the Asian Financial Crisis when the peg did come under pressure and HK has more reserves now. Plus with low interest rates if there were outflows then they have scope to raise rates and stem the outflow. The article also notes that the HKMA could seek assistance from China if it were under pressure. The article says that relying on China rather than the US is a sign of politicisation of the central bank. I think that for this administration it would be the only move they would consider. Furthermore the US could take action against HK and downgrade the HKMA to being under the PBoC anyway. That would remove the HKMA’s ability to meet with the Fed and would mean its transfers would be carried out by the PBoC. That would be a greater signal of how Hong Kong’s status on the world stage had changed.

China’s ‘chop’ system weighs heavily on Arm Ancient practice of using a stamp to authorise documents poses challenge for investors. Looks at the ongoing problems for Arm and trying to regain control of its Chinese business. This, to many, will high light why Hong Kong ’s legal system has been so important. The company chop in China is what, in China binds contracts. In Arm's case it fired Mr Allen Wu, it China head for various good reasons. But he had the company chop. He denied he had been fired and wrote a letter to that effect and sealed it will the company chop, which made it official… that he had not been fired and carried on. Despite being an illegal act the police are usually unwilling to get involved and going through the process to re-register a business in China can take months and requires a number of other documents, which in Arm’s case Mr Wu is also holding. The comment that sums it up nicely is that Mr Wu ''knows he will eventually be removed. But this is his weapon to get a better separation agreement.”
It is because the Chinese law system is often unhelpful that many investors have relied on Hong Kong’s legal system for more certainty. Anything that undermines the trust in the Hong Kong legal system is going to be bad Hong Kong and probably China.

Main Street loan facility draws little interest. Banks say programme to aid smaller companies has more staff than borrowers. Key here seems to be the fact that it is a complicated process and costly for the borrowers (in the tens of thousands of dollars). So far only 200 serious expressions of interest have been registered. It also raises the prospect that companies that need the aid the MSLF is supposed to offer are not getting it and hence risk collapse.

Nokia and Ericsson remain exposed in geopolitical 5G tussle. As the US bans Huawei and pressurises others to follow suit Nokia and Ericsson are in the spotlight. On paper Nokia is the most vulnerable after misjudging the 5G cycle, lacking a major investor and boardroom upsets with both its CEO and Chairman leaving this year. There are questions about whether Finland would take a stake if a major foreign investor wanted to take over the company (Cisco Google or a US buyout group). Currently it is uncertain.
Ericsson is better placed and has been capitalising on 5G and it has Cevian Capital as a shareholder who has been vocal about looking for a US takeover, implying that Ericsson would suffer if Nokia was bought and it wasn’t.
The article notes that within both companies there is the feeling that the EU has no yet awoken to the significance of the US and China’s 5G overtures in terms of geopolitical and national security. There is also the question of whether US ownership would really help them?
The shares of both have rebounded from the March sell off. Ericssons are back to near their highs at SEK 86.00, the high was 95.25 in June 2020. But Nokia at Euro 3.86 is a significant way off its 2016 high of Euro 7
Worth watching.

Pinduoduo founder steps down as chief. There have been a number of articles recently questioning the management governance of the company. I doubt that in Mr Huang stepping down as CEO the concerns have been address as they haven’t actually appointed a new CEO but rather the existing Chief Technology Officer becomes CEO too. Now Mr Huang is only the Chairman and CFO; with his former classmate Chen Lei the CTO and CEO.

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