David Fuller and Eoin Treacy's Comment of the Day
Category - China

    China Tech Crackdown, a short-term pain for the new growth phase?

    Thanks to a subscriber for this note from UOB which may be of interest. Here is a section: 

    As there is still no indication of the regulatory crackdown, investing in the tech sector at this current juncture could result in a high risk of catching falling knives. On the flipside, the attractive valuation and rapid growth of these China Tech companies may strike as a good bargain to long-term investors. The sell-off of some tech stocks were not a result of any fundamental changes, but rather investor sentiment, which could change again in a flash. First, we must understand the short and long-term impact of the crackdown. Here are 3 fundamental factors you may want to consider if you decide to buy the dip:

    1. Will policy changes cause structural change to business’s model?
    2. Companies’ valuation
    3. Companies’ growth

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    Chinese Banks Are Dumping Dollars in Swap Markets, Traders Say

    This article from Bloomberg may be of interest to subscribers. Here is a section:

    The PBOC is expected to conduct its monthly MLF operation on Wednesday, with 600 billion yuan due. Last week a central bank official said that interbank liquidity should remain balanced in the coming months, damping speculation that there’ll be another cut in the required reserve ratio soon. 

    Money market traders are more cautious this month as cash demand could rise due to quarter-end regulatory checks and before China’s Golden Week holiday in early October. If the maturing MLF is not mostly rolled over or covered by another liquidity injection, market sentiment is likely to be further impacted, said Frances Cheung, rates strategist at Oversea-Chinese Banking Corp. 

    Evergrande Woes
    Concern about the property sector amid the potential restructuring of China Evergrande Group -- the world’s most indebted developer -- could also be impacting swap rates. 

    Market participants might be preparing for “the liquidity squeeze in crisis mode,” Mizuho Bank Ltd. chief Asian FX strategist Ken Cheung wrote in a note.

    “Rising property sector concerns and specific credit concerns around Evergrande are raising pressure on banks’ liquidity management,” Eddie Cheung, senior EM strategist at Credit Agricole, wrote in a note. He expects onshore yuan liquidity conditions to remain tight in the near term.

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    Shanghai Copper Stockpiles at Lowest in a Decade, Nickel Jumps

    This note from Bloomberg may be of interest to subscribers. Here is a section:  

    Copper inventories extend a drop to the lowest level in almost 10 years, while aluminum holdings also fell and nickel inventories climbed, according to weekly data from Shanghai Futures Exchanges.

    Copper -11% to 61,838 tons, lowest since Dec. 2011
    Aluminum -1.6% to 228,529 tons, lowest since Dec.
    Lead +3.3% to record 204,008 tons
    Nickel +45% to 8,608 tons, following a more than 30% gain the previous week

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    Email of the day on China Evergrande's impending bankruptcy.

    Hello Eoin, I really like your audios and try to listen to them almost every day and I find today's audio especially interesting because of your focus on Evergrande...and this is something I don't understand: how is it possible that a company of this size, being on the brink of bankruptcy, with a huge amount of USD debt (of which one can be sure it's on the books of big international players), keeps out of sight of the financial press...I can find almost nothing on this topic..and secondly: what do you think of the idea that the sudden drop of crypto was generated by the fact that Tether has usd evergrande bonds on its books...this seems to me a logical catalyst for this flash crash...

    thank and keep up the good work...

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    Evergrande Contagion Fear Returns as Bonds Tumble Below 30 Cents

    This article from Bloomberg may be of interest to subscribers. Here is a section:

    One of the company’s most widely held bonds plunged by 6 cents on the dollar to 28.5 cents on Wednesday, a record low. The rout -- triggered by Evergrande’s warning of a potential default if its asset-sale plans fail to materialize -- accelerated during European market hours as private banks offloaded positions, traders said.

    The collateral damage was concentrated in junk-rated developers including Kaisa Group Holdings Ltd., Fantasia Holdings Group Co. and Guangzhou R&F Properties Co. The latter company’s dollar notes due 2024 tumbled 4.1 cents to 66.8, according to Bloomberg-compiled data. Declines in the broader Chinese high-yield space reached as much as 2 cents on the dollar, halting a tentative rally over the past few days. 

