David Fuller and Eoin Treacy's Comment of the Day
Category - China
Long-term themes review June 22nd 2018
MercadoLibre Shrugs Off Amazon With Brick and Mortar Focus
This article by Carolina Millan and Ed Hammond for Bloomberg may be of interest to subscribers. Here is a section:
"Our way of competing successfully is to look at all the players, see what they have that we think is great, and if we can incorporate that into our model, we will, but mostly play our game," Galperin said while speaking from Allen & Co.’s Sun Valley conference, and musing about this year’s global soccer championship. "As you know, we’re looking at the World Cup -- we try to play our game and use our advantages and our strengths. We have a great network of sellers, a great brand, we’re investing very heavily, we already have scale."
Shares of MercadoLibre gained as much as 2.2 percent in New York, the most intraday in almost a week.
It’s also betting on brick and mortar investments to improve service. Earlier this year, MercadoLibre announced a partnership for a 38,000-square meter distribution center in the greater Buenos Aires area. In addition, the company, which is providing loans to merchants and payment processing platforms, is working on a digital wallet that offers returns on whatever money is left, Galperin said. Infrastructure -- notoriously poor in Latin America -- is also a priority.
China in Ten Charts A New Impossible Trinity
Thanks to a subscriber for this report from ANZ which may be of interest. Here is a section:
However, China faces a new policy trilemma: if President Xi Jinping truly prioritises reforms over growth, we must see more corporate defaults or foreign borrowing. But if the government does not want higher offshore USD debts, they must sacrifice some growth. They can’t have all three.
Removing the implicit government guarantee is a necessary evil. Since the national fiscal audits in 2013 and 2015, the central government has tried to detach itself from ill-defined liabilities, notably the local government financing vehicles (LGFVs).
This is done via taming shadow lending (slide 5). Since these activities were a key funding source for LGFVs, SMEs, and other borrowers which major banks do not serve, we must see credit spreads surge as a result of the deleveraging process (slide 6).
Many corporates opted to borrow from offshore (slide 7) in 2017. However, the rapid rise of foreign debt has triggered policymakers’ concern (slide 8). In Q1 2018, China’s foreign liabilities hit a record high of USD1.8trn (29% y/y), extending its uptrend since Q1 2016. 53% of it was USD debt and 64% were short-term debt. Meanwhile, Q1 also saw China’s first current account deficits since 2001 (slide 9). Going forward, the outlook for China’s FX reserves position deserves attention.
We believe that slowing GDP growth is not a risk; the temptation to pump prime the economy is. The RRR cuts in April and July are unlikely to be monetary policy responses to growth risks. Any impact from the US-China trade war is still insufficient to halt the deleveraging process (slide 10). Thus, we believe the cuts are a response to the normalised ‘M1-M2 gap’ (slide 11) which indicates shadow lending is under controlled. Chinese regulators are tackling credit allocation on banks’ balance sheets under the flag of ‘structural deleveraging’. GDP growth will still slow (ANZ: 6.3% for H2, slide 12). Market sentiment will be poor. But targeting growth over reform will be worse, in our view.
China Stocks Rebound With Biggest Gain Since 2016, Yuan Climbs
This article from Bloomberg News may be of interest to subscribers. Here is a section:
Chinese stocks are still among the world’s worst performers this year. In addition to the trade war threat, investors have been troubled by a domestic deleveraging campaign weighing on liquidity, signs of an economic slowdown, and a weaker currency.
The Shanghai index is in a bear market after dropping more than 20 percent from its January high. “There’s room for a technical rebound after the selloff in past few weeks, while regulators’ positive comments on A shares showing value also helped,” said Shen Zhengyang, Shanghai-based strategist with Northeast Securities Co.
The Shanghai Stock Exchange said in a statement Sunday that valuations of companies listed on the exchange and big-cap blue chips are at reasonable or even relatively low levels when compared with peers in major economies. Value is emerging after recent declines, it said.
China International Capital Corp. said there’s medium-to- long term opportunities in A shares as valuations and sentiment have hit the bottom, while brokerages including Citic Securities Co. and Essence Securities Co. now expect the market to rebound.
Credit Suisse Group AG remains cautious, forecasting further losses over the coming weeks. It added that the downside would be limited by solid fundamentals.
