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

    China to use cornerstones to help Alibaba, Xiaomi list in mainland: sources

    This article by Julie Zhu and Shu Zhang for Reuters may be of interest to subscribers. Here is a section:

    Beijing could also rip up its unwritten rules on pricing caps to make way for these blockbuster deals, said the sources who have direct knowledge of the matter, adding that Alibaba and Xiaomi were furthest along the CDR planning path.

    Selling CDRs equivalent to say about 1 percent of Alibaba’s market capitalization would mean raising $5 billion in Shanghai or Shenzhen, marking what would be China’s largest share sale on the open market since 2009, according to Thomson Reuters data.

    While such deals would allow mainland investors to benefit from any further share price rally, the securities regulator is worried they “will take up too much liquidity in the secondary market, which may lead to a drop in the main indices”, one of the sources told Reuters.

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    Tencent Gains $18 Billion as Record Profit Eases Margin Fear

    This article by Lulu Yilun Chen for Bloomberg may be of interest to subscribers. Here is a section:

    Revenue from Value Added Services, which includes online games and messaging, rose 34 percent to 46.9 billion yuan. The company has however been leery of barraging its users with ads - on Wednesday, it declared it had raised the maximum number of ads that customers see on WeChat Moments, a function similar to Facebook’s newsfeed, to just two a day from one previously.

    “The results were good even without the one-time gains, but the gains made it even better,” said Bhavtosh Vajpayee, a Hong Kong-based research analyst at Bernstein.

    But overall costs surged 51 percent. Tencent executives have signaled a willingness to sacrifice margins in favor of longer term growth in new businesses, though that would depend on growing and engaging a massive user base now primarily confined to China.

    Profit was also helped by one-time gains of almost 7.6 billion yuan from its investments in arenas like video and news.

    “The reason why analysts had been modeling down was because they did mention about subsidies on payments and also continued investments in content costs,” Citigroup Global Markets’s Head of Pan-Asia Internet Research Alicia Yap told Bloomberg Television. “All these years of investments in digital content, for example music and video, actually started to show some leverage” this quarter.

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    Boston Dynamics' Atlas robot can now chase you through the woods

    This article by Rick Haridy for Gizmag may be of interest to subscribers. Here is a section:

    A six-minute walk through an office and lab facility is chronicled in the video, and Boston Dynamics reports that before this recorded autonomous run, the robot was guided along the route manually by a human so a map of the space could be constructed. The video highlights SpotMini's obstacle avoidance systems and navigation map as it moves through the space, so it’s not entirely clear how much autonomy the robot has regarding its overall route, but it can clearly dynamically respond to obstacles in the space.

    As with other subdued Boston Dynamics video reveals, not much more detail is offered outside of the actual footage. The company was acquired by Japanese company SoftBank from Google parent company Alphabet for an undisclosed sum in 2017.

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    China's About to Give Global Finance the Chance of a Lifetime

    This article by Malcolm Scott and Hannah Dormido for Bloomberg may be of interest to subscribers. Here is a section:

    To deliver on longstanding pledges and help stave off the threat of tariffs from U.S. President Donald Trump, Chinese officials have set a June 30 deadline to ease ownership and business restrictions for banks, securities firms, asset managers and life insurers.

    Securities firms like Goldman Sachs Group Inc. and UBS Group AG have an opportunity to boost their share five-fold as they take more direct control of joint ventures, projections by Bloomberg Intelligence show. Insurers including AIA Group Ltd. are set to cash in on their already healthy presence, while banks like HSBC Holdings Plc and Citigroup Inc. face a steeper road ahead to build market share, but will reap juicy profits as they do so.

    Much as World Trade Organization entry in 2001 revolutionized the manufacturing industry, opening the financial sector could transform how capital is allocated and wealth managed across China. The charts below show the state of play and estimates on how that’ll change.

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    US-China rivalry will shape the 21st century

    This article by Martin Wolf for the Financial Times may be of interest to subscribers. I found the comments section to be particularly enlightening because it highlights just how emotive this topic is. Here is a section:

    China is a rival of the US on two dimensions: power and ideology. This combination of attributes might remind one of the clash with the Axis powers during the second world war or the cold war against the Soviet Union. China is of course very different. But it is also potentially far more potent. China’s rising power, economic and political, is evident. According to the IMF, its gross domestic product per head in 2017 was 14 per cent of US levels at market prices and 28 per cent at purchasing power parity, up from 3 per cent and 8 per cent, respectively, in 2000. Yet, since China’s population is more than four times as big as that of the US, its GDP in 2017 was 62 per cent of US levels at market prices and 119 per cent at PPP. Assume that by 2040, China achieves a relative GDP per head of 34 per cent at market prices and 50 per cent at PPP. This would imply a dramatic slowdown of the rate it is catching up (a fall of around 70 per cent from the rate since 2000, starting in 2023). China’s economy would then be almost twice as big as that of the US at PPP and almost 30 per cent larger at market prices. (See charts.)

