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December 31 2013

Commentary by David Fuller

Xi Says in New Year Address China Will Make Progress on Reform

Here is the opining of this informative report from Bloomberg:

Xi Jinping, delivering his first New Year’s address as China’s president, said the country must press ahead with reforms in 2014 to improve livelihoods and make the country “rich and strong.”

“I firmly believe that new glories will be awaiting the Chinese people,” Xi said in a speech broadcast on state radio yesterday.

China enters 2014 facing slowing economic growth, rising environmental concerns and higher tensions with Japan over a territorial dispute that has damaged a $366 billion trade relationship. Tackling those challenges will be up to Xi, who as head of the Communist Party, military and state has amassed the greatest individual sway over his nation since former paramount leader Deng Xiaoping.

“In 2014 we will make new strides along the path of reform,” Xi said.

A key task will be overseeing the broadest economic reforms since the 1990s which were spelled out at the Communist Party Central Committee’s Third Plenum in November. Shifts include loosening the one-child policy, increasing property rights for farmers and encouraging private investment in more industries.

David Fuller's view -

The world’s second largest economy is clearly undergoing an important transformation process.  An investment decision to buy or sell Chinese stocks is a bet on Xi Jinping, who now has more power than any leader since the shrewd and highly effective Deng Xiaoping.

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December 27 2013

Commentary by Eoin Treacy

December 20 2013

Commentary by Eoin Treacy

PBOC Adds Funds Amid Worst Cash Crunch Since June: China Credit

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

"Tightening financial conditions pose a risk to growth at a time when the economy is already weaker," Greg Gibbs, a currency strategist at Royal Bank of Scotland Group Plc in Singapore, wrote in a note yesterday. "The market is well aware of potential stresses in the Chinese financial sector and, if there are weak points, tightening financial conditions are more likely to weed these out."

China's non-financial companies have a record 2.6 trillion yuan of interest and principal repayments to make next year, and the official China Securities Journal said in a Nov. 26 editorial that higher interest costs may cause a "partial debt crisis to explode."

 

Eoin Treacy's view -

Among Asia recovery candidates both Japan and India have been notable for their outperformance. However, despite a low P/E for the overall market China remains an underperformer. The more disciplined approach adopted by the PBOC and its new found respect for market set rates has had a particular impact on the banking sector. 
 

 



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December 09 2013

Commentary by Eoin Treacy

It is safe go to back in the water

Thanks to a subscriber for this educative report by Christeen So for CCB International which may be of interest to subscribers. Here is a section:

Policy tailwinds. We expect China waste and water names to continue to outperform backed by favorable government policies towards environmental protection. We see China’s waste-to-energy (WTE) market continuing to expand in line with the government objective to lift the WTE-to-total treatment ratio from 20% in 2010 to 35% in 2015F. China’s wastewater treatment (WWT) market is likely to experience a gradual slowdown in new capacity additions as the WWT ratio continues to rise over the medium term; however, tariff hikes should mitigate the effect on earnings.

“Market has yet to factor in potential growth from new markets such as hazardous waste treatment (HWT) and water renovation projects. We believe HWT will become a new important income stream for China’s waste operators given increasing demand for third-party waste treatment and the higher returns it brings (levered IRR: 15-20%) compared with WTE (levered IRR: 10-15%). As China is still behind in its water renovation plans, we expect more investment in this area in the medium term; good news for WWT operators.

“Volume growth from new project wins, collection points growth, and M&A opportunities. We expect waste/waste water volume growth from project wins in both existing and new geographical areas, a rising number of waste/waste water collection points, and large-scale M&A. Watch for established SOE players with strong political connections, experienced management teams, solid“

Catalysts and risks. Near-term catalysts include (1) more lucrative waste/water project wins, (2) faster-than-expected penetration into new business segments, (3) additional supportive policies, and (4) large-scale value-accretive M&A. Downside risks to our view include (1) slower-than-expected new capacity expansion, (2) on-grid tariff, waste tipping fee, and water tariff cuts, and (3) rising interest rates.
 

Eoin Treacy's view -

The changing priorities of the Chinese administration from an outright focus on growth to a more nuanced, human capital, centred approach has obvious benefits for the environmental sector. Water treatment has been a particular beneficiary since China has substantial issues with providing ample water for its growing needs and related shares have rallied impressively. 



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November 29 2013

Commentary by David Fuller

November 28 2013

Commentary by David Fuller

Email of the day (1) - On investing in China

"I was very interested in your views as to China being quite cheap - or at least compared with some well known indices!

"I would be interested in your views of how to enter this market. Many funds and collectives seem to have high annual and initial costs, frequently above 2 or 3 % pa.

"I have been a subscriber for 10 years next month- you and Eoin have become distant but fond (and doubtlessly well off) relatives!"

