Asia rallies on good PMI's. FT China uses media for policy, Evergrande, Vietnam & more

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Asia generally positive; N Asia +VE PMI’s

Market to opened lower hitting 7,462 in early trades; as indicated by the futures and taking into account the number companies going ExDiv (including Wesfarmers). Miners weak as Iron Ore prices ease and Financials weak But good macro data out helped the market to trend higher. At 2pm market was -23pts (-0.3%) @ 7,512
Manufacturing Index Aug 51.6 vs 60.8 Jul (F/cast was 55)
Manufacturing PMI Aug 52 vs 56.9 Jul (F/cast was 51.7)
GDP growth Q2 +0.7% QoQ vs +1.9% Q1 revised (F/cast was +0.7%)
GDP growth Q2 +9.6% YoY vs +1.1% Q1 revised (F/cast was +9.2%)
GDP Captial Expenditure Q2 +3.2% QoQ vs +4.7% Q1
GDP Final Consumption Q2 +1.2% QoQ vs +0.7% Q1
GDP Deflator Q2 +2.5% QoQ vs +1.8% Q1 revised
Good pre market data and falling covid cases. Uncertainty over PM Suga’s plans for the election.  
Nikkei opened higher and tested 28,400 in early trades then eased back but with support around 28,300 before working better into lunch; 28,432.
PM opened flat and just easing slightly.
Topix traded in a similar pattern +18pts (+0.9%) @ 1,978
Leaders Nintendo on Nikkei inclusion rumours again, Komatsu on news Cathy Woods Arkk Fund buying, Taiyo Yuden as a competitors plant stoppage means smartphone component shortage.
Capital Spending Q2 +5.3% vs -7.8% Q1 (F/cast was +4%)
Manufacturing PMI  Aug 52.7 vs 53.0 Jul (F/cast was 52.4)
S Korea 
Markets open slightly lower but ticked higher on good exports data on the open but then sold down to 3,185 before working higher after a strong PMI data; at 1pm +8pts (+0.3%) @ 3,208
Kosdaq traded in a similar pattern +5pts (+0.5%) @ 1,043
Key being Foreigners continued as buyers initially but turning sellers.
Leaders Telco (seen as benefiting from anti google law) and Autos.
Laggards Gaming despite anti-google law and the fact that most MMORPG’s are played by over 19 yr olds.
Balance of Trade Aug $1.67b vs 1.76b Jul (F/cast was 3b)
Exports Aug 34.9% YoY vs 29.6% Jul (F/cast was 35.7%)
Imports Aug 44% vs 38.1% Jul (F/cast was 46.4%) S Korea
Manufacturing PMI Aug 51.2 vs 53 Jul (F/cast was 52.6)
Market open lower but tested yesterday’s close in early trades after good PMI data but then trended lower to 17,440 level. Bounced back to test flat again but failed and sold down to 17,420 which was tested a couple of times before working better back to flat. Choppy trading after a 7day rally. Seeing good support at 60 DMA.
Leaders Optical Lenses on news PC/NB lenses to see price hikes. Ability (3362) +10%.
Leader Construction sector, Laggards Petrochems
Manufacturing PMI Aug 58.5 vs 59.7 Jul (F/cast was 59)
Market opened flat but tested lower on more regulation concerns this time healthcare and for ecommerce policing fake goods. Market traded down ahead of Caixin PMI which was weak but then rallied into lunch
Caixin Manufacturing PMI Aug 49.2 vs 50.2 Jul (F/cast was 50.2)
HSI opened @ 25,872 -7pts vs -70pts ADR’s
Traded in a similar pattern to the CSI 300 was +159pts (+0.6%) @ 26,038 at lunch.
Ecommerce strong after good results from NetEase (9999) +8.7%
Phama Healthcare seeing some weakness.
Open to be influenced by the PMI data
Eurozone Manufacturing PMI, Unemployment Rate
Germany Retail Sales, Manufacturing PMI
France Manufacturing PMI, New Car Registrations
UK Nationwide Housing Prices, Manufacturing PMI
US Futures 
Opened Dow +36pts, S&P +0.1% and NDX +0.05%; Ahead ADP employment number, PMI and ISM data.

FT Front Page
Theranos chief goes on trial
Elizabeth Holmes, founder of blood-testing start-up Theranos starts her trial.

