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

    The Great China Supply-Side Revolution? Communists Change Tack

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

    To be sure, the current focus on supply-side reform isn’t unique. In 2013, the State Council published a list of industries it said were suffering from chronic overcapacity.

    "China is slowing down rapidly, so giving up demand management is not an option," said Yao Yang, dean of the National School of Development at Peking University. "Supply- side reform is a long-term process and in the short term it can hardly show an effect. China needs more demand now, we need to utilize the capacity rather than simply cut it."

    So while the pendulum has swung to the supply side for now, Xi must also keep growth ticking over to maintain political backing for policy changes ahead.

    "Structural reforms will be undertaken, as long as growth does not collapse below the targeted levels," said Stephen Jen, co-founder of SLJ Macro Partners LLP in London and a former International Monetary Fund economist. "All of the reforms are meant to enhance the quality of growth, rather than ‘quantity.’"

     

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    IMF Backs Yuan in Reserve-Currency Club After 2010 Rejection

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

    The IMF endorsement is a bright spot in what has been a tumultuous year for the world’s second-biggest economy, which has been buffeted by slowing growth, a tumbling stock market and a shift by authorities toward a more market-oriented exchange rate.

    Approval is unlikely to have much impact on short-term demand for the yuan, given the SDR’s minor share of global reserves, according to economists at banks including HSBC Holdings Plc and ING Groep NV. But the backing of the IMF, as well as the financial reforms required for China to secure and maintain it, could propel use of the yuan past the pound and yen over the medium term, said Viraj Patel, a currency strategist at ING Bank in London.

    "We’re going to see sort of the emergence of a renminbi trading bloc," mostly composed of Asian countries, Patel said in a phone interview before the decision, using the official name which means “the people’s currency” in Mandarin.

    The decision should boost efforts by Xi to open up China’s financial markets. China implemented a series of reforms to win IMF support, such as opening its onshore bond and currency markets to foreign central banks and reporting its reserves to the IMF.

     

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    Foreign Students Pinch University of California Home-State Admissions

    This article by Miriam Jordan and Douglas Belkin for the Wall Street Journal may be of interest to subscribers. Here is a section: 

    A record 974,926 international students were enrolled at accredited two- and four-year U.S. schools for the 2014-15 school year, a 10% rise over a year earlier, according to the Institute of International Education. About one-third of those students—304,040—are from China. 

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    China Doubles Margin Requirement for Stocks to Curb Leverage

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

    Margin financing, which shrank by more than half during the rout, has been rising for six straight weeks as the Shanghai Composite Index bounced back into a bull market. The decision to tighten investor access to the loans comes a week after regulators lifted a freeze on initial public offerings, removing one of the key measures of support for equities.

    "That wasn’t expected by the market, so investors will probably react negatively," said Wu Kan, a Shanghai-based fund manager at JK Life Insurance Co. "The regulators want margin trading to increase in an orderly manner. Brokerages will probably bear the brunt." China stock-index futures dropped 1.9 percent in Singapore at 6:31 p.m. local time.

    Margin debt and volume rose “rapidly” in recent weeks as some investors bought shares trading at high valuations, the Shanghai exchange said in a post on its Weibo account explaining the rule change. The move will help reduce leverage and ensure “healthy development” of the market, it said.

    Officials face a balancing act: if they crimp margin financing too soon, it could derail the bull market and reduce household wealth in an economy increasingly reliant on consumer spending. If they wait too long, the build-up of debt could threaten stability in the financial system and magnify the next market downturn.

     

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    Lloyd George Advisory

    Thanks to a subscribers for this report which makes a number of interesting points on the potential for Chinese overseas investment. Here is a section:

    I have compared Shanghai in 2015 to Boston in 1970 with the genesis of the investment industry led by Fidelity and other major fund management houses. Apart from the US$3.5 trillion of China’s official reserves, there is another US$9 trillion in Chinese household bank deposits. In November, I expect that the IMF will certify the renminbi as one of the 5 global reserve currencies in the SDR (Special Drawing Rights). China must respond, by liberalizing its capital account over the next 12 months, and allowing its citizens to invest more overseas. Even if (a conservative estimate) 20% of the total savings in China were to be invested overseas, it will have the effect of a major wave of capital coming into global financial markets led by Hong Kong (which we see as the prime beneficiary), but followed by London, New York, and other major financial centers.

    This time Chinese capital will not only target property, it will be invested in companies, in technology, in western consumer brands, and in good quality dividend paying shares in the US, Canada, UK, Australia, and elsewhere. The example of Li Ka-shing is not irrelevant. He has been criticized by commentators for taking money out of China and investing it in these Anglo-Saxon jurisdictions, in telecom, water, and power utilities. In my view, he is a very smart, canny, and far-sighted investor. (This month, our research team visited Mr Li’s flagship company, CK Hutchison and were encouraged that their Watson’s pharmacy chain is opening 365 new shops each year in China.)

