PETER’S BUSINESS & FINANCE BRIEFING – Wednesday 26 June 2024, 06:00 Hong Kong
• Premier Li Qiang says China’s business environment is ‘world-class’ • US probing China Telecom, China Mobile over internet, cloud risks • Novo Nordisk’s Wegovy approved in China
Wednesday’s Opening Call
Hang Seng (Hong Kong) Projected Open: 17,952 -121 points -0.7%
Nikkei 225 (Japan) Projected Open: 39,340 +167 points +0.4%
Quick Summary - 4 Things To Know Before Asian Markets Open
Premier Li Qiang delivered a keynote speech at the opening session of the Summer Davos, in northeast China’s coastal city of Dalian on Tuesday and warned that decoupling will lead to a “destructive spiral’. He said, “the history of global economic development shows that openness brings progress, and that isolation leaves it behind. Only through open interactions, exchanges and mutual learning can we keep pushing the boundaries of development and open up new frontiers.” He went on to defend the country’s technological development, saying “the rapid rise of China’s new industries is rooted in our unique comparative advantages. He noted the country’s large market, industrial network, labour force, diverse application scenarios and receptive consumers. “That is how China’s emerging industries get their competitiveness,” Premier Li said.
Reuters reported Tuesday that the Biden administration is investigating China Mobile, China Telecom and China Unicom over concerns the firms could exploit access to American data through their US cloud and internet businesses by providing it to Beijing. Authorities at the Commerce Department are running the investigation, which has not been previously reported. They have subpoenaed the state-backed companies and have completed "risk-based analyses" of China Mobile and China Telecom but are not as advanced in their probe of China Unicom.
Danish healthcare company Novo Nordisk has received approval for its Wegovy weight loss treatment in China. This opens up the blockbuster drug for sale to individuals in a huge market in which obesity rates have more than doubled among adults in the past two decades. As the number of overweight adults in China is projected to rise significantly, Novo Nordisk aims to capitalise on its early-mover advantage in weight-loss drugs.
Michelle Bowman, a rate-setter at the Federal Reserve, indicated Tuesday that she is willing to raise interest rates again if progress on inflation stalls or reverses. While she is one of the more hawkish officials among the Fed’s 19 rate-setters, she also acknowledges that there are still “upside risks” to inflation. These risks include the possibility that looser financial conditions could boost demand, potentially causing inflation to accelerate. Ms. Bowman emphasised that US inflationary pressures differ from those in other advanced economies due to factors like immigration policy and stimulus measures since the pandemic.
Premier Li Qiang Says China’s Business Environment Is ‘World-Class’
Premier Li Qiang delivered a keynote speech at the opening plenary of the 15th Annual Meeting of the New Champions, also known as the Summer Davos, in northeast China’s coastal city of Dalian on Tuesday. The event, held from June 25 to 27, featured the theme “Next Frontiers for Growth.” Approximately 1,600 leading figures from the public and private sectors across nearly 80 countries and regions gathered to explore new drivers and pathways for global economic growth.
In his speech, Premier Li said that the Chinese economy had gotten off to a "good start" this year, and that the nation will continue to strive to create an open environment for technological innovations. "Since the start of this year the Chinese economy has sustained the momentum of recovery. It got off to a good start in the first quarter of this year and continued steady growth in the second quarter. We're confident and capable of achieving the growth target of around 5% for this year," Mr. Li said. He added, “I would also like to say that China’s large market is open. Foreign companies compete, communicate and cooperate with domestic ones on a level playing field, and they have become a major force enabling the growth of emerging industries, and buttressing the sound and sustained development of the Chinese economy.” In his appeal to overseas businesses, he said, “first, we have a massive market. Second, we have a complete industrial chain. Lots of ideas can be tested in China. And to develop new industries, we should rely on enterprises.”
He called on China to keep improving industries through innovation. “The source of industries is technology. Only when new technologies keep emerging can we provide a steady flow of impetus to the development of new industries,” he said. “In recent years, China has enhanced its work in basic research. “We highly value the development of strategic scientific capacities to promote the innovation of enterprises, to improve industries through innovation.”
