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

    Terrorists changing tactics to create panic among civilians, analysts say in wake of Kunming attack

    This article by Zhang Hong for the South China Morning Post may be of interest to subscribers. Here is a section:

    The Kunming attack came just days before the opening meetings of the Chinese People's Political Consultative Conference today and the National People's Congress on Wednesday.

    Last October, three people died carrying out what Beijing described as a terrorist suicide attack in Tiananmen Square that killed two others and left dozens injured.

    Officials blamed the East Turkestan Islamic Movement for the incident, which occurred 10 days before a crucial Communist Party meeting.

    "Terrorists are using all means to create widespread social panic … across China," said Pan Zhiping, an expert on terrorism at Xinjiang Social Science Academy. "The timing of the Kunming attack implies the terrorists want to create the biggest impact possible.

    "Security is tight in Beijing and Xinjiang and in their surrounding provinces, but Kunming, a city thousands of kilometres away … is less defended. Nobody could have predicted an attack would be staged there."

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    Yuan Drops Most Since 2010 on Speculation PBOC Wants Volatility

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

    “Compared with a few days ago, chances for a reversal only from a technical point of view look to be smaller,” said Minoru Shioiri, a Tokyo-based manager in the credit and foreign- exchange trading division at Mitsubishi UFJ Morgan Stanley Securities Co. “The move has a lot to do with the onshore fixing. So, rather than a technical story, it’s a question over whether there is any change in the central bank’s stance over the yuan.”

    UBS AG said yesterday recent depreciation may suggest the People’s Bank of China is shifting away from allowing a steady pace of gains and this may lead to a reversal of “hot money” inflows.

    Investors should buy the offshore yuan at 6.12 per dollar as introducing more volatility into the markets is part of the process to liberalize China’s capital account, said Jonathan Cavenagh, a Singapore-based strategist at Westpac Banking Corp.

    “Where I would definitely reset my view is a move above 6.15 per dollar,” said Cavenagh. “That would potentially be a game changer because that’s where you potentially start to move to regions where some of the structured products in offshore yuan start to get stopped out. The move into the 6.15 to 6.20 range is something where I probably have to reconsider my view in a fairly meaningful way.”

     

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    New PBOC Research Head Is Rising Star in Field

    This is an interesting article from CaixinOnline highlighting some new additions to the PBoC’s research team. Here is a section: 

    Shortly before Lu's appointment, the central bank named Ma Jun, chief China economist at Deutsche Bank AG, as its chief economist, a document seen by Caixin shows. Ma, 50, is considered one of the most bullish economists among analysts in China.

    Sources close to the situation said the two appointments were surprising in that the central bank often fills those positions by promoting insiders. Efforts have continued throughout recent years to bring in talents with more diversified backgrounds, but they were not always successful.

    In 2009, for example, some central bankers wanted to invite Ha Jimin, then chief economist of investment bank China International Capital Corp., to head the bank's second department of monetary policy. The proposal fell through because of opposition, the sources say.

    An attempt to make Goldman Sachs' ex-employee Fred Hu a deputy governor for the bank also failed, the sources said.

    It remains an open question whether Lu's leadership can make the research bureau play a more significant role in deciding monetary policies, analysts say.

    Compared with economists in Western central banks and international economic institutions such as the World Bank, research fellows in China's central bank have been largely reduced to a role of assisting their coworkers with policymaking, sources with knowledge of the situation say.

    In practice, the research bureau can act on its own initiative and choose research topics, but it often needs to work on projects dictated by other departments, the sources say.

     

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    Chinese group considers South Africa platinum bids amid strikes

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

    China’s Long March Capital Ltd., which partners with Citic Group Corp., is considering buying South African platinum assets after their value was depressed by strikes, the company’s Managing Partner Clement Kwong said.

    The company is now reviewing a decision to hold off on purchasing South African platinum assets because of the labor issues, Kwong said in a Feb. 19 interview in Johannesburg. Long March last year partnered with Citic unit Baiyin Non-Ferrous Metal Group Co. Ltd. and China-Africa Development Fund to complete their buy-out of Perth-based Gold One International Ltd. and indirectly acquired a stake in Westonaria, South Africa-based Sibanye Gold Ltd..

    “If the industry survives and makes a profit then that would be a good signal to look at investing,” said Kwong, who founded Long March Capital with a partner in 2008. “This last round has repriced these assets down so I think it would be as cheap as it gets.”

     

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    Email of the day on emerging markets:

    According to yesterday’s [Ed. Tuesday] “Comment of the Day”, “Some bear markets...are occurring in developing countries where governance and politics appear temporarily out of control...Brazil is an example”.   

    The noted economist, Frank Shostak, says, “In countries such as Turkey and Argentina a tighter stance by central banks has set in motion an economic bust.
      
    Sam Kee Chong in the Malaysia Chronicle recently concluded that, “Indonesia might be heading for the perfect storm...and that the other countries, in the region are vulnerable. 

    The above are examples of many analysts alerting us to the emerging markets danger which other economists warn could be the “black swan” that inflicts widespread damage to financial markets in 2014.  It will not be a black swan event as far as FT Money is concerned but your views regarding the severity of the threat, or its imminence, would be appreciated.  