    I believe that the liberalization of the Chinese financial sector is the biggest thing happening in the global capital markets in the next decade. Comparisons may be drawn with Japanese capital in the 1980s, but this Chinese wave is 10 times bigger and will last a lot longer. As yields on RMB deposits are steadily reduced (and the same in Indian rupee deposits), so the thirst for yield will bring Chinese investors, as it once did Japanese investors (the famous Mrs Watanabe) into western equities.

     

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    China Stocks Cap Best Week Since June on SOE Reform Speculation

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

    Chengdu Xingrong Environment Co. also jumped by the daily limit. China will promote price reform in water, oil, natural gas, electric power and transportation sectors, the Xinhua News Agency reported, citing guidelines on promoting price reforms released by the State Council.

    “SOE reform is the catalyst that will ultimately drive this market and indications are that this is certainly ramping up,”

    Douglas Morton, head of Asian research at Aviate Global LLP, wrote in a note. The measures will include commodity price reform, consolidation of excess capacity sectors, asset sales and asset injections, as well as mixed ownership, he said.

    The Communist Party of China Central Committee will hold a key meeting during Oct. 26-29 to deliberate on an economic and social development plan for China over the next five years, according to Xinhua.

    Official data due on Oct. 19 will probably show China’s economy grew 6.8 percent in the third quarter, the slowest pace since March 2009, according to the median estimate of 25 economists in a Bloomberg survey. The government’s growth target for this year is 7 percent.

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    Macau, Hong Kong See Slowing Golden Week Tourism From China

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

    “There’s still pent up demand coming into the market, especially over holiday periods,” Vitaly Umansky, a gaming analyst at Sanford C. Bernstein, said by phone referring to arrivals in Macau. “It would be a bad indicator if there were no growth or a decline in visitation.”

    There are also indications that betting volumes in Macau got off to a “strong start” during Golden Week, according to an Oct. 7 note by Daiwa Securities Group Co.

    The picture in Hong Kong may be grimmer. Some retailers there saw sales shrink, sometimes by a double-digit percentage, during the first two days of October, compared with a year earlier, according to the Hong Kong Retail Management Association. And the comparison wasn’t coming off a high base because shops in the city last year were hit by pro-democracy protests that blocked key shopping districts and prompted some stores to shut.

    Signs also point toward Macau and Hong Kong losing their luster among Chinese tourists. Though they were the top choices last year, Japan and South Korea became the most popular destinations for Chinese tourists during the first four days of Golden Week, according to a recent Credit Suisse Group AG report.

     

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    Besties? Why Alibaba, Tencent Are Teaming Up in $15 Billion Deal

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

    An Alibaba-Tencent tie-up in local services would mirror the creation of Didi Kuaidi this year via a merger of competing taxi-hailing apps they separately backed. That marriage was intended to curtail an aggressive expansion by Uber and marked a rare cooperation between companies that still compete head-to-head in entertainment, e-commerce and finance.

    As fundraising becomes more difficult in China, the current merger could provide advantages for both sides. It would let the Alibaba and Tencent-backed startups avoid competition with their closest rival, potentially saving money on subsidies and allowing them to collaborate on future efforts.
    “The two companies merging would allow them to have absolute dominance of the group-buying market, and require less cash burn,” said Wang Weidong, an analyst at Internet consultancy IResearch in Beijing. “They will be putting a lot of pressure on competitors.”

     

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    Luxury goods From growth to brand productivity

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

    The track record suggests that brands that have focused on productivity already in past years – such as Hermes, LV, and Cartier – are already reporting sustainable outperformance in sales and profitability. Higher levels of productivity give room to invest in the brand equity for the long term and finally create unprecedented levels of cash flow. In this volatile environment, these qualities are even more valuable than catch-up opportunities, in our view. At the opposite side of the spectrum, brands that have lower-than-average productivity are likely to face increasing margin pressure: the risk is a short-term reaction, at the expense of the brand equity, with a potentially higher toll to be paid in the longer term.

    We have therefore summarized into a unique Brand Power Index the weighted average combination of the quartile ranking across seven dimensions for each brand. Three quantitative measures have received a 20% weight each: retail productivity, brand productivity, and Return on Capital. Four more qualitative and therefore discretionary variables have received a 10% weight each: pricing discipline, exclusivity, brand momentum, and organic opportunity to improve margins. Based on the relative positioning across several variables, we have identified, as shown in Figure 5, the brands that rank in top quartiles. This provides a framework, as objective as possible, to evaluate brand productivity, margin sustainability, and opportunities to improve. An interesting fact about this index is that successful implementation of appropriate strategies can help companies improve their scores.

     

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