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China Targets ‘Ambitious’ Growth Without Road Map to Get There

March 7, 2024 By in Asia, China, Communist Party, Geopolitics, Hong Kong, Investment, Politics, Stock market Tags: , , , , , , , , , , Leave a comment

Investors are disappointed about the lack of detail from China’s legislature as Premier Li forecasts growth of “around 5%.”

China has set a challenging target for GDP growth this year “at around 5%” as its legislature holds its annual meeting that sets the tone for the rest of the year.

On the surface, the target seems achievable. It’s essentially unchanged from last year, when the target was a slightly more specific “around 5.0%,” with 2023 growth coming in at 5.2% in the end.

But we need to dig a little deeper into those targets. Last year benefited from coming off a low base because much of China was locked down for large parts of 2022, making for flattering year-over-year comparisons. That won’t be the case now.

This story first appeared on TheStreet.com and its subscription service, Real Money. Click here to see the original.

And any hopes for the Chinese economy to come roaring back to life after the Covid-19 pandemic have fizzled. A loss of corporate and consumer confidence, lackluster demographics, the trend toward “friendshoring” and difficulties deploying international capital across the Bamboo Curtain provide a pessimistic backdrop.

Given the strong headwinds blowing against the Chinese economy, not least of which is the gale of negative trends afflicting China’s property market, a 5% target for 2024 is “ambitious” in the eyes of Commerzbank. It will undoubtedly require stimulus that will need to be rolled out with better coordination among the various ministries and levels of government.

A ‘Very Challenging’ Mark to Hit

Providing that stimulus is a problem. Local governments are still staggering under the weight of debts run up during the costly, failed fight to eliminate Covid-19. Now those local administrations are hit by the reality that private developers have little to no appetite to buy land, one of the main ways that a local government raises funds.

Investment firm Nomura said it will be “very challenging” for China to hit the mark. The numbers for January and February have been lackluster. Beijing officials anticipate inflation of around 3.0% this year, which means nominal growth will need to run at 7.4% for 2024.

“Beijing should step up central government spending and encourage regions with relatively healthy balance sheets to increase spending as well,” the Nomura China economics team headed by Ting Lu wrote in a note to clients. The central government should expand quantitative easing, allow local governments to issue special bonds and refinance others to swap out hidden debt.

But the current budget leaves little room for such spending. What’s more, 12 Chinese provinces have been highlighted as high-risk, financially. The revenues of local government-managed funds, which last year raised 87.5% of their money from land sales, are budgeted to rise by only 0.1% this year.

“We believe this target is still overly optimistic,” the Nomura team noted, “considering the continued downward spiral of the property sector.” Those local-government funds saw revenues contract 10.1% in 2023, well below the target of 0.4% expansion.

In other words, all is not well, particularly at the local level. Beijing will need to figure out some way to turn around the loss of confidence in the property market, and in private developers in particular, which has led to a stalling of transactions as well as a negative wealth effect for property owners.

Premier’s Lower Profile

China has a history of hitting government forecasts, with most economists believing the data are “massaged” if the numbers don’t cooperate. But even Premier Li Qiang admits it is a lofty goal for 2024.

“It is not easy for us to realize these targets,” Premier Li said in delivering the forecast as part of the government work report to nearly 3,000 delegates in the Great Hall of the People in Beijing. “We need policy support and joint effort on all fronts.”

China’s legislature is holding its annual “Two Sessions” meetings this week, with the legislative National People’s Congress taking place alongside the advisory Chinese People’s Political Consultative Conference. The work report calls for the creation of 12 million jobs in urban areas, the highest target ever set, and maintaining the urban jobless rate at around 5.5%, although there were no specifics on how to achieve either goal. Defense spending will rise 7.2%, the same increase as last year.

For the first time since 1993, Li did not hold a news conference after delivering his speech. That downgraded the profile of China’s No. 2 official, with Premier Li also technically the highest-ranked civil servant in China. Beijing said Li will not give such a briefing during his five-year term, barring “special circumstances.”

No. 1 on all fronts, of course, is Chinese President Xi Jinping. Xi, who is also general secretary of the Chinese Communist Party, and he is calling on the legislature to develop “new quality productive forces,” according to the official wire service Xinhua. These high-tech initiatives should help upgrade traditional sectors to “high-end, intelligent and green industries,” although Xi said it is “necessary to prevent a headlong rush into projects and the formation of industry bubbles.”

It was Xi’s clarion call that “Houses are for living in, not for speculation” in 2019 that led to strict measures on credit levels for Chinese developers that were laid out in August 2020. With the property market now in free-fall, that phrase was omitted from the government work report for the first time since its 2019 inclusion.

Otherwise, there were pretty pictures painted of plans to boost growth, but no major structural reforms and no injection of stimulus. The Beijing government left its inflation target at 3%, same as every year in the last decade bar Covid-infected 2020, and left monetary and fiscal policy largely unchanged.

Investors are clearly disappointed by the lack of overt stimulus and market support. One economist called it a “target without a plan,” given the absence of moves to bolster consumption, turn falling wages around and address the deflationary period that China first entered as of last summer.

We can see the reaction most clearly in the Hong Kong market. The benchmark Hang Seng Index led the losses in Asia on Tuesday as the target was announced, with the Hong Kong market off 2.6% to a two-week low. Similarly, the Hang Seng China Enterprises Index of Hong Kong-listed mainland companies fell 2.6% and the Hang Seng Mainland Properties Index of Chinese developers fell 2.4%.

We also can see how the Beijing government would like to order the stock market to rise back up. Trading on Tuesday in mainland markets was masked by buying from state-owned funds, causing the CSI 300 blue-chip index of the largest listings in Shanghai and Shenzhen to rise 0.7%.

State-Supported Rally Doesn’t Last

But that’s window dressing directed by mainland administrators to make the government look good. It can’t and won’t last. The CSI 300 sank 0.4% on Wednesday with the state support removed. The Hang Seng, meanwhile, clawed back 1.7% on Wednesday on a day most Asian markets moved higher.

I was joking with an East Asia-focused fund manager that I’m waiting for Beijing to declare that from now on it only will allow investors to buy shares and never sell. The market would crash as everyone heads for the exits as fast as possible before such a new rule is imposed. While that’s a joke, I’m sure Beijing officials have considered something similar.