David Fuller's view -

Thank you for your email and both Eoin and I are honoured to be thought of as 'distant but fond relatives'.



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November 27 2013

Commentary by David Fuller

Biden to Press China on Air Zone as Hagel Reassures Japan

Here is the latest on this political tension, reported by Bloomberg:

Vice President Joe Biden will press Chinese leaders on their intentions in creating a new air-defense zone, as Defense Secretary Chuck Hagel assured Japan of U.S. support and continued military operations in the region.

Biden will use meetings with leaders in Beijing next week partly to express U.S. concern aboutChina's behavior toward its neighbors and seek an explanation of the air zone it claimed over disputed areas of the East China Sea, according to an administration official who briefed reporters today on condition of anonymity to discuss the vice president's plans.

China's establishment of an air zone that includes islands claimed by both Japan and China "is a potentially destabilizing unilateral action designed to change the status quo in the region, and raises the risk of misunderstanding and miscalculation," Hagel said in a call today to Japanese Defense Minister Itsunori Onodera, according to an e-mailed statement by Pentagon spokesman Carl Woog.

The U.S. sent two unarmed B-52 bombers through the disputed zone this week without the advance notice that China has demanded and without incident. South Korea's military sent a plane through the area yesterday on a regular patrol flight, according to NHK, Japan's public broadcasting organization, which cited military sources it didn't name.

ANA Holdings Inc. (9202) and Japan Airlines Co., Japan's largest carriers, ran flights that landed today through the zone without advance notice, the companies said. Peach Aviation Ltd., a low-fare affiliate of ANA, also flew through the area without coordinating with the Chinese.

David Fuller's view -

China's bullying manoeuvre is creating a Keynesian military stimulus in Asia but I do not think it has many allies in this adventure. Worse still for China, it will now have to endure Joe Biden's grins.



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November 27 2013

Commentary by David Fuller

Today's interesting charts

Price charts show you where the money is going.

David Fuller's view -

Germany's DAX Index has risen for nine consecutive weeks and eleven out of the last thirteen weeks. It is also more overextended relative to its 200-day moving average than at any time since this bull market commenced with a weekly upside key reversal in March 2009. The next downward dynamic (see examples following previous overextensions to the upside) will indicate the onset of a corrective phase.



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November 27 2013

Commentary by Eoin Treacy

Currency market gyrations

Eoin Treacy's view -

The US Dollar declined for much of the decade from 2000 as the USA dealt with twin busts and money policy that deliberately targeted a weak currency as a policy objective. The relative attraction of other currency markets was therefore burnished. Investors became accustomed to an environment where currency market and capital market appreciation contributed to total return.



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November 26 2013

Commentary by David Fuller

"China-Japan rearmament is Keynesian stimulus, if it doesn't go horribly wrong"

Here is the opening from this interesting and unsettling article by Ambrose Evans-Pritchard for The Telegraph (UK): 

Asia is on the cusp of a full-blown arms race. The escalating clash between China and almost all its neighbours in the Pacific has reached a threshold. All other economic issues at this point are becoming secondary.

Beijing's implicit threat to shoot down any aircraft that fails to adhere to its new air control zone in the East China Sea is a watershed moment for the world. The issue cannot easily be finessed. Other countries either comply, or they don't comply. Somebody has to back down.

The gravity of the latest dispute should by now be obvious even to those who don't pay attention the Pacific Rim, the most dangerous geostrategic fault line in the world.

Japan's foreign minister, Fumio Kishida, accused China of "profoundly dangerous acts that unilaterally change the status quo".

The US defence secretary Chuck Hagel called it "a destabilising attempt to alter the status quo in the region" and warned that the US would defy the order. The Pentagon has since stated that US pilots will not switch on their transponders to comply, and will defend themselves if attacked. Think about this for a moment.

Mr Hagel asserted categorically that Washington will stand behind its alliance with Japan, the anchor of American security in Asia. "The United States reaffirms its long-standing policy that Article V of the US Japan Mutual Defense Treaty applies to the Senkaku Islands," he said.

Whether China fully believes this another matter, of course. The Senkaku islands offer a perfect opportunity for Beijing to test the resolve of the Obama Administration since it is far from clear to the war-weary American people why they should risk conflict in Asia over these uninhabited rocks near Taiwan, and since it also far from clear whether President Obama's Asian Pivot is much more than a rhetorical flourish.

Besides, Beijing has just watched the US throw its long-time ally Saudi Arabia under a bus over Iran. It has watched Moscow score an alleged victory over Washington in Syria. You and I may think it is an error to infer too much US weakness from these incidents, but that is irrelevant. Beijing seems to be drawing its own conclusions.

Even if the immediate crisis can be defused, we are clearly sliding into a new Cold War. While it is dangerous, it could have paradoxical and powerful side effects. Rearmament lifted the world economy out of slump in the late 1930s, working as a form of concerted Keynesian fiscal stimulus. It could do so again.