Decade-high eurozone inflation raises heat on ECB to cut stimulus
• Headline rate at 3% • Economy rebounds from pandemic • Markets sanguine over rise. The headline number was higher than expected and rose at the fastest since Nov 2011. Whilst it is expected that inflation will ease the question is by how much and when.

South Korea takes swipe at Google and Apple app store commissions
Key got Google and Apple is that this doesn’t become a precedent for other countries to follow. The new bill ‘bans Google, Apple and other app store operators from requiring users to pay for content with their purchasing systems. It also bars them from delaying approvals for apps, “inappropriately” removing them from their stores, or insisting on exclusivity with developers.’
It will be interesting to see whether the move impacts the Epic Games case against Google and Apple in the US and the legislation being proposed in the US and Europe on the issue.
The obvious beneficaries are the App operators who will see a saving but it will be interesting to see how the platform operators will monetise their platforms going forward.

China media back call to expand clampdown
Blogger’s demands widely shared as investors ready for further measures.
The call was for Beijing to target ‘the high costs of housing, education and healthcare while also instituting deep reforms to finance and cultural industries.’ ‘“This is a transformation from capital-centred to people-centred,” the writer said. Those who sought to block the reform would be “discarded”.’
I think a key element that some are missing is that whilst the founders may have seen their wealth dip that is not really going to make a difference. But smaller ordinary investors have been hurt too. Again whilst the nationalistic blogger’s words sound fine they carry great risks to the growing middle class in China.
More worrying is the impact on foreign investors into China. It is interesting to note the comments from ‘Han Wenxiu, deputy director of the Communist party’s central finance office, who “represents the economic authority of the party” and had sought to reassure the public that China would not “repeat its ‘extreme left’ policy”, a reference to the chaos of the Mao era.’
The reprinting of the blog by the media illustrates how the leadership is keen to play to the nationalistic public but that could lead to problems ahead. The plan is still to promote more domestic consumption but that is going to require a huge capital investment and investors will want a return.
Bloomberg has a good article ‘Xi Tests ‘Common Prosperity’ Policies in Alibaba’s Home Province. Setting out the aim to reduce the disparity between rural and city incomes. That sets out that Beijing is hoping for private sector investment in poorer areas and encourage more people to start their own business. The hope is to further the urbanisation, without house prices rising and moving up the added value chain in manufacturing and also moving more of it into rural areas. There is a hope to improve education but keep costs down and expand hospital resources into rural areas. It notes other comments from Han Wenxiu who also said that China could not afford to feed the laxy.
Effectively China is hoping to be able set up a socialist system with Chinese characteristics. Beijing will be able to look to a number of successful companies for assistance but there is a huge risk to hurting ordinary investors, who have for many years been used to getting a return on their money.
There will also be the issue of how to fund hospitals and schools to achieve the desired results. Both will present problems because those who have recently lost their jobs as tutors are unlikely to draw to government teaching with the associated drop in salary. That is one area where I think their is a risk to the social contract.
For Hospitals the big problem is the aging population and the increase in diseases like diabetes which require increasingly costly treatments.

Companies & Markets
Debt-laden Evergrande warns of default risk

• Chinese developer’s profits fall 29%
• Group forced to pursue asset sales
The company is facing a downward spiral unless it can get some government help. Potential purchasers know that it is in difficulties and hence its negotiating position is very poor. I saw a a couple of term sheets being circulated for funding with details of the projects but without the client’s name. They have been very active but the whole market knows the issues. What could happen is that other developers are pressured into buying certain projects and that the chairman sees his wealth and position removed. What is certain is that government will not want to get directly involved in the solution. But equally it will not want a default that could ripple across the debt markets and cause problems for better developers who also have offshore loans.

Vietnam virus curbs knock production and disrupt supply chains
Looks at how the original containment and tracing policy failed, as it has in other countries like Australia. Now under pressure due to the delta variant, it is racing to vaccinate. But as the recent PMI data shows it has hurt the economy more than the likes of Japan, SKorea and Taiwan. The article questions whether that might result some disinvestment but concludes that Vietnam with benefit from that US/China standoff. For Vietnam the upside is that the Biden administration hasn’t pursued the trade imbalance with Vietnam which Trump had been indicting he might. Whether that changes remains to be seen but short term like so many countries it has to act quickly to vaccinate, like everywhere in the world.