Chinese officials last month moved to curtail the ability to short stocks and to prevent quant funds from trading large volumes of stock that might disrupt markets. One prominent fund was barred from trading for three days for so-called “disorderly” trading. Securities regulators also told major institutional investors not to reduce equity holdings at the open and at the close of each trading day – effectively, a partial selling ban.

Economists, meanwhile, still forecast that China will miss its growth mark, with the World Bank forecasting growth of 4.5% for the mainland economy in 2024 and the International Monetary Fund predicting 4.6%.

Chinese Stocks Surge But Can the Year of the Dragon Roar?

February 8, 2024 By in Asia, Business, China, Communist Party, Hong Kong, Investment, Stock market Tags: , , , , , , , , , , , , , , Leave a comment

Heading into the Lunar New Year this weekend, Chinese officials are increasingly concerned about poorly performing stocks. Will they make the necessary stimulatory moves?

Have we reached the China bottom?

That’s what I asked my fund-manager friend yesterday as Chinese equities surged. The blue-chip CSI 300 index jumped 3.5% to post its biggest one-day gain since November 2022. He thinks we must be there.

In Hong Kong, the Hang Seng Index soared 4.0%, its biggest gain since last July. Tech stocks led the way, up 6.8%, and the Hang Seng China Enterprises Index of mainland businesses listed in Hong Kong rallied 4.9%.

There are several drivers, which certainly leave investors with plenty to ponder as many Asian markets take a Lunar New Year break. But I’m not entirely convinced they justify a sustained rally.

This story first appeared on TheStreet.com and its subscription service. Click here to see the original story.

What’s driving the optimism? Essentially, it revolves around the extent of the Beijing government’s concern that equity markets have fallen so far, for so long, that it constitutes a threat to social stability.

Driver 1 is that Central Huijin Investment, a subsidiary of the US$1.2 trillion Chinese sovereign wealth fund, said on Tuesday that it is increasing its investment into exchange-traded funds for Chinese A shares. It didn’t disclose how much it has invested but says the buying has already begun, with more to come “to resolutely safeguard the stable operation of the capital market,” according to state news service Xinhua.

Driver 2 is that the stock watchdog, the China Securities Regulatory Commission (CSRC), says it will support Central Huijin’s efforts. It will also “coordinate and guide” other institutional investors, both state-backed and private, “to enter the market more vigorously.” It will also encourage listed companies to buy back their own shares.

Driver 3 is that regulators plan on running their concern about financial markets right up the flagpole, to the very top. Officials from the CSRC, China’s equivalent of the U.S. Securities and Exchange Commission, plan to brief Chinese President Xi Jinping about the need for “forceful” measures to support the market, according to a Bloomberg report.

It’s not clear what if anything would come of such a briefing. Xi is nicknamed “The Core,” such is the centrality he has ensured for himself in party politics, and everyday Chinese life. But he has previously hewn to decidedly Marxist-Leninist tactics, and prefers a centralized command economy in which the Chinese Communist Party comes first, state-owned enterprises second, and the private sector comes third.

It was the targeting of successful entrepreneurs and Big Tech, followed by efforts to rein in the property industry, that started this market downturn. The Chinese Communist Party is, fundamentally, suspicious that the private sector can pose a threat to its supremacy.

Mainland markets are coming off fresh five-year lows set on Friday, while Hong Kong stocks are half the value of their first post-Covid rally in February 2021. Since early 2021, around US$7 trillion has been wiped off the market capitalization of Chinese companies.

While there have been frequent efforts by officials to talk the market back up, so far they have met with little success. Government ministries have also responded with strictures telling analysts to avoid negative commentary. Social-media posts about the markets are also censored and scrubbed from the Internet if they gain traction.

This led to a strange situation where an innocuous U.S. embassy post about efforts to combat giraffe poaching in Namibia using GPS technology became an impromptu graffiti wall lamenting the state of stocks and the economy in China, soliciting 166,000 posts.

There has been concrete but piecemeal action to support the stock market. The CSRC this week announced curbs on securities lending intending to make it difficult to short stocks, while the stock watchdog has vowed “zero tolerance” in targeting malicious short sellers. Securities cannot now be re-lent, a practice that brokerages used by borrowing shares then lending to clients for short sales. Securities lending is already down 24%, the CSRC says.

But these have been tweaks around the edges, and tinkering with how the markets operate does not change fundamentals. Slower economic growth of 3% to 4% “is here to stay” for China, the New York-based think tank Rhodium Group says in a new commentary.

It notes that China’s market-support efforts in 2023 already involved ETF purchases by Central Huijin as well as state-owned China Reform Holdings Corp. The CSRC slowed the pace of new stock listings, tightened rules on share sales by large shareholders and even, late in the year, briefly stopped mutual fund managers selling more shares than they bought. Stamp duty on stocks was halved, brokerage handling fees cut, margin requirements lowered…

These are artificial measures to shape supply, demand and prices for shares, the commentary notes, “administrative solutions to stock exchange problems.” It will require less control over private capital for markets to truly reform and recover.

So, even if there is a high-level meeting between stock-market regulators, officials and Xi, the outcome will likely be more pep talk, more tinkering with market function, but little to boost company fundamentals and stimulate the economy. China appears at a loss as to how to turn a lack of confidence around.

And indeed, while mainland stocks enjoyed a second day of gains for Wednesday, with the CSI 300 adding another 1.0%, Hong Kong stocks saw a little selling, ending Wednesday down 0.3%.

China bellwether Alibaba Group HK:9988 and (BABA) added 7.6%, not quite fully reflected in Tuesday’s showing on Wall Street, where it advanced 4.8%. The stock ended the day down 1.5% on Wednesday in Hong Kong.

Surely we cannot have far farther to fall in Chinese equities. But Tuesday’s rally does little to reassure investors. The selling has been longest and hardest in Hong Kong, where it’s easy for international investors to buy and sell. We have a couple more days of trade to see if there really are green shoots taking hold suggesting a longer-term rally.

We are heading into the Lunar New Year, and the Year of the Dragon, which will start on Saturday. Markets in mainland China will break at the close on Thursday, and remain shuttered all of next week, making Feb. 19 their next day of action.

In Hong Kong, trading also ceases on the eve of the new year, Friday, although markets will be back in action next Wednesday, Feb. 14.