Premier Li also mounted a robust defence of China’s new energy sectors, such as electric vehicles, which are the subject of investigations and tariffs in the US, EU and elsewhere. “We cannot slow down our pace in the green transition for short-term growth, nor practice protectionism in the name of green development or environmental protection,” he said. “The green transition itself provides huge potential for development. We need to jointly advance the development of green and low-carbon industries and foster more growth drivers for the green economy.” He dismissed complaints over exports saying China’s production of new energy products such as lithium batteries and electric vehicles, which have soared in recent years, was “enriching global supply”.
He went on to talk about the need for openness. “The history of global economic development shows that openness brings progress, and that isolation leaves it behind. Only through open interactions, exchanges and mutual learning can we keep pushing the boundaries of development and open up new frontiers,” he said. He defended the country’s technological development while criticising efforts to restrict global cooperation. Premier Li said some countries use the green transition as an excuse for “trade protectionism”, a practice that he rejects. “We should ditch bloc confrontation,” he said, “and go against supply-chain decoupling.” The “regressive actions of decoupling” would only “drag the world into a destructive spiral where the fierce competition for a larger slice ends up in a diminishing pie.” Mr. Li said, “the rapid rise of China’s new industries is rooted in our unique comparative advantages. He noted the country’s large market, industrial network, labour force, diverse application scenarios and receptive consumers. “That is how China’s emerging industries get their competitiveness,” Premier Li said.
The World Economic Forum meeting comes before a major meeting of the ruling Communist Party in July that investors hope could unveil a series of reforms to boost the sluggish economy. Underscoring his view that technology is key to China’s future, President Xi said at a Politburo study session in the run-up to the plenum that higher education courses should be adjusted to meet the needs of new industries.
US Probing China Telecom, China Mobile Over Internet, Cloud Risks
Reuters reported Tuesday that the Biden administration is investigating China Mobile, China Telecom and China Unicom over concerns the firms could exploit access to American data through their US cloud and internet businesses by providing it to Beijing. Authorities at the Commerce Department are running the investigation, which has not been previously reported. They have subpoenaed the state-backed companies and have completed "risk-based analyses" of China Mobile and China Telecom but are not as advanced in their probe of China Unicom. The companies still have a small presence in the United States, for example, providing cloud services and routing wholesale US internet traffic. That gives them access to Americans' data even after telecom regulators barred them from providing telephone and retail internet services in the United States. The Chinese Embassy in Washington said it hopes the United States will "stop suppressing Chinese companies under false pretexts," adding that China will continue to defend the rights and interests of Chinese companies.
Philippines Warns Of Region-Wide Conflict Over South China Sea
The Philippine ambassador to Washington has warned that a conflict with China over a contested reef in the South China Sea could engulf countries across the Indo-Pacific, raising the spectre of a possible nuclear war. Jose Manuel Romualdez said in an interview with the Financial Times that the dispute with China over the Second Thomas Shoal had created an incendiary situation. In recent months, the Chinese coast guard has violently blocked Philippine boats from carrying out supply missions to marines stationed on the Sierra Madre, a marooned ship on the reef. “It’s the most dangerous time, weapons of mass destruction are very real,” Mr. Romualdez told the FT. “You have several countries, major powers that have large arsenals of nuclear power.” “If anything happens, the entire Asian region will be completely included,” he added.
Edinburgh Halts Deal With Kaohsiung Over Fears Of China Backlash
Edinburgh City Council has decided to shelve plans for a proposed ‘friendship arrangement’ with Kaohsiung city in Taiwan due to concerns that it could harm relations with China. Organisations such as the University of Edinburgh, Edinburgh Airport, and the Edinburgh Chamber of Commerce expressed worries that this move might result in sanctions on the city, as well as reduced trade, tourism, and student numbers. The council’s decision was based on the potential risks posed by the arrangement, although quantifying these risks remains challenging. China’s representative in Edinburgh expressed grave concerns about the proposed agreement. “We’ve spent years building up the relationship with China,” said one person briefed on the discussions. “It just isn’t worth jeopardising it all over a friendship agreement.” Some of these business groups had also been contacted by Chinese diplomats in Edinburgh, who work out of a large consulate in the Murrayfield area of the capital. “They were none too pleased about the agreement,” the person said.