    Investors in China’s $12 trillion bond market have become fixated on Evergrande as they weigh the ramifications of a potential default by the world’s most indebted developer. With bondholders, banks, suppliers and homebuyers exposed to the real estate giant, any collapse could roil China’s economy. While regulators urged the company to resolve its debt woes in a rare public rebuke earlier this month, they have said little about whether state support is forthcoming. President Xi Jinping has been trying to wean the Chinese financial system off implicit government guarantees that fueled years of outsized borrowing.

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    China's CSI 300 Slides, Weighed Down by Moutai, Wuliangye

    This article from Bloomberg may be of interest to subscribers. Here is a section:

    Shares of Chinese liquor makers fall, with Kweichow Moutai and Wuliangye among the biggest drags on the benchmark CSI 300 Index.

    Moutai drops as much as 3.3%, the biggest drag on the CSI 300 Index, which declines as much as 1.1%

    Wuliangye also loses as much as 3.3%, Jiangsu King’s Luck -6.2%, Shanxi Xinghuacun Fen Wine -3.7%, Anhui Gujing -3.9%

    Moutai organized a week-long special training for its sales team, stressing on product price stability, ahead of the Mid-Autumn Festival next month and the National Day holiday in October, according to a Wednesday posting by a WeChat account on liquor industry news

    Prices of all Moutai products have dropped marginally in Beijing recently, with its flagship liquor down about 200 yuan to around 2,800 yuan

    Capital Securities analyst Gu Xiangjun says liquor shares have had sizable gains recently, adding pullback on Thursday could be “temporary”

    Moutai added a total of 7.6% over a three-day rally through Wednesday and Wuliangye rose 5.4% during the period

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    Iron Ore Spikes With Commodities Markets Set for Demand Revival

    This article by Annie Lee and Mark Burton for Bloomberg may be of interest to subscribers. Here is a section:

    Iron ore’s revival came after it lost about a quarter of its value in the past month, as China’s push to curb steel production hammered demand. But steel and other industrial commodities have rebounded this week, after China’s count of daily Covid cases fell back to zero and central bankers vowed to step up support for the real economy. Coking coal in China hit a record on Tuesday, while copper has also recovered amid signs that Chinese consumers are on a buying spree. 

    “Iron ore just cannot be the only one lagging while everything else in steel space is massively bid,” Xiaoyu Zhu, a metals trader at StoneX Financial Inc., said by email. “After the price spike in coal products in the last two days, it’s hard for iron ore to stay quiet.”
     

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    Evergrande Slumps as Investors See No Bailout After Huarong

    This article from Bloomberg may be of interest to subscribers. Here is a section:

    Huarong’s bailout was reassuring for investors who went through months of agony guessing just how determined the Chinese government was in combating moral hazard. But even with $300 billion in liabilities that could roil banks, suppliers and home buyers, junk-rated Evergrande is seen as a separate case as authorities crack down on excessive leverage in the property sector. 

    Investor concerns grew Thursday evening after Chinese regulators demanded Evergrande resolve its debt risks and refrain from spreading untrue information. People’s Bank of China and banking watchdog officials summoned the company’s executives, telling them to maintain operations and protect the stability of financial and property markets, according to a joint statement.  

    “The Chinese government’s stance to prioritize social harmony and equality over corporate profit is becoming increasingly clear,” said Anthony Leung, head of fixed income at Metropoly Capital HK. “Evergrande is completely different in the sense that it is the poster child of an industrywide reckless risk-taking culture.”

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    Beijing Tightens Grip on ByteDance With Rare China Board Seat

    This article by Zheping Huang for Bloomberg may be of interest to subscribers. Here is a section:

    But the fact that the industry regulator can designate someone to the board of a prominent sector player may unsettle investors worried about the broader ramifications of Beijing’s clampdown. Even before Xi’s administration tightened its grip on the tech sector, ByteDance had grappled with American lawmakers’ accusations that TikTok in particular threatens national security and could aid Beijing in espionage efforts. In May, the month after the Chinese regulator took its stake, founder Zhang Yiming relinquished day-to-day control of his company to its closest lieutenant, a decision regarded as an attempt to distance himself from the growing turbulence at home and abroad.

    “It intensifies worries about the government’s intentions for China’s internet sector and the concessions private firms may have to make,” said Michael Norris at consultancy AgencyChina. “It gives new context to Zhang Yiming’s decision to step down from his position as ByteDance’s CEO.”

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