Taiwanese stocks – one of last year’s success stories, with a semiconductor-driven 26.8% advance for 2023 – have already broken for the holidays, inching ahead 0.2% on Monday before the break. They resume on Thursday, Feb. 15.

Vietnam and South Korea also honor the Lunar New Year, with markets closed as of Thursday in Hanoi and Ho Chi Minh, and as of Friday in Seoul. Korean trade kicks back into gear on Tuesday, Feb. 13 with Vietnamese action resuming two days later.

There’s plenty to ponder as East Asia breaks for food and family gatherings. How markets shape up when trading resumes will depend on the direction of company profits and the overall Chinese economy, far more than administrative measures attempting to game an upward move.

Japan’s Trading Houses Get Buffett-Backed Trading Boost

April 13, 2023 By in Asia, Business, Investment, Japan, Stock market, Warren Buffett Tags: , , , , , , , , , , , , , , Leave a comment

Warren Buffett sees something in Japan’s sogo shosha conglomerates, and says he’ll throw out the idea of co-investment deals while visiting his holdings in Japan.

Warren Buffett’s desire to sample more Japanese-equity flavor continues to boost the Tokyo market. The Topix closed 0.8% higher on Wednesday, matching Tuesday’s 0.8% bump, after Buffett indicated he intends to increase his holdings in Japan, and specifically its storied sogo shosha, or trading houses.

This story first appeared on TheStreet.com’s subscription service Real Money. Click here to see the original.

Buffett via his Berkshire Hathaway holding company owns a decent chunk of each of the five biggest Japanese sogo shosha: Itochu, Marubeni, Mitsubishi, Mitsui and Sumitomo. Berkshire first revealed holdings of at least 5% in an August 2020 filing, indicating it had spent US$6 billion on the stakes, then increased its holdings to 6.6% of all five in November 2022, and now announces it holds 7.4% of each.

“We’re very proud of that,” Buffett says in an interview with the Nikkei business daily. He will be meeting with those five trading houses this week “to really have a discussion around their businesses and emphasize our support.”

True to form for value-driven Buffett, the trading houses are very “real” businesses that are sprawling and complex but serve very essential purposes. With their roots in commodities and goods trading, they have expanded to become investment holding companies, too, much like Berkshire Hathaway in fact.

Buffet went on to indicate that Berkshire would be open to co-op investment with or alongside the trading houses. “We would love if any of the five would come to us ever and say, ‘We’re thinking of doing something very big’ or ‘We’re about to buy something and we would like a partner,’ or whatever,” Buffett said.

Although the trading houses are currently the extent of Berkshire’s holdings on the Tokyo market, Buffett says additional investments in Japan are “always a matter of consideration.” The five trading houses are his current focus but “there are always a few I’m thinking about.” This is his first trip to Japan since August 2011.

The trading houses are a kind of conglomerate specific to Japan, dating to the mid-1800s and Japan’s period of reopening to the world as the reign of the isolationist Tokugawa shogunate ended. The earliest trading houses were zaibatsu family-run conglomerates, with the trading house operating in-house to supply goods, transport and finance to the group’s various businesses. After World War II, another cluster of trading companies formed in the Kansai region to deal in commodities such as textiles or steel.

The trading houses played a major role in the overseas expansion of “Japan Inc.” in the 1980s, helping source goods and provide financing for companies that weren’t all that experienced internationally because of Japan’s 200+ years of closure to the outside world. As Japanese companies became more comfortable with their own overseas operations, the trading houses boosted their business in insurance, transportation, property development and project management — very much lines of business that Buffett likes.

The global scope of the conglomerates and the similarities with his own holding company are not lost on Buffett. “We feel that these five companies are a cross-section of not only Japan but of the world,” he says. “They really are so much similar to Berkshire. They own a lot of different things.”

However, the trading houses are perpetually lowballed in valuation, trading under 10x forward earnings, some would say for a reason. They are so diversified that they are hard to categorize, and critics contend their very nature is an oddity of Japanese history that no longer serves a purpose. Growth has been hard to come by for these giants, while their core operations are open to disruption to trade such as we’ve seen in the wake of the pandemic and due to the war in Ukraine.

Marubeni and Sumitomo in particular took write-downs to their operations in Russia during the tax year that ran through March. Profits when they come out are expected to drop for all five trading houses due to Russian disruption and pandemic effects.

On the plus side for a value investor like Buffett, the trading houses have been engaging in share buybacks, increasing the value of existing shares. And they pay very solid dividends indeed, as high as 5.01% for Sumitomo.

The share prices of the trading houses have all blossomed since Buffett bought into them. Part of that is the effect of other investors following Buffett’s lead. In the past year, both Marubeni and Mitsui are up by more than 30%, while Mitsubishi has advanced 15.6%.

They’ve all basked in Buffett light in the past two days. Itochu is up 4.8%, Marubeni is up 7.7%, Mitsubishi is up 4.4%, Mitsui is up 5.1% and Sumitomo is up 6.0%.

Buffett also discussed the sell-down of Berkshire’s stake in Taiwan Semiconductor Manufacturing Corp., the world’s largest chip foundry. Berkshire bought more than US$4 billion in TSMC stock between July and September 2022. But it ditched 85% of that holding in quick order, an unusual move for Buffett, who typically likes to retain core holdings for years if not decades. By the end of 2022, however, Berkshire held only US$617 million in TSMC stock.

Buffett said geopolitical tensions are a “consideration” in the divestment. He believes that TSMC is well-managed but that Berkshire has better places to deploy its capital.

One reason investors have been particularly excited about what Buffett has to say in Japan is that Berkshire Hathaway is marketing another offering of yen-denominated bonds. It’s expected to price those this week.

Berkshire did the same thing three years ago before buying the stakes in the trading houses. One underwriter told the Nikkei that these new bonds will be used to roll over existing debt. But savvy Buffett doesn’t like to tip his hand before he plays it. Watch for any indication that the money is going toward other companies in Japan, which would be sure to get a stock-price boost from the Buffett seal of approval.

Hong Kong Stocks Stagger Into 2022 as World’s Worst Performer

January 4, 2022 By in Asia, China, Communist Party, Hong Kong, Investment, Stock market Tags: , , , , , , , Leave a comment

Hong Kong was the worst performing major stock market not only in Asia but the entire world in 2021. The hamstrung Hang Seng index hobbled into year end. It’s astonishing to see a major financial hub’s market down almost 15% in what was supposed to be a year of recovery, when U.S. markets and others have been touching record highs.