In 2023, Chinese visitors accounted for 1% of all overseas visits to Scotland and 3% of international spending in the country. China ranks as Scotland’s fifth-largest long-haul international market in terms of visitors. The growing number of Chinese students in Edinburgh has transformed the Southside area of the city near the university, with new restaurants and supermarkets catering for the growing Asian population.
Australia Consumer Mood Improves
Australia's Westpac-Melbourne Institute Consumer Sentiment index increased by 1.7% m/m to a three-month high of 83.6 in June, reversing from a 0.3% fall in May. While marking the first rise in four months and the highest print since February, the latest result remained far from the neutral level of 100 as fiscal support measures were insufficient to ease concerns about high inflation and elevated interest rates. The ‘family finances vs a year ago’ sub-index jumped 9.7% but was very weak at 69.3, and family finances for the next 12 months rose 0.4% to 96.5. Consumers' views on economic conditions for the next five years added 2.1% to 94.1 but their assessment for the next 12 months fell 5.7% to 78.5. The ‘time to buy a major item’ climbed 4.2% to 79.7. Meanwhile, unemployment expectations rose 2.5% to their highest since September 2020.
South Korea Consumer Mood Rises To 4-Month High
South Korea’s Composite Consumer Sentiment Index (CCSI) increased to 100.9 in June, its highest level since March, up from 98.4 in May. Sentiment regarding current living standards increased by two points to 90, while future outlook improved by the same margin to 94. Expectations for future household income also rose by two points to 99, while sentiment regarding future household spending remained unchanged at 109. Consumer sentiment towards current domestic economic conditions increased by four points to 71, and optimism about future domestic economic conditions rose by one point to 80. The expected inflation rate for the upcoming year stood at 3.0%.
Hong Kong Trade Deficit Narrows Sharply In May
Hong Kong's trade deficit decreased sharply to HK$12 billion in May from HK$26.4 billion in the corresponding month of the previous year, as exports grew more than imports. Year-on-year, exports surged 14.8% to HK$375.9 billion, the highest growth since January 2024. Among major destinations, shipments increased to Vietnam (31.5%), the USA (26.6%) and China (23.6%). Meanwhile, imports grew at a softer 9.6% from a year earlier to HK$388.1 billion. For the first five months of the year, Hong Kong’s trade deficit came in at HK$105.2 billion.
Malaysia Inflation Rate Above Estimates
The annual inflation rate in Malaysia rose to 2.0% in May from 1.8% in the prior three months, exceeding market forecasts of 1.9% and marking the highest level since August 2023. The main upward pressure came from food (1.8% vs 2.0% in April), housing (3.2% vs 3.0%), and health (2.2% vs 2.3%). Core consumer prices, excluding volatile fresh food items and administered costs, increased 1.9% y/y, the same pace as in April, the steepest rise in four months. Monthly, the CPI rose 0.3%, the most in three months, after a 0.2% gain in April.
US Consumer Confidence Dips
U.S. consumer confidence eased in June amid worries about the economic outlook, but households remained upbeat about the labour market and expected inflation to moderate over the next year. The business and research organisation’s consumer confidence index dipped to 100.4 from a downwardly revised 101.3 in May. That was marginally stronger than the reading of 100 economists had forecast. The mixed survey from the Conference Board on Tuesday also showed consumers' perceived likelihood of a recession over the next 12 months retreated this month after rising in April and May. Though fewer consumers planned to buy vehicles and household appliances over the next six months, more planned to go on vacation. Labour-market resilience is driving consumer spending, underpinning the economy despite the Federal Reserve's hefty interest-rate hikes in 2022 and 2023 to quell inflation. “Consumers expressed mixed feelings this month: their view of the present situation improved slightly overall, driven by an uptick in sentiment about the current labour market, but their assessment of current business conditions cooled,” said Dana Peterson, chief economist of the Conference Board.
Earlier this month, the University of Michigan’s preliminary reading of its consumer sentiment index unexpectedly hit a seven-month low in June. In other economic news, the Richmond Federal Reserve’s manufacturing index slumped to -10 in June, down from zero in May and worse than the estimate for -0.5.