With Tariff Deadline at Hand, Businesses Brace for the Fallout
This article from the Wall Street Journal may be of interest to subscribers. Here is a section:
And China has been shifting soybean purchases to Brazil, from which it bought nearly 30% more beans in May than it had a year earlier, according to research firm CEIC. Chinese importers have mostly stopped buying U.S. soybeans, said Paul Burke of the U.S. Soybean Export Council, and agricultural giant Cargill Inc. worries about a longer-term shift to other suppliers.
By value, soybeans are the top item targeted by Beijing’s proposed tariffs; China imported around $14 billion in U.S. soybeans last year, according to Wind Information
In all, China’s tariffs would cover 545 categories of U.S. products, while the U.S. tariffs would cover 818 categories of products from China.
China to be less interventionist on yuan than in 2015
This article by Kevin Yao for Reuters may be of interest to subscribers. Here is a section:
While the intervention underscored Beijing’s desire to inject confidence in markets that have been roiled by the trade war fears, the sources say policymakers would tolerate a weaker yuan to help cushion a slowing economy and take some of the sting out of Washington’s proposed tariffs on its exports to the United States.
“Policymakers believe some yuan depreciation is okay, but they don’t want to see it falling below 6.9. Appropriate currency depreciation is needed given that the economy faces downward pressure,” one policy insider said.
A second policy source echoed those views: “there is no big problem with the yuan depreciation. It could be beneficial as the economy is slowing. We are able to control capital outflows. There is no need for aggressive intervention.”
Copper May Need a Very Hot Chile to Save it From a Cool China
This note by Benjamin Dow for Bloomberg may be of interest to subscribers. Here it is in full:
Looking at LME copper's current price levels, ie near a 10-month low, it seems it would take more than the risk of labor conflict in Chile to keep the red metal from slipping further to $6,000 per tonne -- especially considering the state of the Chinese economic path, which is currently searching for answers.
Verbal intervention in the tumbling yuan and the do-or- don't nature of the deleveraging debate don't give copper longs much of a handle to grasp. In addition, there's the tense wait for the global trade-war boot to drop, and the fact that copper has risen for seven of the past ten quarters. Chilean mine strikes may have to be acrimonious and long to save Dr. Copper.
Replaced His Acura's Windshield. Then the Self-Driving Feature Tugged Him Into Oncoming Traffic
This article by Bill Howard for Extreme Tech may be of interest to subscribers. Here is a section:
“I thought [the repair} was a pretty standard procedure,” Ash told CBC News. But after the repair was completed, when he went to drive the car, “It was actually pulling me into oncoming traffic. … it was a startling feeling to have the steering wheel actually pulling you into traffic.” Ash said he was able to control the car and get it back into lane.
According to Ash, a technician at the glass shop pointed at the camera, but Ash doesn’t recall hearing that person suggesting having the camera re-calibrated, which would most likely be at the dealership. Ash told CBC there was fine print in the invoice that talked about having the camera re-calibrated — fine print being the thing almost no one ever reads until there’s a problem. And the manual, which many people do read, says nothing about this.
Taiwan's Technology Secrets Come Under Assault From China
This article by Chuin-Wei Yap for the Wall Street Journal may be of interest to subscribers. Here is a section:
Taiwanese government officials and company executives say China is deliberately targeting Taiwan, whose manufacturers make chips for the biggest American companies, including Apple Inc., Nvidia Corp.and Qualcomm Inc. They say China aims both to pressure what it considers a breakaway province and to pursue its goal of reducing its reliance on foreign suppliers.
Technology-theft cases more than doubled to 21 last year from eight in 2013, according to official data. Taiwanese authorities and attorneys say they mostly haven’t indicted Chinese entities believed to be the ultimate beneficiaries, often for political reasons and because they don’t believe they would be able to enforce court judgments on the mainland.
While China manufactures most of the world’s smartphones and computers, it imports almost all the semiconductors needed to provide the logic and memory that run the gadgets. Last year, China paid $260 billion importing chips—60% more than it spent on oil. Chinese leaders want homemade chips to account for 40% of locally produced smartphones by 2025, more than quadruple current levels.