This story first appeared on TheStreet.com and its subscription service, Real Money. Click here for the original story.

The Hong Kong stock market’s increasing influence from Chinese tech explains part of the underperformance. Then there’s real estate, a mainstay of the local market but beaten down by the sharp falls in mainland Chinese developers. And equally, the depressing disappearance of the city’s civic freedoms are to blame.

The Hang Seng index plunged 14.1% last year. It is far out of step with the double-digit gains in Australia (up 13.0%), Japan’s Topix index (up 10.4%), Indonesia (up 10.1%), and the majorly outperforming markets in Taiwan (up 23.7%) and India (up 21.7%).

There are smaller gains, true, in Singapore (up 9.8%), South Korea (up 3.6%), with the Philippines essentially flat (0.2% lower for 2021), and losses in New Zealand (down 0.4%) and Malaysia (down 3.7%).

Chinese markets also ended in the red. It is internationally focused Chinese companies that are experiencing the rot. The Hang Seng China Enterprises Index is made up exclusively of Chinese companies that are listed in Hong Kong but that do not trade inside mainland China. It was down a startling 23.8% in 2021, a sharp contrast with home-listed Chinese companies.

It’s a reflection of the rising pressure from Beijing for Chinese companies to “return back home” in terms of their listing. Didi Global (DIDI) is the unwitting poster child for that category of company. The ride-hailing market leader in China was pressured into delisting from the New York Stock Exchange under duress from Beijing. It was barred from signing new customers after its June 30 IPO, leaving its shares now 66.2% below the listing price. It said at the start of this month that it will abandon the NYSE and attempt to list in Hong Kong, as I explained at the time.

Most of the tech companies listed in Hong Kong have U.S. listings that are sure to be equally unpopular with the Chinese Communist Party. Until they abandon them, there’s the suspicion their shares can be hurt by drastic action. U.S. authorities are also acting to bar foreign companies if they don’t file accounts that can be inspected by U.S. regulators – a move that Chinese law suggests would be illegal. It’ll take a regulatory huddle across the Pacific to sort that one out.

Meanwhile, Hong Kong’s market remains in limbo. It should rebound once any penalties that Beijing is levying on Big Tech are laid down, and if the U.S. listing issue can be resolved. If and when that happens, there could be a swing in the order of 20% to 30% – the Hong Kong market’s underperformance this year – but this is a regulatory issue, not one driven by fundamentals. A policy change could be announced overnight in Beijing, or Washington. Or not.

Then there are the ongoing social problems in Hong Kong. Britain says 88,000 Hong Kongers have taken up its offer of a residence visa through September, after the program began in January. A record number of Hong Kongers have emigrated, to the United States, Australia, Canada, Singapore and New Zealand and other popular destinations.

British Foreign Secretary Liz Truss just delivered the six-month report that Britain compiles twice a year to cover the state of play in Hong Kong. It is damning in its condemnation of the oppression of citizens by the Hong Kong puppet government and the Chinese Communist Party above it.

In particular, a much-hated National Security Law went into effect on June 30, 2020, imposed directly from Beijing rather than having any input from Hong Kong’s people or their representatives. But the local authorities – the police, the courts, the administration of Chief Executive Carrie Lam, and the shadowy National Security Office – have abused it to persecute any and all of Beijing’s perceived enemies.

The media is under attack, sometimes literally. Unions, civic groups and student unions have been forced to disband. There’s an informant’s hotline, East Germany-style, for you to rat on your neighbors if you think they’re not patriotic enough. You can feed through information, photos, audio clips and video files if you want to report a violation of the National Security Law, which is so vague that popular protest slogans can land you in jail.

Britain notes that any contact by its politicians with anyone in Hong Kong is often construed by Beijing and the Hong Kong government as “foreign collusion.” This can involve the simplest diplomatic contact, and in fact Beijing’s critics are dubbed to be “colluding” with, well, anyone that they contact overseas. The Hong Kong government and China frequently refer to shady “foreign forces,” which sounds like an army, or the CIA, but can equally mean the World Association of Girl Guides and Girl Scouts. They never identify who these “foreign forces” are.

Hong Kong is preparing to hold joke elections on December 19. They’re a sham designed to pretend there’s any semblance of democracy in the city. But no pro-democracy candidates are running – they’re not allowed to, since only pre-screened “patriots” who support the mainland government and the Chinese Communist Party can take part.

The vast majority of opposition politicians have either gone into exile, or are in jail. The city’s most-popular newspaper, the pro-democracy tabloid Apple Daily, was forced to shut down when its accounts were frozen and its top executives arrested. On Monday, the newspaper’s founder, Jimmy Lai, was sentenced to 13 months in prison for attending a vigil honoring those who died in the 1989 Tiananmen Square massacre. Hong Kong used to mark the June 4 anniversary with a memorial service attended by thousands of people. It has been banned the last two years, under the pretense that it would violate Covid-19 protocols.

Lai, who was sentenced alongside seven other pro-democracy leaders, is already in prison. He was convicted of inciting people to participate in a rally for a cause that is, at least on paper, legal to celebrate. But the police didn’t approve the vigil – for political reasons they pretend are all about public health. A hand-picked judge doing Beijing’s bidding, Amanda Woodcock, insists there’s a need for “deterrent” sentences due to the disruption to public order and the way those attending “belittled” a public-health threat. She insists those convicted thought the Tiananmen Square massacre commemoration was “more important than protecting the community.”

They thought nothing of the sort. Lai wrote a mitigation letter that you can find here. Any punishment will see him share the “burden and the glory” of those who shed their blood to proclaim truth, justice and goodness. “May the power of love of the meek prevail over the power of destruction of the strong,” he says.

These social issues bubble away, a poisonous undercurrent beneath society. It is the issues over U.S. listings that have depressed the city’s stock market this year, not to mention the forced deleveraging of the Chinese property industry. Hong Kongers will remain depressed as long as they’re oppressed by the dictatorship sitting atop them.

Australia and India Lead Mid-Week Selling for an Asia in Recession

March 20, 2020 By in Asia, Australia, Business, China, Communist Party, India, Investment, Politics, Stock market Tags: , , , , , , , , , , , , , , , , , , , , , , , , 2 Comments

There are country-specific reasons why Australia, India and Thailand are leading Asia’s plunge, but the whole region is in recession, S&P correctly says.

