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

    China Traders Say Stock Intervention Misguided Amid Slowdown

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

    The Shanghai Composite Index plunged 12 percent last week, erasing all bar one point of the rebound from July’s $4 trillion selloff. For CMB International Securities Ltd. and KGI Securities Co., the gap between the growth outlook and China’s stock valuations, which are the highest among the world’s biggest markets, means further declines are inevitable.

    While the benchmark stock gauge still traded 57 percent above the levels of a year earlier through Friday, data from industrial output to exports and retail sales depict a deepening slowdown. China’s first major growth indicator for August showed the manufacturing sector is at the weakest since the global financial crisis.

    The government is “trying to defy market forces at overvalued levels,” said Daniel So, a strategist at CMB International Securities in Hong Kong. Policy makers should “focus on helping the real economy instead of the stock market,” he said.

     

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    What the China bears are missing

    Thanks to a subscriber for this article from China Spectator which may be of interest. Here is a section:

    First, let's address the issue of overstating the GDP. Critics point to the country's weak industrial production, export and investment figures as proof that the country is fudging its number. Lardy, a senior fellow at the Peterson Institute of International Economics, points to a salient fact that many people choose to ignore: the biggest contributor to the country's GDP is now the services industry.

    "the skeptics have taken insufficient notice of China's progress in transitioning to its new model of economic growth, one less dependent on expanding industrial output, investment, and exports and more dependent on expanding private consumption expenditure¡±, he says.

    Between 2011 and 2014, the size of the service sector as a share of GDP rose by about 4 percentage points to 48 per cent and, at the same time, the share of the industrial sector dropped to 43 per cent of GDP. This is a marked change from a decade ago, when the industrial sector accounted for 47 per cent of the GDP while the service sector only accounted for 41 per cent of the economy.

    Considering the size of China's economy -- it's a $US10 trillion behemoth -- the transition is even more impressive. Many services are booming in China, the e-commerce sector grew by 31.4 per cent in 2014. The entertainment sector has been growing at an average of 17 per cent a year between 2010 and 2015. In health care, McKinsey predicts the growth in spending will grow from $US357 billion in 2011 to about $US1 trillion in 2020.

     

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    Email of the day on the implications of Yuan devaluation for global companies

    Surely a devaluation of the renmibi should be beneficial to non-Chinese companies that have their manufacturing facilities inside China. If they then export to the rest of the world they will earn other currencies and increase their profits. Which companies correspond to this scenario?

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    Taiwan Stocks Fall to Two-Year Low on Economic, China Concerns

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

    The wave of declines is rooted in the problems in Taiwan's economy, Alan Tseng, vice president at Capital Investment Management Corp. in Taipei, said on Wednesday. "The electronics industry is facing the toughest competition in 10 years because of China. The index will fall below 8,000."
         
    There is a "looming new bear cycle" in emerging markets, with the weaker yuan adding competitive pressures to Taiwan, Malaysia, Thailand and Vietnam because of their dependence on exports, Lim Say Boon, the Singapore-based chief investment officer at the private banking unit of DBS Group, wrote in a report dated Aug. 17. The MSCI Emerging Markets Index entered a bear market on Aug. 12.

     

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    Tin Prices Rise Despite Metals Rout

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

    More than half of all demand for tin is accounted for by the solder which is used to assemble electronics devices such as smartphones and televisions, according to Fastmarkets, a metal research group.

    China’s appetite for tin hasn’t fallen away in the way that it has for other base metals, such as iron ore, and China is tin’s biggest importer. Although this week’s devaluation of the yuan will make the metal more expensive in the Chinese market, electronics manufacturers are likely to be well-hedged and able to absorb price rises, said Ms. Bain.

    Analysts see the biggest impact on prices coming from the supply side. Indonesia is the world’s largest tin exporter, with up to 35% of the global trade. New regulation this month bans all but refined products from legal mines leaving the country.

    Myanmar, whose exports took off around 2011 after the fall of the ruling military junta led to the lifting of some sanctions, is a recent entrant into the tin market.

    Now, though, output from Myanmar’s main tin mine is declining due to falling ore grades, and the challenges posed by the ethnic conflict raging nearby. The recent fall in tin prices also stymied investment in current and prospective tin mines, analysts say.

