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

    Exclusive Interview with Zoltan Pozsar: Adapting to the New World Order

    Thanks to a subscriber for this interview from Ronald Stöferle and Niko Jilch. Here is a section:

    These topics are becoming more mainstream. When I talk to the most sophisticated macro hedge funds and investors, the common refrain that comes back is they’ve never seen an environment as complicated as this. There is consensus around gold; it’s a safe bet, and everything else is very uncertain. This is a very unique environment. I think we need to take a very, very broad perspective to actively reimagine and rethink our understanding of the world, because things are changing fast. The dollar and the renminbi and gold and money and commodities. I think they are all going to get caught up.

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    World's Largest Solar Manufacturer Is Fueling a Price War

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

    Chinese company Longi Green Energy Technology Co. cut wafer prices by as much as 31% on Monday. Wafers are silicon squares that are wired up and pieced together to form solar panels. 

    The reduction comes after solar silicon prices have plunged by almost half since early February. A slew of new factories have ramped up production, ending a shortage of the material that disrupted the industry’s supply chain last year. 

    Longi President Li Zhenguo warned last week that aggressive expansion in the solar supply chain could lead to excess capacity that forces more than half the companies in the industry out of business in the next few years. 

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    Amazon's stock is misunderstood for these 3 reasons, according to an analyst

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

    "First, we believe the current growth rate is depressed by the overall softness in consumer discretionary spend," Mahaney wrote of Amazon's retail business, which he expected will grow revenue by 10% this year, compared with 13% last year. An improvement in macroeconomic trends "should enable an acceleration in North American Retail revenue growth."

    Further, Amazon could see big revenue benefits as it continues making its shipping times ever speedier. As Mahaney wrote, "the faster the shipping, the greater the demand."

    On the cloud-computing side of the business, Mahaney saw the potential for an even more dramatic slowdown in the near term. Revenue there could increase by only 10% or 11% in the second quarter and 16% for the whole of 2023, by his estimates, versus 29% in 2022.

    But he also saw room for Amazon to drive a growth inflection after the second quarter of this year, driven by easier comparisons, traction for artificial-intelligence workloads and a relaxation of "optimization" efforts like discounts and bundled renewals.

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    Great Wall Motor, BYD Sink After Chinese Auto Giants Clash on Car Emissions Tests

    This article from Yicai Global may be of interest. Here is a section: 

    BYD’s Qin Plus DM-i and Song Plus DM-i models use normal-pressure fuel tanks and therefore purportedly fail to meet the country’s vehicle emissions standards, Great Wall Motors said today, citing the filing it made to the Ministry of Ecology and Environment, State Administration for Market Regulation and the Ministry of Industry and Information Technology on April 11.

    Great Wall Motors is paying close attention to the case to see if legal action will be taken, the Beijing-based carmaker said. Environmental protection authorities need to conduct a probe and legal proceedings must be started should the results show any irregularities, it added.

    BYD retorted that it reserves the right to carry out legal action of its own and is firmly against any form of unfair competition. All of the Shenzhen-based company’s autos conform with national standards and they have all passed verification by the country’s authorities.

    Great Wall Motor bought the two cars and sent them to the China Automotive Technology & Research Center for testing, BYD said. They were not tested according to national-level standards, it said.

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    China's $23 Trillion Local Debt Mess Is About to Get a Lot Worse

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

    “Many cities will become like Hegang in a few years’ time,” said Houze Song, an economist at US think tank MacroPolo, noting that China’s aging and shrinking population means many cities don’t have the workforce to sustain faster economic growth and tax revenue.
     
    “The central government may be able to keep things stable in the short term by asking banks to roll over local governments’ debt,” Song said. Without loan extensions, he added, “the reality is that over two thirds of the localities won’t be able to repay their debt on time.” 

    In Heilongjiang province, where Hegang is located, bond investors are already wary of the risks. The province’s outstanding seven-year bond had an average yield of 3.53%, 18.8 basis points higher than the average nationwide, ranking it among the top four most expensive.