The wildly unpredictable movements of equity markets continued apace on Wednesday. Despite the strong rally on U.S. markets the day before, when the S&P 500 rose 6%, almost all Asian markets again posted sizable losses here on Wednesday.

The biggest losers are in Australia and India. I’ll briefly explore why each of those two markets is performing particularly poorly.

In Australia, there are massive daily moves in either direction, sometimes even intraday. The S&P/ASX 200 was down 6.4% at the close Wednesday after posting its biggest single-day gain in 20 years on Tuesday. Now that gain has been wiped out! Since hitting a record high on Feb. 20, the index has corrected 31.2%.

Australian equities are dominated by the Big Four banks – Commonwealth Bank CMWAY, Westpac Banking (WBK) , ANZ ANZBY and NAB NABZY – all of which are seeing their shares oscillate as central banks shift policy globally. The Oz market also has a healthy dose of commodity stocks such as the gold miners BHP Group (BHP) and Rio Tinto (RIO) , and commodities are getting crushed, even gold. There’s also a hefty listed real estate sector and renters are going to start struggling to pay up. Oh, and let’s not forget that Australia’s main customer is China, which isn’t buying.

India follows suit

Indian shares again sold off hard on Wednesday, with the Sensex down 5.6% at the close. Indian shares have now corrected 30.1% in the month since Feb. 19, one of the worst performances in Asia. Foreign institutional investors have been heavy sellers, placing a higher risk premium on Indian stocks than before the outbreak.

India only has 137 declared Covid-19 cases so far, and it’s a bit of a mystery why the world’s second-largest country by population has been spared so far. It may be that only a few people are being tested. While ultraviolet light does kill viruses in general, there has been no scientific proof that hot weather deters Covid-19, so it may be that developing markets that often are hot either haven’t been hit yet or tested well. Of course, developing nations will struggle the most in a health care sense if the disease sets in.

Here in Hong Kong, we’ve had virus cases confirmed among Hong Kong tourists returning from India trips. State governments in India are starting to shutter schools, malls, movie theaters and so on, an economic danger because domestic consumption accounts for around 60% of the economy. Travel and tourism, around 7.5% of GDP, will suffer immensely with tourism visas being cancelled.

There are some India-specific issues that add an extra layer of worry. Yes Bank, a private bank established in 2004 as an alternative to state-backed institutions, has collapsed and is being bailed out by the Reserve Bank of India, the nation’s central bank. Also, violent attacks against Muslim minority by radical Hindu nationalists have left scores dead. Those ethnic tensions are not going to be helped by any downward spiral in the economy.

It isn’t pretty elsewhere, either

While Australia and India have fared worst here on Wednesday, other markets alternate to outdo each other in poor performance. Japan was one of the only sources of green on screens, with the Topix up a narrow 0.2% on Wednesday after the Bank of Japan announced it will support the market by buying ETFs. But the Topix, a broad measure of all big Japanese stocks, is down 26.2% this year.

Thailand’s SET index has fallen 33.7% in 2020, by a small margin the worst year-to-date performance in Asia. Thailand gets 11% of its GDP from tourism, and that’s dead – technically, down 44% and getting worse. The Philippines, where stocks are down almost as much, 31.7% in 2020, has simply shut down its stock exchange, saying it couldn’t guarantee the health of folks on the floor. The blood pressure of investors is another health disaster altogether.

It’s going to take a coordinated global response when it comes to fiscal and monetary stimulus to get everyone on the same page. It also will take cooperation among medical bodies and addressing transportation links if we’re going to get out of the coronavirus mess. The unilateral, single-nation responses are firing buckshot when we need a .458 Winchester Magnum, the kind of Big Game rifle the ranger carries when I’ve been on walking safaris in South Africa.

Investors are sensibly responding to economic disruption rather than simply rates of infection. Korean stocks lost 4.9% in a market dominated by big exporters and heavy industry.

Hong Kong’s Hang Seng index closed down 4.2% on Wednesday, even though the rate of new infections is now slow in East Asia. Most of Hong Kong’s new cases are coming from abroad as Hong Kongers hurry home ahead of travel shutdowns around the globe. The Hang Seng hadn’t risen as high as other Asian indexes due to the pro-democracy protests here last year, so the benchmark is down “only” 20.9% in 2020.

Mainland China, where this all started, is seeing its stocks spared the worst of the selling. The CSI 300 index of the largest shares in Shanghai and Shenzhen fell 2.0% on Wednesday, and the whole index is down only 11.2% this year. That’s half the size of the general selloff around Asia. But treat Chinese share movements with skepticism. Domestic retail investors drive the trading and don’t have many other places to put their money. They are also notorious momentum traders. Mainland stocks are also essentially options on companies rather than genuine holdings, because Communist Party policy can change literally overnight without warning and shut your favorite company down. The party also has cash to spend on stimulus.

Recession is here

I was a guest on RTHK Radio 3’s drive-time business show “Money Talk” Tuesday morning, talking about the disastrous economic figures out of China on Monday. The jobless rate is at a record high, manufacturing has slowed a record amount, and retail sales cratered by a record margin.

One point I made is that, given the shutdowns already under way in Italy and Spain, we can expect similar figures out of those economies in the next month or two. And as more countries corral movement and stop public gatherings, we will see that economic pain spread.

So I chuckle a wry laugh when I hear forecasters predicting that we’re heading for recession. We are in recession, people! It’s here now.

The backward-looking economic output figures will confirm that assessment in the future. I hate the new piece of business jargon that an analyst is attempting to “nowcast” activity. But real-time assessments and common-sense assessments are what we need right now.

I’m digesting a particularly gloomy set of reports from Standard & Poor’s. The rating agency isn’t pulling any punches.

“Asia-Pacific Recession Guaranteed” is my light reading right now. It’s a quick hit. The “enormous first-quarter shock” in China means its growth will shudder to 2.9% in 2020, S&P says, a gutsy call because the Communist Party was keen on “predicting” growth of “around 6%.”

S&P is using the traditional definition of two down quarters in a row to define recession. By other measures, countries such as India and China need to achieve outsize growth just to keep the floods of people moving from the countryside to the city gainfully employed.