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    It is End of Era for Yuan Appreciation, Says Ex-PBOC Adviser Yu

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

    The era of yuan appreciation has come to an end with China’s move to lower the daily reference rate by 1.9 percent, said Yu Yongding, a member of China’s monetary policy committee when the currency was revalued in July 2005.

    The yuan exchange rate will enter “a period of stabilization or even depreciation,” said Yu, now a researcher with the Chinese Academy of Social Sciences. The People’s Bank of China’s reduction to the daily fixing was a “symbol” for the change, although signs of yuan depreciation were evident before Tuesday’s move, he said.

    The biggest slide of yuan since the peg ended a decade ago is a one-time adjustment, the PBOC said in a statement, adding it will strengthen the market’s role in the fixing and promote the convergence of the onshore and offshore rates. The move comes as sliding exports add to slowdown pressure and may add to concerns more capital will flow out of the nation.
    While a weaker yuan may bolster exports in the short term, it’s a dangerous long-term way to increase shipments, Yu said.

    “It would be a very wrong and stupid way to boost exports, and I don’t think China’s central bank will opt for that,” he said. “The depreciation is more of a recognition and respect of market forces.”
    “The PBOC should reduce its intervention in the yuan,” Yu said. “If the market believes the yuan should be weaker, then just let it weaken.”

    Yu said the yuan’s change will “for sure affect other currencies of emerging markets,” although the biggest deciding factor will be the policy stance of the U.S. Federal Reserve.

     

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    Email of the day on China support for the stock market

    Do you really believe that China's propping up their stock market is any more different from the FED's Plunge Protection team's operations in the US markets?

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    A Simple China Trading Rule to Trounce the State-Run Market

    This article from Bloomberg News highlights the extent to which the Chinese market is being supported at present. Here is a section:

    The open-to-close strategy on CSI 300 Index contracts has returned 18 percent since July 8, when the mainland market bottomed. That compares with about 6 percent from buy and hold, after accounting for the rollover of contracts in the middle of this month.

    “It seems to be an exploitable and workable strategy in the futures market, unless there is some unexpected big news,” said William Fong, an investment director for Asian equities at Baring Asset Management in Hong Kong.

    The Shanghai Composite rose 2.4 percent at the close on Thursday, after opening with a 0.1 percent drop.

    Like any pattern, its lifespan will diminish as more investors catch on, said Bernard Aw, a Singapore-based strategist at IG Asia Pte Ltd. There’s also the risk that state- backed buyers disappear as the Shanghai Composite approaches 4,500 -- a target Chinese brokerages cited when they unveiled a market support fund on July 4.

     

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    China ADRs: Long Way Home

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

    The year 2015 has thus far seen a frenzy of privatization offers to US-listed Chinese companies, some with an intention of subsequent re-listing back home. Questions, however, have arisen about the practicality of this scheme, with virtually no successful precedents yet. In this report, we analyze major hurdles like legal complexities, IPO procedures and timing issues. VIE set-up and unwinding, and the new foreign investment law may further hinder the privatization process. Even with early signs of relaxation of some restrictions, developments are at a premature stage. Nonetheless, we shortlist and assess 'likely go-through bids', those that screen well for a bid and "maybe not's".

    Going home is more easily said than done: challenges in privatization and…
    Privatization requires a significant amount of immediate funding for the share repurchase, repatriation tax and professional fees. Funding, usually raised through equity capital and debt borrowings from a consortium, largely depends on the target’s ability to generate cash flow, its franchise value and to a lesser extent, its balance sheet strength. Further, the entire process is lengthy (a minimum of 6-12 months) to complete. In addition, the offerors could face litigation from unsatisfied minority shareholders on matters such as abuse of super voting power that might even derail the whole programme.

    ….challenges in re-listing: complications with the VIE structure 
    While some controls have been eased, there is still a long way to go for the Chinese supervisory bodies to continue their relaxation of key restricted areas such as ICP (internet content provider) license, which is a pre-requisite for almost all Chinese internet companies. Those intending to unwind these structures and return home face the risk of being disqualified on other key regulatory pre-requisites, including but not limited to: a) a continued track record of profitability after repatriation tax liabilities, b) unchanged ownership structure, c) consistent historical business operations for the entity intended for listing, d) autonomy of the company over its operations and decision-making power, and e) fairness in related party transactions.

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