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    The Green Energy Transition Has a Chilean Copper Problem

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

    Codelco’s production is down by about a fifth from only six years ago. After a double-digit-percentage drop in 2022, it’s expected to fall as much as 7% this year, to 1.35 million metric tons.

    Ore quality is deteriorating around the world as existing deposits are depleted and new ones are more difficult and costly to develop. “There’s no easy mining left—not in Chile nor the rest of the world,” said Sougarret at a shareholders meeting on May 2.

    Because Codelco is the world’s biggest copper supplier, its production wobbles have greater impact on a market where warehouse inventories are near their lowest levels in 18 years. The company’s travails also have tremendous impact on Chile’s economy: Copper accounts for more than half of the country’s exports and a significant share of the government’s income. President Gabriel Boric’s administration is budgeting a 40% drop in tax revenue from Codelco in 2023 at a time when it’s trying to boost social spending.

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    China's Weak Inflation, Borrowing Show Economic Recovery Waning

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

    Separately, data from the People’s Bank of China showed credit and new loans were much worse than expected in April as consumers and businesses curbed their borrowing.

    “China’s credit data came in well below estimates, reinforcing the concerns over the sustainability of post-Covid recovery,” said Zhou Hao, chief economist at Guotai Junan International Holdings Ltd. Overall growth momentum “has been slowing significantly,” he said. 

    Expectations of policy easing has been growing, and a “policy rate cut looks imminent in the second quarter,” he added.

    China’s economic growth accelerated to a one-year high in the first quarter after pandemic restrictions were dropped, led by stronger consumers spending on travel and shopping. Recent data has been more mixed though, with manufacturing activity contracting in April and imports plunging.

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    Chinese Bank Stocks Soar, Adding $166 Billion in Trading Frenzy

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

    With China’s reopening trade stalled, Chinese investors are betting on a pledge by Beijing to let state-owned firms have access to more capital and play a bigger role. New guidelines on bond sales by SOEs is seen as another step in the reform as President Xi Jinping reshapes the economy. The frenzied trading has also been attributed to moves by three nationwide lenders to cut deposit rates to boost profit margins. 

    It’s a “valuation system with Chinese characteristics” story, said Willer Chen, a senior analyst at Forsyth Barr Asia Ltd. Some investors are also “seeing value in bank stocks because their valuation is cheap and dividend yields are attractive, despite the shrinking net interest margins and weak
    Q1 results.”

    For now, much of the gains may be driven by sentiment, rather than fundamentals. Chinese lenders posted a tepid set of first-quarter earnings as they faced deeper margin woes despite being sheltered from the recent global banking jitters. Analysts say the pressure may persist through the year as lending rates are lowered to revive the economy.

     

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    Copper Mine Flashes Warning of 'Huge Crisis' for World Supply

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

    Take not just Chile, with its revisions to fiscal policies for miners, but Peru, a country long considered crucial to the next wave of copper production, where the mining sector has been battered during lengthy social unrest. Rio in late March agreed to sell a controlling stake in its Peruvian mine La Granja to First Quantum.

    “What the market never predicted was how difficult South America would become,” said Radclyffe. “The uncertainty out of both Chile and now ongoing in Peru, that’s just added an extra level of complexity that the market never expected, and that hasn’t really been resolved.”

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    Email of the day on Hong Kong

    As a HK subscriber to your excellent service, I like to give a few on the grounds observations. In my view, the reason why LVMH is making the shift is 1) China opened Hainan tax free shopping and Shenzhen also exploring the same makes shopping high end products less unfavorable in the mainland. 2) Chinese tourist since reopening find HK less attractive relatively for tourism than before.

    On HK becoming just another Chinese city, on recent trip to UK, found some general public perception of HK over the last few years seriously incorrect, I suppose due to the sensational and misleading journalism on HK from the press in the west. While there are changes in HK in last few years, that it is becoming another Chinese city I think is very much misplaced.

    On the HKD peg, from what I heard from current and prior HK central bank chiefs and top officials from PRC, there is no desire or rationale to change the peg for the foreseeable future. Also that HKD in circulation is back by about 5X USD reserve and that the peg is setup unilaterally by HK, risk of interference by US due to geopolitical concern is low.

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