This new report says the “rising scale of the shock will leave permanent scars on balance sheets and in labor markets” in Asia. I concur. The rating agency believes US$400 billion in permanent income losses is going to be wiped off profit-and-loss statements.

S&P forecasts aggregate growth will fall by more than half in Asia to under 3% for all of 2020. It envisions a U-shaped recovery.

V-shaped, U-shaped, it’s all a question of how deep and how long this recession is going to last. All downturns are temporary unless you think the world economy is going to zero, which it’s not. But how bad will this get? We don’t know. The costs are continuing to add up, meaning we can’t count the final tab yet.

China Posts Worst Economic Performance on Record

March 20, 2020 By in Asia, Business, China, Communist Party, Geopolitics, Investment, Politics Tags: , , , , , , , , , , , , , , , , , , , , , , , , , , , Leave a comment

Monday’s numbers for production, retail sales and the jobless rate are all the worst on record for China. Asian shares continued heavy selling despite central-bank support. [This story first appeared on TheStreet.com.]

China has posted its worst production and sales figures on record on Monday, as a series of firsts continue to be set in Asia, almost all of them on the downside.

The economic numbers released on Monday are far worse than predicted by forecasters, indicating that China’s factories essentially shut up shop in the first two months of the year. Retailers stopped buying, too, e-commerce not able to offset the empty stores nationwide.

Industrial output fell 13.5% for the January-February period, from the prior year. That’s the worst reading on record since Reuters began tracking the figure in January 1990. A poll by the news agency had anticipated a 1.5% rise.

Retail sales plummeted 20.5%, also the first decline on record, despite an increase in online purchases of goods like groceries. Shopping malls and high streets have become ghost towns, and a logistics logjam due to a lack of delivery people has delayed e-commerce orders. A survey of economists by Bloomberg had anticipated only a 4.0% fall.

China’s unemployment rate has risen to 6.2% for February, up from 5.2% in December. That, too, is a record high jobless rate since the government started publishing figures.

Investment also sank 24.5% for the January-February period, the first drop in record, and far worse than the dip of 2.0% forecast by economists. (Combining the two months negates the impact of Lunar New Year, which fell in January in 2020 but February in 2019.) Investment into property, the holding of choice for wealthy Chinese citizens, shrank by its largest amount on record, and home prices stalled for the first time in five years.

Early predictions of the impact of the coronavirus suggested there would be a rapid V-shaped recovery in China. But the location of the virus outbreak in the “Chicago of China” rapidly impacted travel and trade. The epicenter, Wuhan, is a major inland port on the Yangtze River, as well as a north-south and east-west node on railway lines. It is the center of China’s auto manufacturing.

Economic figures for March may be even worse than those recorded for the first two months of the year. Consumer confidence has been shaken to its core, and it’s unclear what will encourage it to return.

Official figures claim that China registered only 16 new cases of the coronavirus on Sunday, and 12 of those stem from “imported” cases of people arriving from abroad. But with the country opening back up to human movement, there’s potential for a second outbreak. One Hong Kong news report out of Wuhan states that doctors there are releasing patients from temporary hospitals if a lung scan shows no scarring, without testing for the virus, since test kits have run low.

During the SARS outbreak in 2003, which centered on southern Guangdong Province as well as Hong Kong, China did not enter any significant lockdown. With the Covid-19 disease, the top leadership effectively ordered half the country’s 1.4 billion people to stay home. That has complicated the return of workers from the Lunar New Year, and only around 75% of Chinese companies are back in business.

The cessation of production is far more extreme than in 2003, hence the huge and unprecedented impact on industrial production. This has broad implications in the West. Even if demand returns around the world, that is no good if there is no supply of goods.

China’s efforts to get its economy firing on all cylinders are now going to be deterred by a lack of demand, too. The travel bans put in place around the world, and a rising number of lockdowns in major economies such as Italy and Spain, will only further dampen economic activity in Asia.

China’s top leaders were due to announce their “forecast” for full-year economic performance in 2020 at a meeting on March 5. But the event has been postponed due to the virus crisis. The Communist top brass had reportedly agreed a “target” of around 6% when they gathered late last year, and are now debating whether to lower that.

Hong Kong’s economy is also suffering through what amounts to a virtual shutdown. Figures released on Monday showed that there were only 199,000 tourist arrivals in February. That is normally the same number of tourists who arrive in a single day, equating to a 96% decrease. Even at the height of SARS, which centered on the city, 427,000 visitors arrived in the month of May.

The lessons learnt during SARS have however led to far fewer cases of Covid-19 occurring (so far) here in my hometown. Although Hong Kong is next to mainland China, it has only recorded 148 cases, far fewer even than Singapore, at 226, despite Hong Kong having a population that is 32% larger. Social distancing and staying at home, as well as a rapid response to track relatives and friends of those infected, seems to be working.

Asian markets continued their panic selling on Monday, despite moves by the U.S. Federal Reserve to slash interest rates, and an emergency meeting by the central Bank of Japan. New Zealand and South Korea also cut interest rates.

Australian stocks have crashed 9.7% on Monday, their biggest fall since “Black Monday” in 1987. That comes after an extraordinary day’s trade on Friday, which saw the S&P/ASX 200 fall 8.1% at the start, only to close with their strongest one-day gain in more than a decade, of 4.4%. Financial stocks led the selling on Monday, and investors will also have been unnerved by those historically bad activity numbers out of China, the largest source of demand for Australian exports.

Japan’s Topix declined 2.0%, despite BOJ action. The Japanese central bank moved up a policy meeting by two days, and agreed to purchase bonds and other financial instruments, as well as expand corporate finance.

Chinese shares fell 4.3% on Monday after the economic-output figures, and the Hang Seng in Hong Kong dropped 4.0%. Singapore’s Straits Times index lost 5.3%. Indian shares were the biggest fallers outside Australia, the Sensex down 7.9%.

Global Markets Finally Follow Asia’s Lead on Covid-19

March 12, 2020 By in Asia, Business, China, Communist Party, Investment Tags: , , , , , , , , , , Leave a comment

The coronavirus has finally infected global markets over the last two weeks. It’s taken a while to fester. But the outbreak has now spread from China’s CSI 300 to Asian, European and, finally, U.S. stocks.

I’ve been warning since Jan. 21 that a mystery SARS-like disease was hitting China, and likely to spread globally. The World Health Organization was due to meet the next day to decide if the outbreak is a “public health emergency of international concern.” I pre-empted that the answer is “Yes.”

