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

    Trading Frenzy Grips China's New Stock Venue After Big IPO Gains

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

    The board is also a testing ground for regulators, who have waived rules on valuations and debut-day price limits for the first time since 2014. The venue is the only one in China to welcome companies that have yet to make a profit, as well as shares with unequal voting rights. The Shanghai stock exchange will create an index tracking the firms about two weeks after the 30th listing starts trading.

    Shares on the Star board have no daily price limits for the first five trading days, followed by a 20% cap in either direction. To limit volatility, the venue suspends activity for 10 minutes if a stock moves by 30% and then 60% from the opening price in the first five trading days, a wider band than the rest of the stock market. Only certain qualified foreign investors can buy the stocks directly, as there’s no access through trading links with Hong Kong.

    The first batch of listings included China Railway Signal & Communication Corporation Ltd., whose Hong Kong shares sank on huge volume as traders switched into the A shares. Advanced Micro-Fabrication Equipment Inc., which was the most expensive listing of the batch, jumped as much as 331%. Its 171 multiple compared with an average of 53 times for the group, and 33 for similar stocks on other Chinese venues.

    Despite the hype, there are questions about whether the excitement will give way to the lukewarm sentiment that’s blanketing the world’s second-largest equity market. On the other hand, a sustained period of ultra-high demand risks draining funds from other exchanges, where volumes are shrinking. The Shanghai Composite Index fell 1.3% on Monday, while the ChiNext Index was down 1.7%.

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    A $117 Billion Chinese Wealth Manager Says It Was Scammed

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    To be sure, Noah is not alone. Central China Securities Co., a mid-sized brokerage, said on Thursday two asset management products totaling 240 million yuan are in danger of defaulting after the borrower falsified documents. It didn’t provide more details.

    For Noah, the incident has raised questions about the firm’s approach to risk management, said Yan Hong, a finance professor at Shanghai Jiao Tong University.

    “It exposed the lack of credit-risk controls and absence of a verification mechanism for contract authenticity, which is a low-level mistake for a manager of private credit products,” Yan said.

    It’s not the first time that Noah’s investments have run into trouble, as JPMorgan Chase & Co. analysts noted in a July 8 research report. In 2017, products managed by Gopher had exposure to China Huishan Dairy Holdings Co., which collapsed after being targeted by short sellers. In May 2018, Noah’s Hong Kong unit was fined by the city’s securities regulator for failing to comply with know-your-customer, due diligence and other requirements.

    One lesson for asset managers is that they should talk to all of the relevant parties in an investment before committing money, said Jesse Si, a Beijing-based senior manager at Mintz Group, which specializes in due diligence investigations.

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    Walmart's Supplier Says Chinese Factories in "Desperate" State

    This article by Daniela Wei and Jinshan Hong for Bloomberg may be of interest to subscribers. Here is a section:

    “U.S. clients are definitely very, very worried,” Fung said in an interview with Bloomberg. “Everyone is making razor-thin margins already and most people have a huge percentage in China. So if the biggest source increases the price by 25%, they are worried,” he said, referring to the scale of tariffs threatened on all Chinese imports to the U.S. by President Donald Trump.

    Though Fung didn’t specify Walmart by name, the U.S. retailer is the company’s second-biggest customer after Kohl’s, accounting for 7.6% of revenue, according to Bloomberg data. A spokeswoman for Walmart declined to comment.

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    China's Venture Capital Boom Shows Signs of Turning Into a Bust

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

    But the rise of China’s tech industry put it squarely in the crossfire of the trade war. The Trump administration has accused China of stealing intellectual property and unfairly subsidizing companies in strategic fields, including semiconductors, artificial intelligence and autonomous driving. In May, the U.S. blacklisted Huawei Technologies Co., preventing the telecom giant from buying American components, and is considering doing the same to a swath of startups.

    The trade war gives investors one more reason for caution. Valuations had already grown vertiginous. High-profile startups such as smartphone-maker Xiaomi Corp. and delivery giant Meituan Dianping saw their stocks tumble after they went public, reinforcing the impression that private-market valuations had gotten out of hand.

    So-called sharing economy startups have also tested the patience of their investors. Companies like Didi, Meituan and bike-sharing provider Ofo blitzed the market with heavy subsidies to grab market share from rivals, making up for their losses with venture money. Now there’s skepticism that many such companies will ever turn a profit.

    “You’re really reaching the end of the shared economy -- this idea of let’s give away services for free and make up for it in volume,” Rieschel said. “Some companies -- Didi is the classic case -- are just not showing any ability to become profitable.”

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    China Is Forcing Tourists to Install Text-Stealing Malware at its Border

    This article from vice.com maybe of interest to subscribers. Here is a section:

    Together with the Guardian and the New York Times, the reporting team commissioned several technical analyses of the app. Penetration testing firm Cure53 on behalf of the Open Technology Fund, researchers at Citizen Lab from the University of Toronto, and researchers from the Ruhr University Bochum as well as the Guardian itself all provided insights about BXAQ. The app's code also includes names such as "CellHunter" and "MobileHunter."

