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

    Is silver due to catch up?

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

    "Record 3,000" Hong Kong lawyers in silent march against controversial extradition bill

    This article by Alvin Lum may be of interest to subscribers. Here is a section:

    If passed, the new legislation would allow the transfer of fugitives from Hong Kong to jurisdictions with which it has no extradition deal, including mainland China.

    Organisers estimated the turnout to be between 2,500 and 3,000, but police said attendance peaked at 880.

    Four Nordic chambers of commerce also jointly expressed concern that the bill had been “fast tracked without the thorough consultation and full legislative scrutiny that is customary for a piece of legislation of this nature”.

    The city’s last colonial governor Chris Patten meanwhile urged the government to shelve the bill, arguing it would “strike a terrible blow” to Hong Kong’s rule of law.

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    One Month, 500,000 Face Scans: How China Is Using A.I. to Profile a Minority

    This article by Paul Mazur from New York Times, dated April 14th may be of interest to subscribers. Here is a section:

    Chinese authorities already maintain a vast surveillance net, including tracking people’s DNA, in the western region of Xinjiang, which many Uighurs call home. But the scope of the new systems, previously unreported, extends that monitoring into many other corners of the country.

    The police are now using facial recognition technology to target Uighurs in wealthy eastern cities like Hangzhou and Wenzhou and across the coastal province of Fujian, said two of the people. Law enforcement in the central Chinese city of Sanmenxia, along the Yellow River, ran a system that over the course of a month this year screened whether residents were Uighurs 500,000 times.

    Police documents show demand for such capabilities is spreading. Almost two dozen police departments in 16 different provinces and regions across China sought such technology beginning in 2018, according to procurement documents. Law enforcement from the central province of Shaanxi, for example, aimed to acquire a smart camera system last year that “should support facial recognition to identify Uighur/non-Uighur attributes.”

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    As China's Debt Balloons, Emerging Markets Fail to Take Off

    This article by John Authers and Lauren Leatherby for Bloomberg may be of interest to subscribers. Here is a section:

    Within China, all forms of debt have risen, reflecting a shift in the dynamics of its economy. Before the crisis, China had largely managed to finance its growth without recourse to much debt. The inflows from exports had done the job. The population, fast reaching middle-class living standards, still tended to fund itself conservatively. But household debt has almost tripled from 18.8% of China’s GDP before the crisis to 51.2%. All this debt has successively less impact in stimulating economic growth.

    There are reasons why China’s debt is not creating greater fears. If countries want to avoid crisis, issuing a greater share of debt in their own currency is key. This avoids the risk that a devaluation can force them into default, and it leaves them with the option—not necessarily a good one—of printing money to escape difficulties.

    China does more than 90% of its borrowing in local currency, which limits the risks somewhat. Meanwhile, almost all large emerging markets now do more than half of their borrowing in their own currency. But not all emerging markets have made uniform progress in converting to local market debt. The two biggest exceptions are Argentina and Turkey—and it is no coincidence that these two countries both slipped into crisis during 2018 as a strong dollar put pressure on their currencies.

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    Rare Earth Stocks Give Abundant Returns as Investors Pile In

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

    The People’s Daily, a flagship newspaper of the ruling Communist Party, said in a commentary that the U.S. shouldn’t underestimate China’s ability to fight the trade war. The country is “seriously” considering restricting rare earth exports to the U.S., the editor-in-chief of the Global Times, a newspaper affiliated with the Communist Party, said in a tweet. An official at the National Development & Reform Commission told CCTV that people in the country won’t be happy to see products made with exported rare earths being used to suppress China’s development.

     

    The U.S. relies on China for about 80% of its imports of rare earths, the group of materials that are used in everything from electric cars to high-tech military equipment. Rare earths, which include elements such as cerium and dysprosium, are relatively abundant in the Earth’s crust but mine-able concentrations are less common than other ores.

    China produces about 70% of the world’s mined rare earths and its industry is dominated by a handful of producers including China Northern Rare Earth, China Minmetals Rare Earth Co., Xiamen Tungsten and Chinalco Rare Earth & Metals Co. Some of the country’s listed rare earths stocks are small caps, making them easy targets of speculation.

    The country has taken a proactive approach to managing the global market, Bank of America Merrill Lynch said in a report, citing steady exports in the 1990s that depressed prices and a 40% reduction in its export quota in 2010 that led to a spike.