The WHO ruled “No.” The Wuhan coronavirus is an emergency only for China, the global health body ruled on Jan. 22. How wrong they were.

Investors worldwide have had more than a month to prepare for this week’s selloff on global markets. Even while car factories in South Korea, Japan and Serbia were shuttered because they couldn’t get parts, U.S. stocks climbed toward all-time highs. Now the reality of worldwide manufacturing pain is sinking in.

Jaguar Land Rover’s CEO, Ralph Speth, expects the company to run out of some parts shortly. The British carmaker, a Tata Motors (TTM) subsidiary, says it has “flown parts in suitcases from China to the U.K.”

Isaac Larien, the CEO of Bratz dollmaker MGA Entertainment, says it has enough Chinese parts for another month. “The timing couldn’t be worse,” he told The Washington Post. “In 41 years in the toy business, this is the worst disaster I’ve seen.”

So I’ve been surprised it has taken this long for investors outside greater China to respond. Yes, China’s financial markets are ring-fenced, so there’s little direct connection from its A shares to other equities. But this infection in the “factory to the world” has had a severe effect in China, and I believe the supply-chain pain has only just begun.

Korean shares have fallen 18% since mid-February. Japanese stocks turned south earlier, but are now down 22.9% since the start of the year. Hong Kong stocks saw a short-lived rally, but are off 16.3% since virus concerns first got real in mid-January. So the radius of stock-market pain is expanding.

Nomura estimates today that 74.1% of Chinese businesses have resumed work after the Lunar New Year lockdown, and only 61.6% in the worst-affected areas. They base that off the Baidu Migration Index, which shows 49.2% of China’s population has returned to where it was pre-virus. Most migrant workers, in other words, have stayed put.

By the end of March, 91.8% of businesses outside Hubei Province should be operating, the Japanese investment bank predicts — quite optimistically, if you ask me. This crisis has already defied expectations.

Early comparisons looked at the impact of SARS in 2003. It made sense because the diseases are quite similar. SARS was short-lived, a deadlier virus that nevertheless only resulted in 813 fatalities globally. Economists and market watchers globally raced to release reports about a similar “V-shaped recovery” from Wuhan Acute Respiratory Syndrome.

Given enough time, all recoveries are V-shaped. This is a little like warning that markets will be volatile. Yes, the WARS effects will not continue forever, and China’s economy is not going to slide into permanent decline. What’s yet to be determined is how deep and wide the V is.

It’s understandable that economists have been slow. They are better at explaining what’s happened than predicting what’s to come, particularly with an unpredictable disease. Yet simple math should have suggested a sizable impact from the Covid-19 virus hitting right as much of China was on the move for the most-important holiday of the year.

China has a much greater importance to the global economy now than in 2003. The Middle Kingdom’s economy stands at $14.2 trillion for 2019. It was one-quarter the size, $3.6 trillion, when SARS hit. China only began its economic opening up in earnest in 1997. So the country has also become far better-integrated into the global supply chain.

Likewise, common sense should have told the WHO to act earlier. Many people in Hong Kong fault the organization as being beholden to Chinese funding. I’m not sure if that’s accurate, but the body has certainly bent over backward to praise China for its response, criticizing the rest of the world for lacking preparedness instead.

Not every nation can respond as China has, by locking down large proportions of its population. Nor should they.

Chinese authorities have carried out a remit to “round up everyone who should be rounded up,” a random dictum that’s sounds a lot like rounding up the usual suspects. As a result, authorities in the county of Tongbai have been training SWAT teams to noose, then hood uncooperative suspects who refuse to wear a mask. Each Chinese province is unleashing tens, even hundreds of thousands of tin-pot Communist Party local representatives or uniformed volunteers, based on a block-level grid system. Each one has their own crazy way of outcompeting the other to win what President Xi Jinping calls an all-out “people’s war” on the virus.

Consider the confusion in Wuhan. On Monday, the city government said non-residents were free to leave the city if they weren’t infected or under quarantine. By noon, that advisory was withdrawn. The city’s top brass said the announcement was “unauthorized,” and there was no change in the lockdown.

As a result, China is as much at war with its own people as the virus. Even after the immediate virus crisis passes, it may take months for those block-level dictators to relinquish their hold on the people and allow life to get back to normal. For now, you have “escapees” shinnying down drainpipes from five floors up just to get out of their apartment blocks if they don’t have the right “hall pass.”

The way the virus has popped up with pockets of infection in South Korea, Iran and Italy has been strange. But it suggests we may need to get used to the Covid-19 virus being a way of life, worse than the flu, a dangerous pneumonia, but something people learn to coexist with.

The WHO may be right that most nations are not prepared for that eventuality. The H1N1 swine flu, essentially a new and nastier but normal influenza bug, sent 60.8 million Americans to hospital and killed 12,469 of them, according to the Centers for Disease Control. Its worldwide mortality was a whopping 151,700 to 575,400 people, the vast majority young people in Southeast Asia and Africa.

Honestly, I don’t remember H1N1 all that well. It certainly doesn’t stick in the brain as something that killed half a million people. Here in Hong Kong, SARS and its 298 deaths in this city carries a lot more cultural resonance.

It appears Wuhan pneumonia is going to have far greater impact, both practically and culturally. Just as they should take reasonable precautions over their own health, investors should start assessing public companies for their exposure to the supply-chain effects of Covid-19.

What the Hitchhikers Guide to the Galaxy Has to Say About Covid-19

March 12, 2020 By in Business, China, Communist Party, Feature, Humor, Investment Tags: , , , , , , , , , , , , , , , Leave a comment

Global stock markets have now shed US$5 trillion in value in response to the Covid-19 coronavirus. Starting to get alarmed yet?!

Fall back to the advice “Don’t Panic.” I was eight when one of my favorite novels, The Hitchhikers Guide to the Galaxy, came out in 1979. On the cover of that guide, a kind of Lonely Planet for all the planets, are those two reassuring words. We’re told they appear in “large, friendly letters” on a “small, thin, flexible lap computer.”

The hitchhikers guide, a kind of Wikipedia that predated the Internet, has a humorous entry about the planet Golgafrincham. Bear with me, there’s a point here in the end.

[This story originally appeared in Real Money on TheStreet.com. Click here to see the original story.]