US Home Prices Rise More Than Expected
The S&P CoreLogic Case-Shiller 20-city home price index in the US rose 7.2% y/y in April, easing from an upwardly revised 7.5% increase in March, but above forecasts of 6.9%. "2024 is closely tracking the strong start observed last year, where March and April posted the largest rise seen prior to a slowdown in the summer and fall. Heading into summer, the market is at an all-time high, once again testing its resilience against the historically more active time of the year", Brian D. Luke, Head of Commodities, Real & Digital Assets at S&P Dow Jones Indices said.
Canadian Inflation Rises Unexpectedly, 3 Weeks After Rate Cut
Inflation in Canada has risen unexpectedly, just three weeks after its central bank became the first in the G7 group of advanced economies to cut interest rates in the current cycle. Statistics Canada said the country’s consumer price index rose 2.9% in May from a year ago, up from 2.7% a month earlier, primarily due to higher prices for services. Economists polled by Reuters had expected inflation to slow to 2.6%. On a monthly basis, the index climbed 0.6%, versus expectations for a 0.3% gain and up from 0.5% in April. Tuesday’s data broke a four-month string of easing price pressures.
The Bank of Canada cut its policy interest rate to 4.75% on June 5, having held it at 5% since June 2023. Announcing the move, Governor Tiff Macklem said the bank’s governing council had decided that “monetary policy no longer needs to be as restrictive”. The reacceleration of both headline and core inflation will likely caution the central bank against a second consecutive interest rate cut next month, as officials seek to understand whether the resurgence in price pressures is transitory.
Top Official Warns Fed May Need To Raise Interest Rates Again
Michelle Bowman, a rate-setter at the Federal Reserve, indicated Tuesday that she is willing to raise interest rates again if progress on inflation stalls or reverses. While she is one of the more hawkish officials among the Fed’s 19 rate-setters, she also acknowledges that there are still “upside risks” to inflation. These risks include the possibility that looser financial conditions could boost demand, potentially causing inflation to accelerate. The Fed has maintained interest rates at their highest level in 23 years, but the latest projections in the so-called ‘dot plot’ suggest policymakers expect only one rate cut this year. But four of the 19 officials who attend the committee also revealed earlier this month that they expect to make no rate cuts this year. Ms. Bowman emphasised that US inflationary pressures differ from those in other advanced economies due to factors like immigration policy and stimulus measures since the pandemic.
Another Fed governor, Lisa Cook, said on Tuesday in New York that she believed that inflation was likely to fall “more sharply” next year and that “at some point” it would be necessary to cut rates “to maintain a healthy balance in the economy”. Ms. Cook said she expected housing-related inflation to ease in 2025, and for three- and six-month rates to continue to ebb this year as consumers became less tolerant of higher costs for goods.
Meanwhile, the European Central Bank and the Bank of Canada have already begun cutting rates, while the Bank of England is also considering an August cut. Speaking in London, Ms. Bowman said it was “possible” that the divergence in strategy between the Fed and other central banks would widen over the coming months.
Novo Nordisk Weight Loss Drug Wegovy Approved In China
Danish healthcare company Novo Nordisk has received approval for its Wegovy weight loss treatment in China. This opens up the blockbuster drug for sale to individuals in a huge market in which obesity rates have more than doubled among adults in the past two decades. The company initially plans to target Chinese patients willing to pay out-of-pocket for the weekly injectable drug. However, details on the drug’s pricing, sales start date, and shipment quantities to China are yet to be disclosed. As the number of overweight adults in China is projected to rise significantly, Novo Nordisk aims to capitalise on its early-mover advantage in weight-loss drugs. The patent for semaglutide, the key ingredient in Wegovy, is set to expire in less than two years in China, prompting local drugmakers to develop generic versions. Meanwhile, Novo Nordisk faces competition from rival Eli Lilly, whose diabetes drug tirzepatide was approved in China in May.