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    PBoC cuts RRR to avoid over-tightening

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

    The PBoC announced it will cut reserve requirement ratio (RRR) by 1 ppts for most banks by next week. RRR will be reduced to 16% for big banks and 14% for mid and small banks (Figure 1). This will inject some 1.3tn new liquidity into the banking system. Banks are asked to pay off some 900bn balances from the medium-term lending facility (MLF) on the same day. Net liquidity injection of about 400bn will largely go to small city and rural banks. Lastly, the PBC asks these banks to use the new funding mainly for lending to small businesses.

    We believe the RRR cut should not be seen as a change of monetary policy stance. The economy is doing well; growth stayed strong at 6.8% in Q1, supported by consumption and property investment (see our note here). Hence there is no need to loosen monetary policy. Indeed the OMO rates were raised just last month (Figure 2). We do not expect PBC to cut policy or OMO rates in the coming months. If anything, OMO rates may be raised further.

    The main purpose of the RRR cut, in our view, is to avoid over-tightening on small banks and small businesses. The PBoC will continue to tighten financial regulations and deregulate interest rates under the leadership of the new government. This will lead to higher funding costs, particularly for smaller banks who do not have large deposit base and rely on wholesale funding. Meanwhile, tightening financial regulations, including the expected new regulation on asset management, will affect the shadow banking business. Banks are pressured to move their off-balance sheet lending back on balance sheet (Figure 3). Small businesses are more severely affected in this process, as they have limited access to regular bank loans and rely more on shadow banking. The RRR cut will mainly benefit smaller banks and, with the guidance on lending, will help relieve financing difficulties faced by small businesses.

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    Email of the day on what to own in the latter stages of a bull market

    Hello Eoin, Whatever age you happen to be, it is always salutary to lose a parent. A constant pillar in one's life has gone and no more questions can be asked. It brings into relief one's own fragility and mortality in a way that few, if any, other deaths will do. I hope your mother's passing was a comfortable one. My condolences to you and your family.

    While it is probably improper to revert immediately to business, I am sure you will want to re-immerse yourself in the observation and interpretation of markets without delay. On this basis, I have a question:

    Given that we believe we are heading for monetary contraction, a rise in interest rates and accelerating inflation how should we be positioning portfolios? Banks and resources should be well bid for the time being and Japan should benefit from inflation.

    But how about India, China and the other economies of North and South East Asia? What sectors and markets are best avoided? At what point does one accumulate cash? Gold is much talked about as an inflation hedge but that will be a shooting star - it might soar in the near future but it will then weaken once more. It is to be regarded as a hedge or a trade, not as an investment - at least that's my view.

    In my own portfolio, I've trimmed China and India, reduced or eliminated high flying 'big-tech' stocks (but not touched PCT), increased my Japan weighting and increased cash. I'm probably underweight gold. I plan to accumulate more cash but at this stage, I've no idea what holdings I shall reduce or sell over the coming months. Providing one is not losing money, investment is fun but over the next two or three years, I suspect there will be plenty of opportunities to lose money which we should try to avoid. It's a tough time for you and you have plenty on your plate but if you care to comment on these musings it would be much appreciated. All best.

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    Xi Warns Against Returning to a 'Cold War Mentality'

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

    “Human society is facing a major choice to open or close, to go forward or backward,” Xi told hundreds of investors gathered on the resort island of Hainan, in a speech that didn’t mention Trump’s name. “In today’s world, the trend of peace and cooperation is moving forward and the Cold War mentality and zero-sum-game thinking are outdated.”

    Trade talks between the world’s biggest economies broke down last week after the Trump administration demanded that China take steps to curtail support for high-technology industries, a person familiar with the situation said. The conciliatory tone of Xi’s speech helped bring risk appetite back to Asian markets as shares from Sydney to Hong Kong rose alongside oil and metals and Treasuries extended declines with gold and the yen.

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