David Fuller's view -

The world could certainly use a Keynesian stimulus, although most of us hoped that would be infrastructure redevelopment. However, China has already done that, although perhaps not to everyone's tastes.

I have been concerned for some time about what Ambrose Evans-Pritchard discusses in this excellent article. China is definitely the aggressor in the East China Sea. Its World War II resentment of Japan, while understandable, can also be politically expedient. Moreover, China will not welcome the economic revival and rearmament of its old enemy. China is also testing President Obama. Additionally, due to its disastrous one child policy, China has a growing social issue with over 30 million excess males, who may be regarded as an expendable asset.

We should keep an eye on this situation because if it ever did go horribly wrong, the world's three biggest economies would be involved.



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November 26 2013

Commentary by Eoin Treacy

Atlantis China Fund Newsletter

This note from Atlantis may be of interest to subscribers. Here is a section:

China's growth moderation is on course. The latest IMF forecast suggests that China's GDP growth will fall to 7.3% in 2014 from an estimated 7.6% in 2013. Reducing inequality and gentrification are on top of the government's agenda. We believe this should be accomplished by implementing broad reforms such as financial market liberalisation, effective land management, free labour mobility, broadening of social security net coverage and establishing a well-defined property rights / compensation system on natural resources. In our view, headline GDP rates only matter when it comes to national power as what counts day to day are living standards, i.e. GDP per capita.

Eoin Treacy's view -

One of the reasons democracies tend to persist is because of the institutions normally associated with this form of government. Among these are individual property rights, minority shareholder protections, an independent judiciary, free press and unambiguous law enforcement. Without aspiring to such a framework it is hard to imagine how democracies could persist beyond the short to medium term.



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November 25 2013

Commentary by David Fuller

"Gold No Slam-Dunk Sell in China as Aunties Buy Bullion"

Here is the opening from this informative article from Bloomberg:

Yang Cuiyan, a 41-year-old housekeeper from Anhui province, is one reason China is poised to topple India as the world's top consumer of gold even as investors desert the metal.

"I don't know anything about the stock market and I don't have enough money to buy property, so I figured gold is the safest choice," she said. "I can put it on when I go back home to show everyone that I'm doing well."

Yang, who made the 650-mile (1,000-kilometer) journey to the capital from her rural home to visit relatives and shop, is one of the legions of middle-aged Chinese women, respectfully referred to as aunties, who bought coins and jewelry this year, bringing support to a market shunned by many professional investors who began doubting the metal as a store of value.

Bullion consumption in the world's second-largest economy will surge 29 percent to a record 1,000 metric tons in 2013, according to the median of 13 estimates from analysts, traders and gold producers in China surveyed by Bloomberg News. Demand that may ease 2.4 percent in 2014 from this peak still points to purchases greater than any other nation and more than the U.S., Europe and the Middle East combined.

China's demand for jewelry, bars and coins rose 30 percent to 996.3 tons in the 12 months to September, while usage in India gained 24 percent to 977.6 tons, according to the London-based World Gold Council. India was No. 1 for calendar 2012.

David Fuller's view -

Gold remains in an overall downward trend; Goldman Sachs it talking it lower and western investors and traders are still drifting away from the Total Known ETF Holdings of Gold. However, it is also oversold in the short term and near prior support from the late June low.



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November 25 2013

Commentary by David Fuller

Tim Price: Madness, and sanity

My thanks to the author for his ever-interesting letter, published by PFP Wealth Management. It is posted in the Subscriber's Area but here is a brief sample:

Probably the biggest of those fish is that giant part of the world economy known as Asia. The chart below shows the anticipated growth in numbers of the middle class throughout the world over the next two decades. The solid green circle is the current middle class population (or as at 2009 to be precise); the wider blue-fringed circle represents the forecast size of this population in 20 years' time. The OECD definition of middle class is those households with daily per capita expenditures of between $10 and $100 in purchasing power parity terms.

Note that in the US and Europe, the size of the middle class is barely expected to change over the next two decades. Central and South America, and the Middle East and North Africa, are forecast to grow a little. But one area stands out: the emerging middle class in Asia is forecast to explode, from roughly 500 million to some 3 billion people.

In equity investing, the combination of a compelling secular growth story and compellingly attractive valuations is a very rare thing, the sort of investment opportunity that one might only see once or twice in a generation, if that. But it exists, here in Asia, today. Once again, however, we have to abandon conventional financial thinking in order to exploit it.

David Fuller's view -

This is a very good issue of Tim Prices' letter and I commend it to you.