Warren Buffett’s Berkshire Trims BYD Stake To Less Than 6%
Warren Buffett’s Berkshire Hathaway has further reduced its stake in Chinese New Energy Vehicle company BYD. With this latest reduction, Berkshire Hathaway now holds less than a 6% stake in BYD. The firm sold nearly 2.02 million Hong Kong-listed shares of BYD at an average price of HKD 234.57 per share, effectively dropping its stake from 6.18% to 5.99%, according to a filing to the Hong Kong Stock Exchange. This move comes after a previous reduction in June, where Berkshire Hathaway cut its stake in BYD by 1,347,500 shares, reducing its stake from 7.02% to 6.9%. Berkshire is an early investor in BYD thanks to the late Charlie Munger. It first bought about 225 million shares of Shenzhen-based BYD in 2008 for around US$230 million. Hong Kong’s rules only require a filing when a stake percentage crosses a whole number, so if Berkshire’s stake falls below 5%, there will be another filing.
Asian Stocks Defy US Tech Sell Off
Asian stocks were mainly higher on Tuesday, defying a tech sell off on Wall Street the previous day. Information technology was the biggest declining S&P 500 sector for the day, falling more than 2%. The tech-heavy Nasdaq Composite declined 1.1% in the worst day since April for the Nasdaq. Shares of Nvidia fell another 6.7% Monday, taking its slide since last Thursday’s intraday high, when it was briefly the world’s largest company, to over 16%.
Shares in Australia led gains in the region with the ASX 200 up 1.4%. Japan’s Nikkei 225 rose 1.0% to a more than two-month high. In South Korea the Kospi added 0.4% after optimism over economic conditions improved. Consumer confidence in South Korea increased in June, with the index rising to 100.9, as compared to 98.4 in May.
The Taiwan Weighted Index recovered from losses of as much as 1.4% earlier in the session to close 0.3% higher. Index heavyweight Taiwan Semiconductor Manufacturing Company rose 0.5%%, Hon Hai Precision Industry (Foxconn) jumped 2.4%%, while semiconductor firm MediaTek slipped 1.8%.
In India, the BSE Sensex rose 0.9% to a fresh record high. Economic data showed India's current account posted a surplus of US$5.7 billion in Q1, shifting from a US$1.3 billion gap in Q4 of 2024, marking the first surplus since Q2 of 2021.
Hong Kong Stocks Shake Off US Investigation Into Telecoms
Hong Kong stocks also rose on Tuesday despite a Reuters report that the Biden administration is probing three Chinese telecommunications firms over worries that Beijing could access American data through these firms’ cloud and internet businesses in the US. All three firms named in the Reuters report – China Mobile, China Telecom and China Unicom – gained on the day. Hong Kong’s Hang Seng index was up 45 points, or 0.3%, at 18,073, partially rebounding from a 2.2% decline over the previous three days. For 2024 so far, the city’s benchmark index is up 6.0%. The Hang Seng trades at an average of 8.9 times projected earnings for this year, the second cheapest among the world’s key markets, according to Bloomberg data. The Tech Index fell 0.2%, taking its year-to-date losses to 2.9%. “For global investors seeking diversification from US equities, Asia-Pacific equities could present a viable option and the Hong Kong equity market stands out as a particularly attractive choice,” index compiler Hang Seng Indexes Co said in a report on Tuesday.
On the mainland, the Shanghai Composite fell 0.4%, to a new four-month low of 2,950. For 2024 so far, the index has dropped 0.8%. The Communist Party’s third plenary session due next week is coming into focus, with investors’ expectations building that long-term economic reform plans may be announced at the meeting.
European Shares Follow US Lower
European shares slipped on Tuesday, with defence groups among the worst-performing companies. The Stoxx 600 index was down 0.2%. The Stoxx Europe Aerospace & Defence index ended the session down 3.9%, dragged lower by Airbus. Industrial stocks sank 1.7%, while health care rose 0.8%. France’s Cac 40 was down 0.6% ahead of the first round of voting Sunday in the country’s parliamentary elections. London’s FTSE 100 fell 0.4%.