     

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    China Stocks Erase Losses YTD as New Credit Increases

    This article from Bloomberg News highlights the recent rebound for Chinese shares. Here is a section: 

    New local-currency lending was 1.32 trillion yuan, the highest level since 2010. M2, the broadest measure of money supply, increased 13.2 percent from a year earlier last month, according to the central bank. That matched the median economist estimate and compared with 13.6 percent in December.

    Record new credit will help the economy to maintain momentum while underscoring challenges for officials trying to limit the risk of financial turbulence from defaults and bad loans.

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    Email of the day on the differing performance of China large cap State Owned Enterprises compared to private sector consumer oriented sectors:

    “I remember from one of your recent audios you pointed to the fact that despite the relative lackluster performance of China’s main stock indices there are sectors that are performing well. I came across this presentation that addresses the same: be careful with general index-linked funds & ETFs and look for specific sectors, e.g. healthcare, insurance, railways.”

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    ICBC Will Not Repay Troubled China Trust Product, Official Says

    This article from Bloomberg news highlights some potentially important developments in China. Here is a section: 

    Industrial & Commercial Bank of China Ltd. is rejecting calls to bail out a troubled 3 billion-yuan ($495 million) trust product, a bank official with knowledge of the matter said, stoking concern that the nation’s first default on such high-yield investments may be looming.

    ICBC, which distributed the product sold by a trust company to raise funds for Shanxi Zhenfu Energy Group, won't assume primary responsibility after the coal miner collapsed, according to the executive, who asked not be identified while negotiations continue. China's largest bank may be forced to repay investors, most of whom were Beijing-based ICBC's own private banking clients, Guangzhou Daily reported yesterday.

    A default on the investment product, which comes due Jan. 31, may shake investors' faith in the implicit guarantees offered by trust companies to lure funds from wealthy people.

    Assets managed by China’s 67 trusts soared 60 percent to $1.67 trillion in the 12 months ended September even as policy makers sought to curb money flow outside the formal banking system.

    “Nobody wants this default to become a trigger for a financial crisis,” Xue Huiru, a Shanghai-based analyst at SWS Research Co., said of China Credit Trust's product. “Breaking the implicit guarantee may help the long-term development of China's financial system, but the short-term pain would be too much for the economy to take.”

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    Time to catch up; Buy

    Thanks to a subscriber for this interesting report from Deutsche Bank. Here is a section: 

    First, IPPs are the cheapest power stocks in the world and the cheapest in their 10-year trading history. Second, there will be a potential tariff hike for gas-fired plants. Third, IPPs have scope to raise dividend payout. Fourth, asset injection will return in 2014. After a mediocre share performance despite a strong earnings recovery in 2013, it is time to catch up. We have Buys on all five IPPs with Huadian/Huaneng as top picks given their 1) more attractive valuation, 2) stronger asset injection potential, and 3) more upside from gas plant tariff hike. 

    IPPs are significantly undervalued
    Following a mediocre performance in 2013 despite 60-156% EPS growth, IPPs are trading at the lowest PE multiples and highest dividend yield over the past ten years. Across the global power utility stocks, China IPPs have the highest average dividend yield and the lowest average PE. Among the China utilities sector, the China IPPs are trading at 6.3x FY14E P/E and 0.9x FY14E P/B vs. Gas at 20.6x FY14E P/E and 2.8x FY14E P/B, Water at 26.9x FY14E P/E and 3.4x FY14E P/B and Wind at 16.2x FY14E P/E and 1.5x FY14E P/B. 

    Tariff hike for gas-fired plants; dividend payout to rise
    We expect a tariff hike for gas-fired plants to address the gas price hike and supply shortage, which will be particularly positive to Huaneng, Datang and Huadian. With better cashflow and reduced capex, IPPs are likely to raise payouts, such as Huadian and CR Power with payout ratio of 32/33% in 2013. Moreover, IPPs are on the fast track to de-leveraging.

    Asset injection is the key theme in 2014
    As we have argued, China IPPs uniquely positioned with significant assets at the parentco level that are scheduled to be put into listco over the next few years. For example, at end-2013, Huaneng Group had 137GW vs. Huaneng Power¡¯s 67GW; Huadian Group had 100GW vs. Huadian Power?¡¥s 37GW. In 2013, asset injection was done on a small scale by CR Power and CPI. We expect more scalable injection in 2014 after profitability improves in 2013.

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    China Reverses Console Ban as Gamemakers Wait for New Rules

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

    China took the step as computer games have proliferated well beyond consoles to smartphones and the Internet, so people who want to play games already can in many cases. China had announced last year that the ban would be lifted within the Shanghai free-trade zone, which opened in September.

    “The way they are ending the ban gives them a controlled way to let in global leaders to partner with domestic companies,” said Mark Natkin, managing director of Marbridge Consulting Ltd., a market research firm in Beijing. Companies should wait for the release of the rules, which may take another six months, before starting production and hardware sales, he said.

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