    Once installed on an Android phone, by "side-loading" its installation and requesting certain permissions rather than downloading it from the Google Play Store, BXAQ collects all of the phone's calendar entries, phone contacts, call logs, and text messages and uploads them to a server, according to expert analysis. The malware also scans the phone to see which apps are installed, and extracts the subject’s usernames for some installed apps. (Update: after the publication of this piece, multiple antivirus firms updated their products to flag the app as malware).

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    A Dark Alley in China's Credit Market Suddenly Getting Rough

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    For firms that obtained funding via unorthodox methods, conditions may become particularly challenging. One of those practices is known as structured issuance, where a company will transfer cash to an asset manager to buy a slice of the bonds the company is itself selling. The manoeuvre helps give the appearance of greater demand for its securities and stronger ability to obtain funding. What could make the practice untenable is if asset managers can no longer use those securities held in custody as collateral for repos.

    “Since some repo transactions have defaulted recently, it is unclear whether companies can continue to borrow money from the structured issuance method, said Meng Xiangjuan, chief fixed-income analyst at SWS Research Co. in Shanghai. “If it stops, some issuers will certainly face difficulties operating their business normally, and their debt-repayment pressure will rise,” she said.

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    The Man Who Inherited Australia's Downturn Just Isn't That Fazed

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

    That’s all put the economy on track for its weakest fiscal year since the last recession in 1991. Even the Reserve Bank, which rarely wades into political territory, is urging more government stimulus after cutting interest rates for the first time in almost three years.

    But whether boxed in by his sunny disposition or pledges to deliver a budget surplus made ahead of the government’s shock re-election last month, Frydenberg appears unfazed. While he’ll push to pass tax cuts when parliament resumes on July 2 and ramp up infrastructure spending, that’s about it, leaving the heavy lifting of stimulus to the central bank.

    “I’ve found the treasurer to be remarkably sanguine,” said Danielle Wood, an economist at the Grattan Institute, an independent think tank in Melbourne. “When you’ve got the central bank governor coming out and talking about perhaps moving to stimulatory fiscal policy as well as the need for more long-term structural reforms, I’d be hoping for a more substantive response.”

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    What Your Face May Tell Lenders About Whether You're Creditworthy

    This article by Zhou Wei for the Wall Street Journal may be of interest to subscribers. Here is a section:

    In its lending business, meanwhile, Ping An says it uses its technology to analyze the faces of loan applicants in real time, searching for “micro-expressions” that reveal their emotional and psychological state. Such expressions typically occur within fractions of seconds and are hard for people to control, and loan officers make more accurate judgments on the applicants’ credibility based on this information, according to an article posted by Ping An on its official WeChat social-media account in China last year.

    For large loans, applicants often have to answer questions in an online video meeting that typically lasts 10 to 15 minutes. Ping An records and analyzes how the applicant answers questions, and looks for signs of eye-shifting or other suspicious behavior, which would be flagged by its system.

    Ping An in January said it has made more than 500 billion yuan worth of loans with the help of its micro-expression technology. It also said the technology has helped shorten its average loan-approval times to two hours from five days.

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    China Sets Yuan Fixing Stronger Than Expected in Sign of Defense

    This article by Tian Chen and Ran Li for Bloomberg may be of interest to subscribers. Here is a section:

    "Forget about the psychological 7 level," said Khoon Goh, head of research at Australia & New Zealand Banking Group Ltd., adding that the fixing will stay stronger than 6.9 before the Group of 20 summit. "Today’s fixing sends a clear message that the authorities are still intent on keeping the yuan stable, and
    have no desire to see it weaken further."

    Trump Says He’ll Raise China Tariffs If Xi Won’t Meet at G-20 U.S. President Donald Trump and his Chinese counterpart Xi Jinping may meet at the G-20 summit in Osaka this month. Traders will be closely watching the gathering to gauge the outlook for trade negotiations and the yuan.

    "We expect the Chinese authorities to continue defend 7 in the foreseeable future," said Becky Liu, head of China macro strategy at Standard Chartered Plc, adding that a negative outcome at the G-20 summit wouldn’t warrant a change in this stance. "The PBOC may step up the size and frequency of bill issuance should the yuan come under greater depreciation pressures."

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    China Faces Showdown in Hong Kong as Mass Protests Roar Back

    This article by Shawna Kwan, Carol Zhong and Blake Schmidt for Bloomberg may be of interest to subscribers. Here is a section:

    China has spent much of the past five years tightening its gripover Hong Kong with little challenge. Now, hundreds of thousands in the city are fighting back.

    Hong Kong is bracing for a potentially historic showdown over extradition legislation that could for the first time subject residents to face justice in Chinese courts, further eroding the city’s autonomy. Opponents on Sunday staged one of the largest protests since the former British colony’s return to China: Organizers said more than 1 million participants showed up, while police put the figure at 240,000.

    Tensions are only heating up, with demonstrators vowing to surround the city’s Legislative Council on Wednesday, when lawmakers debate scores of proposed amendments. Hong Kong’s Beijing-backed leader, Carrie Lam, defended the bill in a 45-minute news briefing Monday, saying it was necessary to prevent the city from becoming a “haven” for fugitives and vowing to press ahead with its passage. China endorsed her government’s efforts later in the day.

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