Golgafrincham’s poets were fond of making up stories about how the planet was going to end. Maybe it would be as a result of it crashing into the sun, or the moon crashing into it, or 12′ piranha bees. A tale that it was about to be eaten by a mutant star-goat got its residents to organize three arks: Ark A of leaders and scientists; Ark B of useless people like hairdressers, middlemen and telephone sanitizers; and Ark C of the little people who made stuff and got stuff done. Ark B took off first, sent toward a distant insignificant planet, which turned out to be our prehistoric Earth. The wise folk in Arks A and C stayed put after they got rid of the useless people. Tragically, those Golgafrinchans who remained all died out from an infectious disease contracted from an “unexpectedly dirty” telephone.

Is this our dirty telephone? No, we are the middle managers, lawyers, hairdressers, phone sanitizers. The useless ones. These are 12′ piranha bees. We’re saved!

Back to reality. There are so many unknowns surrounding this disease. I’ve been living with it here in Hong Kong since early this year, having survived through SARS in 2003, too. I caution investors who are worried about the health of themselves and their portfolios to keep a calm head.

Strangely, it has been the sudden emergence of clusters of the disease in South Korea, Italy and Iran that has spooked the markets. These clusters have people the world over rushing to buy industrial-strength face masks, stock up the hand sanitizer, panic-buy canned goods.

Here in Hong Kong, people have been stockpiling rice (which mainly comes here from Thailand, not China), and toilet paper, because a tabloid story said all the toilet paper factories in China would start making masks. I stood today behind an elderly lady buying a US$1 bag of bread, who compulsively reached for the huge stack of toilet paper standing by the checkout. She hesitated, didn’t buy in the end. I could a thought bubble, “If it’s run out, then why is there this huge stack?!”

What investors should be worrying about is the fact that China essentially shut down for more than a month. I’m sorry that almost 3,000 people have died. I’m sorry almost 84,000 people are infected. Here in Hong Kong we have 94 cases, which is 0.001% of the population. Last year, 34,157 Americans died of the flu.

So yes, I am avoiding taking public transportation, and I wear a mask when I’m going to very crowded places. I wash my hands, a lot. But I’m not wearing a mask non-stop. I bet a lot of those 94 infected people wore masks, but took them off at group meals, an apparent source of many infections. If I do get the Covid-19 virus, as a healthy Gen Xer, there’s every chance I’ll survive.

Global manufacturing is going to be stumbling to correct for parts failing to arrive for months to come. Eventually that is going to spill over to other sectors: it’s not much good buying Microsoft (MSFT) shares if Lenovo (LNVGY) has stopped making computers.

Markets hate uncertainty, that’s the cliché, and the situation we find ourselves in is full of them. South Korea now counts 2,337 cases, the most outside China, but at least the Korean peninsula shares an extensive border with China. How it cropped up in Iran and Italy in large numbers is a mystery, and that’s what seems to have finally punctured the protective bubble around investors.

You know the numbers. The S&P 500 has entered technical correction, a drop of 10% or more, faster than ever before. In six trading days, it has come off 12% since last Wednesday’s record high. A record high, one month after Wuhan broke out! We’ll see a few more records broken before this is all over, I’d imagine. The Dow’s 1,191-point fall on Thursday was also a new single-day high.

Asian equities are also ailing. This has been a brutal last trading day of the month, with Japan’s Topix down 3.7%, China’s CSI 300 down 3.6%, Korea’s Kospi down 3.3%, a similar fall for Australia’s ASX 200. These are large single-day falls for markets that have generally been selling off since mid-January.

Not since the Lehman Brothers crisis have we seen such selling. Of course, all asset classes are going to have to contend with virus fallout. Are equities more at risk because they had climbed so high?

Analysts at Goldman Sachs (GS) are predicting that members of the S&P 500 will post no earnings growth at all in 2020. That’s a compound effect from the severe decline in China’s economy, resultant disruption in global supply chains for U.S. companies, and eventually a slowdown in the U.S. economy itself, which is 68% driven by consumer spending.

That seems like a sensible path of calculation. The blanket panic selling, however, isn’t wise. Equally, I think it would be incredibly sad if the Tokyo Olympics this summer got called off.

Bargain-hunting investors should not step into the markets now. There is too much uncertainty, and above all too much herd panic. Day traders on the other hand may find these happy hunting times. Shareholders should be holding companies to account for their exposure to Chinese manufacturing disruption, and chaos in supply chains.

The Hitchhikers Guide has little to say about Earth as a whole. “Mostly harmless” is its entire entry. Covid-19 is a nasty pneumonia, certainly not harmless. But investors should for now fear manufacturing sickness above any infected telephone.

Second Set of Gray-Swan Shocks To Watch in 2018

January 12, 2018 By in Asia, Bitcoin, Business, Cryptocurrency, Feature, Politics, Real Estate Tags: , , , , , , , , , , , , , , , Leave a comment
Second Set of Gray-Swan Shocks To Watch in 2018

In my previous piece, I examined five gray swans that are already in view, but could fly in to roost in the year ahead. That’s the first half of the list of 10 ugly goslings that the Japanese investment bank Nomura sees as potential surprises in 2018.

Black swans are completely unexpected, and therefore can’t be predicted. Gray swans are a little different, neither hidden nor invisible, just largely ignored.

The investment bank has sought to identify situations that are a little out of the ordinary. We know that Donald Trump will be unpredictable — what he does is a known unknown. These birds fall into the camp of the unknown unknowns.

Here’s how cryptocurrencies, Bitcoin, house-price declines, war in the Middle East, oil prices and central banks may shock us in 2018.

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5 Gray Swan Shocks On the Horizon In 2018

January 12, 2018 By in Business, China, Feature, Politics Tags: , , , , , , , , , , , , , , , , Leave a comment
5 Gray Swan Shocks On the Horizon In 2018

The Japanese investment bank Nomura (NMR) has 10 “gray swans” to watch out for in 2018. Unlike their cousins the black swans, which simply pop out of nowhere and therefore can’t be predicted, gray swans aren’t hidden or invisible, just largely ignored. At our peril, it seems.

They are topics that aren’t widely discussed, the bank says — not the question of what to do over North Korea, or whether nationalists will triumph in the Italian elections.

I’ll tackle the first five in this story and revisit the gray-swan family by addressing the other five in a second piece.

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