Shares of Novo Nordisk rose 4%% after the company said that its Wegovy weight loss treatment has been approved in China for long-term weight management. Shares of Zealand Pharma, which is developing its own contender weight loss drug, led gains in the Stoxx 600, jumping 9.5%. Airbus shares led losses on the region-wide Stoxx 600 index on Tuesday, falling by 9.4% on Tuesday after the company said it was cutting its targets for 2024, including aircraft deliveries and earnings. Shares in the German healthcare group Merck dropped 5.7% after late-stage trials for a cancer drug failed
US Equities Mixed
On Wall Street Tuesday, US stocks were mixed with the S&P 500 & Nasdaq snapping a three-day losing streak, lifted by a rebound in shares of Nvidia and other tech sector rivals, while the Dow was lower. The S&P 500 was up 0.4% at 5,469. The Dow lost 299 points, or 0.8%, closing at 39,112. The tech-dominated Nasdaq Composite jumped 1.3% to 17,718. The so-called “Magnificent Seven” megacap tech companies, Nvidia, Alphabet, Microsoft, Amazon, Meta, Apple and Tesla, all climbed, and accounted for seven of the eight biggest index point drivers of the S&P 500’s advance. Nvidia led the charge with a 6.8% increase, bouncing after three consecutive days of declines.
Shares in cruise line operators were among the best performers after one of the industry’s top players boosted its full-year outlook on continued strength in demand. Carnival forecast adjusted net income of US$1.55bn in fiscal 2024, a US$275mn increase from three months ago, and above the US$1.37bn analysts had pencilled in. Shares in Carnival were up 8.7%, followed by rival Norwegian Cruise Line with a 5.1% gain. Royal Caribbean Cruises was up 4.0%.
After the bell, Volkswagen said it is taking a US$1 billion stake in electric vehicle startup Rivian, which has been seeking to cut costs and shore up cash amid slower-than-expected adoption of EVs. The companies also plan to establish a joint venture, which could increase the investment to up to US$5 billion until 2026. Shares of Rivian soared over 34% in after-hours trading.
US Treasuries Steady
Government bond prices were mostly steady amid the combination of a large Treasury auction, new economic data and updates from a senior Federal Reserve official on the inflation outlook. The yield on the two-year note inched up 2 bps to 4.75%, while the benchmark 10-year yield added around the same amount, to 4.25%.
Dollar Slightly Higher
The US Dollar Index spent much of the day hovering around the 105.50 mark, before lifting 0.1% higher through the US session to end at 105.6. Fed speakers included Michelle Bowman who reiterated her known hawkish tendencies and said she does not see any rate cuts for 2024. Lisa Cook said monetary policy is restrictive and current policy is 'well positioned' to respond to the economic outlook, and "at some point" it will be appropriate to cut rates. The US Macro Surprise Index is at its weakest since March 2019. US data for the day saw the Richmond Fed Composite Index fall to -10, below the prior 0, with the decline propelled by a further drop in new orders and shipments falling into contractionary territory for June. US Consumer Confidence fell from 102.0 to 100.4 in June, albeit above the expected 100.0. Looking ahead, participants await the pivotal core PCE inflation data on Friday.
The euro was 0.2% lower against the buck at $1.0712. Sterling was unchanged at $1.2681. The yen was flat at ¥159.68, following a lower-than-expected Services PPI for May of 2.5% (expected 3.0%, previous 2.8%). Japanese Finance Minister Suzuki said authorities will continue to respond appropriately to excessive FX moves and that it's desirable for FX to move stably. In Shanghai, the yuan was 0.1% weaker at Rmb 7.2629.
Gold Slips
Gold traded back down to Friday's lows. Spot gold ended the day 0.6% lower at $2,319 an ounce.
Oil Rally Stalls
Crude oil futures fell Tuesday as the recent rally took a breather, with traders watching for summer fuel demand and tensions on the Israel-Lebanon border. Brent crude oil settled 1.2% lower at $85.01 a barrel. For the month Brent is ahead by 4.8% and year-to-date the international benchmark has climbed 10.3%, as prices have bounced back from May doldrums on a more optimistic outlook for summer fuel demand.
Bitcoin Recovers
Bitcoin regained some ground, advancing toward $62,000 after tumbling more than 7% a day earlier. It rose 4.4% to $61,930.
Peter Lewis’ Money Talk Podcast
On Wednesday’s “Peter Lewis’ Money Talk” podcast, I’ll be joined by Louisa Fok, China Equity Strategist at Bank of Singapore, and Carlos Casanova, Senior Asia Economist at UBP. With a view from Japan is Tokyo-based journalist and author, William Pesek.
The podcast is also available on Apple Podcasts, Google Podcasts and Spotify.
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