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November 18 2013

Commentary by Eoin Treacy

Beneficiaries of reforms post 3rd Plenum

Thanks to a subscriber for this timely report by Jun Ma and colleagues at Deutsche Bank which may be of interest to subscribers. The full report is posted in the Subscriber's Area but here is a section

“The mega reform package approved by the 3rd Plenum, which includes 60 measures, is by far the most profound in a decade, if not decades, in terms of scope, depth, and impact. Its aggressiveness even exceeded our very bullish expectation. Emphasizing that the market would play a decisive role in allocating resources, this plan will guide China's second-half journey towards a market-based economy, significantly lift China's growth potential, and help reduce macro risks.

We believe that deregulation which will permit private companies to enter most industries other than those related to national security is the most important reform within the package. Our estimate shows that relative to the reform scenario, deregulation will boost the average annual real output growth of the private sector by 3ppts per year in the coming decade.

The measures to liberalize interest rates and the capital account, granting greater market access to foreign investors, granting farmers the titles of land use rights, as well as resource pricing reform will enhance the efficiency of resources allocation, and speed up the development the service sector. The development of the municipal bond market will help remove a major overhang on banks NPLs. The transfer of SOE shares to the pension fund and raising the SOE dividend payout ratio will help improve pension and fiscal sustainability in the longer run. The two-child policy will help raise long-term growth potential.

Eoin Treacy's view -

What can only be described as a lukewarm response to the initial announcement of policy ambitions following the plenary session of China's parliament turned to enthusiasm on Friday as some of the more ambitious objectives were revealed. These are now being hailed as the most extensive reforms in decades and are likely to prove a catalyst for investor interest in the stock market.

Two of the most important moves relate to the banking sector and the one child policy.



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November 18 2013

Commentary by David Fuller

China's Bold, Contradictory Reform

Here is the opening to this interesting editorial from Bloomberg

Call it policy presentation with Chinese characteristics. After the meeting of its leadership last week, China's Communist Party issued a muddled communique that aroused no great excitement. Then, on the weekend, well ahead of the usual schedule for such announcements, the party released a longer follow-up statement worth getting excited about.

It's radical stuff -- in principle, if not (yet) in policy. Maybe China's new president, Xi Jinping, aspires to be another Deng Xiaoping after all.

The "Decision on Major Issues Concerning Comprehensively Deepening Reforms" was nothing if not wide-ranging. Tucked inside it were the biggest headlines, so far as many foreign observers are concerned: China's notorious one-child policy is to be softened, and the system of arbitrary confinement to "re-education" in labor camps, a tool of political repression, is to be ended.

Most of the statement, though, is devoted to a comprehensive list of economic and financial reforms. This emphasis is deliberate: "The reform of the economic system is the focus of all the efforts to deepen the all-round reform." Many of the proposals echo the long-standing recommendations of pro-market advocates at home and abroad.

The statement calls for China's financial sector to be liberalized. There will be new private banks, as well as further moves toward exchange-rate flexibility, market-determined interest rates and capital-account convertibility. The blueprint calls for price reforms in water, energy, transportation and telecommunications. Farmers will be given new property rights, including the right of succession and the ability to sell shares in their land or use it as collateral. The system of household registration, which controls workers' movement from countryside to city, will be eased (though curbs on migration to the biggest cities will remain).

David Fuller's view -

Bloomberg's second paragraph above summarises the reaction of numerous China watchers. Many of us hoped for another Deng Xiaoping when Xi Jinping was first appointed. He had more power than his immediate predecessors but the new President obviously did not have Deng's political stature. Consequently he had to negotiate his way and has successfully done so, judging from this abridged 60-point document.



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November 13 2013

Commentary by Eoin Treacy

China Vows Bigger Role for Markets as Party Closes Policy Summit

This article from Bloomberg covers the main points relating to the end of China’s third plenum. Here is a section

China’s leaders are under pressure to revamp the nation’s finances as swelling local-government debt highlights the risk of a buildup of bad loans and state businesses’ access to bank funding crowds out small firms. Today’s document didn’t discuss specific issues such as regional borrowing, interest rates or the one-child policy, while referring generally to giving farmers more property rights.

“It’s going in the right direction is the most you can say,” said Louis Kuijs, chief China economist at Royal Bank of Scotland Group Plc in Hong Kong. “Even though some of the phrasing is new, the ideas are not so new.”

The communique, published by the official Xinhua News Agency, reiterated the role of state ownership while saying development of the non-public sector will be “encouraged.”

That emphasis “probably precludes drastic state-owned enterprise-related reforms,” said Kuijs, who previously worked for the World Bank in China.
 

Eoin Treacy's view -

The announcement following the weekend’s policy summit has underwhelmed markets. This is particularly noteworthy because high level officials had taken such pains to hype the reform agenda ahead of the meeting. What is perhaps most important is that while a greater role for markets has been advocated, nothing specific has been mentioned about reform of the state owned enterprises (SEO) sector. These companies remain the personal fiefdoms of individual party cadres and represent a barrier to greater competition and efficiency. (Also see Comment of the Day on October 29th).



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