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    Franklin Says Aussie Bonds to Rally as RBA May Ease Four Times

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

    Overnight swap markets are currently pricing in two RBA cuts by November. Westpac Banking Corp. economist Bill Evans on Tuesday brought forward his forecast for the first reduction in the cash rate to June, with a second to follow in August. Commonwealth Bank of Australia and Royal Bank of Canada expect the same.

    JPMorgan Chase & Co. though says two cuts may not be enough. “From where we are today, this is still not sufficient to fully neutralize risks to the RBA staff’s current forecasts, suggesting risks to a sub-1% cash rate,” economist Ben Jarman wrote in a note.

    Franklin Templeton’s Canobi expects the RBA to lower borrowing costs three to four times over the next nine to 12 months as tepid inflation weighs. “We never felt that inflation has really had a grip since the RBA started easing in 2016, and it still looks pretty weak,” he said.

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    Google Cuts Off Huawei Smartphones From Some Android Services

    This article by Dan Strumpf and Yoko Kubota - for the Wall Street journal may be of interest to subscribers. Here is a section:

    From now, Huawei will be able to use only the public version of Android and won’t have access to proprietary apps and services from Google, according to a person familiar with the matter. Though existing phones are expected to keep functioning largely as usual for now, users could lose some app functions, including some artificial-intelligence and photography features, the person said.

    In a separate move, German chip maker Infineon Technologies AG said it was terminating the delivery to Huawei of some components originating in the U.S., in a sign that even non-U.S. suppliers to Huawei are being swept up in the U.S. trade restrictions. Infineon didn’t specify which components were affected by the action but said the “great majority” of products it sells to Huawei aren’t subject to trade restrictions.

    Separately, Qualcomm Inc., San Diego, has suspended shipments to Huawei of its chips, and some employees have been told not to communicate with the Huawei side, according to a separate person familiar with the matter. Qualcomm chipsets are used in certain Huawei smartphone models. Huawei also designs a large number of its own chips for higher-end phones.

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    The future of Emerging Markets

    This report from Dimitris Melas for MSCI may be of interest to subscribers. Here is a section:

    The rationale for allocating to emerging markets rests on three pillars: Superior economic growth has resulted in positive market returns historically, low correlation within emerging markets and across asset classes has provided diversification benefits, and relative scarcity of information has created opportunities for active portfolio management. Long-term historical data confirms that emerging markets have provided positive long-term risk-adjusted excess returns and enhanced portfolio diversification. Their diversity has led to high cross-sectional return dispersion, both at the country and at the security level, creating opportunities to add value through active country allocation and stock selection. Omitting this equity segment would have introduced a performance drag on global indexed strategies and reduced the investment opportunity set of active strategies. The opening of the domestic Chinese capital market and its integration into international markets is likely to have a transformative effect on the emerging markets equity segment. MSCI introduced domestic Chinese equities (A shares) into the MSCI Emerging Markets Index in June 2018 at a reduced weight. Chinese equities listed in mainland China and Hong Kong currently represent 30% of the index but could grow to over 40% when A shares are included at full weight. The growing size of China within emerging markets raises the prospect for investors of making dedicated allocations to China. Whether investors make separate China allocations or continue to seek opportunities across global emerging markets, the segment likely will remain an essential element of the global equity universe in the future.

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    Email of the day - on winners form the trade war:

    As you say, the US has many alternative sources of cheap goods but there are limited sources of US technology. China also has no alternative buyers of its products. Round One of the international confrontation will be won by the US.

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    Funds Flock to Dollar on Bets Markets Underpricing Trade Divide

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

    Uncertainty over how the dispute would be resolved in the one-month deadline set by Washington will reinvigorate a hunt for haven assets in a world already hampered by slowing growth.

    An easy bet will be to short the expected losers: risk-sensitive currencies from Asia to South America, they say. “To be honest, I thought the dollar would be rising at a much faster pace than this -- markets were pricing in a Goldilocks environment and they were clearly wrong,” said Stephen Miller, an adviser at asset manager GSFM and a former head of fixed income at BlackRock Inc.’s Australian business.

    “Right now I’d be long U.S. dollar versus EM currencies, the likes of Argentina and Turkey.” There’s a 60% chance that China and U.S. won’t reach a deal in the coming weeks, according to analysts at Australia and New Zealand Banking Group Ltd., after last week’s talks laid bare divisions including the removal of existing tariffs and a breakdown in trust. While both nations plan to continue negotiations, traders are waiting for Beijing’s retaliation measures after Washington slapped more duties.

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