Activists cite Seoul’s $127bn boost for fossil fuel projects over a decade
South Korea’s public financial institutions have provided more than $127bn for global fossil fuel projects over the past decade, an environmental group has said, as the country faces pressure to respond to climate change. Governments will continue to come under pressure from activists. A useful point to note that it is not currently possible to just switch everything to green energy but financing projects must be done with proper considerations.

Investors look beyond China risks to bet on EM recovery
Buyers say global economic upswing and years of derating mean stage is set for rebound.
‘Many analysts and fund managers remain sceptical about emerging markets, with Chinese risks looming large at the moment. China accounts for more than a third of MSCI and FTSE Russell’s influential flagship EM indices, and the country’s economic heft is so great that its ebbs and flows can affect sentiment to the developing world more widely.
Beijing’s crackdown has sent the Hong Kong stock market down more than 10 per cent since the beginning of July and the onshore CSI 300 index has slipped 6.4 per cent. Oppenheimer said some global investors considered Chinese equities to be “uninvestable”, given fears that more measures were coming.’
‘Despite being optimistic for emerging markets to recover their footing in the near term, Oppenheimer also points out longer-term issues on which they often score badly, such as slowing globalisation and mounting pressures for investors to take environmental, social and governance factors into account.
“Are we going into a golden era where emerging markets massively outperforms? I think that is less clear,” he said. “I think that there are some structural headwinds compared to what emerging markets faced in the past 20 years.”’

Aluminium prices hit 10-year high as demand surges and output stutters Key being concerns about shortages out of China; part due to bottlenecks at the mines but also power and pollution constraints in China.
An interesting read. ‘On Monday, China’s largest aluminium smelters met to address the surge in prices, according to the China Nonferrous Metals Industry Association. The meeting described the rise in prices as “irrational,” and pledged to stabilise the market by ensuring supply and preventing speculation.’
It should be that prices are linked to strong demand.
‘While markets are focused on an increase in Covid cases and a tapering of the Federal Reserve’s monetary stimulus later this year, the fundamentals in metals markets were being overlooked.
“As Covid cases in China continue to decline and uncertainty over the Fed’s tapering timeline is resolved, we believe investors will refocus on the clear micro tightening trends across base metals and reprice the complex more closely in line with fundamentals,” analyst Nicholas Snowdon said.’
I certainly think that demand will continue especially with an increased reliance on alternative energy, in remote places which will need connecting to the grid. To say nothing of all the other uses it is put too.

LEX China video games: power off ‘The figure spent on in-game transactions positively correlates to total gaming hours. When people spent more time gaming during lockdowns, virtual item purchases surged.A second trend was the increase in viewing figures for game video streaming channels. With gaming time limited, enthusiasm for those platforms may wane too. Expect further share price declines for Huya and DouYu, the largest operators. Both have fallen over two-thirds in a year.
The rules are already in flux. Local game companies have little defence when Beijing shuts down play.’

For interest
Covid speeds up automation of low-wage jobs
Many retail, hospitality and leisure roles lost since February last year are unlikely to return.
Notes how QR codes are replacing some jobs even though employers in many cases would prefer to hire staff they are just not coming forward.

Dollar stores rise to meet inflation challenge
Freight and wage costs take toll but strength of business model and adaptability are vital assets
An interesting read but the key is the adaptability of the consumer and key will be whether as the economy recovers whether those customers are loyal or move up the quality ladder?

Securitisation woes hold lessons for supply chains
Worth a read, concludes
‘If production strains begin to subside, and input supplies normalise, current fears should abate. Still, the return to a more just-in-case supply chain will be an inflationary headwind ahead. Businesses will feel they have little choice but to try to pass along the higher costs of lower efficiency to consumers.
Policymakers would be wise to keep this in mind. As recent history has shown, finance and industry move together. They are two sides of the same sentiment coin. What is ahead in supply chain management is all but certain to be mirrored by a more cautious financial system. If we are not careful, a vicious spiral of rising consumer costs and shrinking credit availability could easily emerge, leading to further fears of shortages and even greater hoarding.
Much like we saw in the securitisation-driven mortgage market in 2008, what was once a world of overabundance could quickly turn to one of intense scarcity.’