Category Archives: Asian economic development

inheritance tax changes as a lever for structural change in Japan

May 18, 2015 By in Asian economic development, family owned companies, Japanese development, mergers and acquisitions Tags: , , , , 1 Comment

value investing and corporate change…

One of the basic tenets of value investing in the US is that when a company is performing badly, one of two favorable events will occur:  either the board of directors will make changes to improve results; or if the board is unwilling or incapable of doing so, a third party will seize control and force improvements to be made.

…hasn’t worked in Japan

Not so in Japan, as many Westerners have learned to their sorrow over the thirty years I have been watching the Japanese economy/market.

Two reasons for this:

—culturally it’s abhorrent for any person of low status (e.g., a younger person, a woman or a foreigner) to interfere in any way with–or even to comment less than 100% favorably on–a person of high status.  So change from within isn’t a real possibility.

–in the early 1990s, as the sun was setting on Japanese industry, the Diet passed laws that make it impossible for a foreign firm to buy a large Japanese company without the latter’s consent–which is rarely, if ever, given.

The resulting enshrinement of the status quo circa 1980 has resulted in a quarter century of economic stagnation.

Abenomics to the rescue?

Abenomics, which intends to raise Japan from its torpor, consists of three “arrows”–massive currency devaluation, substantial deficit government spending and radical reform of business practices.

Now more than two years in, the devaluation and spending arrows have been fired, at great cost to Japan’s national wealth–and great benefit to old-style Japanese export companies.  But there’s been no progress on reform.  The laws preventing change of control remain in place.  And there’s zero sign that corporations–many of whose pockets have been filled to the brim by arrows 1 and 2, are voluntarily modernizing their businesses.  Mr. Abe’s failure to make any more than the most cosmetic changes in corporate governance in Japan is behind my belief that Abenomics will end in tears.

One ray of sunshine, though.

Japan raised its inheritance tax laws at the end of last year, as the Financial Times reported yesterday.  The change affects three million small and medium-sized companies.

The top rate for inheritance tax is 55%, with payment due by the heir ten months after the death of the former holder.   This development is prompting small business owners to consider how to improve their operations to make their firms salable in the event the owner dies.  More important, it’s making them open to overtures from Western private equity firms for the first time.  Increasing competition from small firms may well force their larger brethren to reform as well.

For Japan’s sake, let’s hope this is the thin edge of the wedge.

 

 

cooling the Chinese stock market fever

April 17, 2015 By in "naked" short selling, Banks, China, commodies speculation--stabilizing or destabilizing?, Investment firms, Margin, securities markets, short selling, stock market Tags: , , , , , , , , 1 Comment

In the 1990s, Alan Greenspan, the head of the Fed back then, famously warned against “irrational exuberance” in the US stock market, but did nothing to stop it   …this even though he had the ability to cool the market down by tightening the rules on margin lending.  This is the stock market  analogue to raising or lowering the Fed Funds rate to influence the price of credit, but has never been used seriously in the US during my working life.

The  Bank of Japan has no such compunctions.  It has been very willing to chasten/encourage speculatively minded retail investors by tightening/loosening the criteria for borrowing money to buy stocks.

 

We have no real history to generalize from in the case of China.  But moves in recent weeks by the Chinese securities markets regulator seem to indicate that Beijing will fall into the stomp-on-the-brakes camp.

Specifically,

–at the end of last month, the regulator allowed (ordered?) domestic mutual funds to invest in shares in Hong Kong, where mainland-listed firms’ shares are trading at hefty discounts to their prices in Shanghai

–highly leveraged “umbrella trusts” cooked up by Chinese banks to circumvent margin eligibility requirements have been banned,

–a new futures product, based on small and mid-cap stocks, has been created, offering speculators the opportunity to short this highly heated sector for the first time, and

–effective today, institutional investors in China are being allowed to lend out their holdings–providing short-sellers with the wherewithal to ply their trade (although legal, short-selling hasn’t been a big feature of domestic Chinese markets until now, because there wasn’t any easy way to obtain share to sell short).

What does all this mean?

The simplest conclusion is that Beijing wants to pop what it sees as a speculative stock market bubble on the mainland.  It is possible, however, that more monetary stimulus–to prop up rickety state-owned enterprises or loony regional government-sponsored real estate projects–is in the pipeline and Beijing simply wants to dampen the potential future effects on stocks.

I have no idea which view is correct.

It’s clear, however, that Hong Kong is going to be a port in any storm, and that it is going to be increasingly used as a safety valve to absorb upward market pressure from the mainland.  So relative gains vs. Shanghai seem assured.  Whether that means absolute gains remains to be seen, although I personally have no inclination to trim my HK holdings.

 

 

Hong Kong back to earth

April 14, 2015 By in Asian economic development, China, economics, Hong Kong, Stock Connect Tags: , , , , , , Leave a comment

After four days of furious buying by mainland institutional equity investors, the Hong Kong market had a down day today.  This comes despite continuing healthy money inflow from the Shanghai-Hong Kong Stock Connect mechanism.  Although I didn’t watch the market closely (too late in the night for me), it seems as if sellers emerged in force in the afternoon when mainland money was unable to push the market much higher in the morning.

As one might expect, the big winners of the past week were the big losers of today.

Although I feel no overwhelming need to buy tomorrow, it looks to me that Stock Connect will end up setting a higher floor under China-related shares in Hong Kong than was possible when locals and US/EU international investors were the main participants in the market.

 

I’ve been a bit bemused at media surprise that many Hong Kong heavyweights have not participated in the rally.  The stocks in question have at least one of the following characteristics:

1.  they have broad global exposure but no particular focus on China,

2.  they’re controlled by UK interests and continue to be symbols of former colonial rule, and/or

3.  in the case of the “hongs” or trading companies, they are the 21st century form of the British-owned opium companies that were Hong Kong’s mainstay in the nineteenth century.  During the Opium Wars of the mid-1800s, Britain invaded China, forcing legalization of trade in the narcotic and effectively seized of Hong Kong Island and a chunk of the mainland from Beijing.  Companies strongly connected with this national humiliation are the last firms mainland investors are likely to buy!

What stocks are mainlanders buying?  They’re what one would expect:

–companies dually listed in Hong Kong and China, but trading at a discount in Hong Kong

–companies with attractive businesses in China, but listed only in Hong Kong.

Trading over the next few days will likely give us a better idea of the staying power and price sensitivity of mainland investors.  For me, the key question is whether Stock Connect buyers will let prices drift down before reentering.

 

the “decimation” of Portland, Oregon’s container business–is this LA’s future?

April 13, 2015 By in Asian economic development, Industry Analysis, Shipping Tags: , , , , , 1 Comment

Last week I wrote about the Los Angeles-area container ports’ continuing problems between the shipping lines and port workers.  My view is that inability to resolve these conflicts is the motivating factor behind the shippers’ support for alternate routes to the east coast of the US, like the expansion of the Panama Canal now under way.  A corollary is that there’ll be a significant supply chain reshuffle for East Coast customers once the canal expansion is completed.

Shortly after that post, I found an article in the Journal of Commerce about the contraction of the container business in Portland, Oregon.  It seems to me to anticipate what is likely to occur in the LA area in coming years.

According to the JOC,  a jurisdictional dispute between the International Longshore and Warehouse Union (ILWU) and the International Brotherhood of Electrical Workers (IBEW) over who controls two electrician positions servicing refrigerated containers has resulted in continuing work stoppages and slowdowns in the Portland port over the past three years.  The jobs were originally IBEW positions.  In 2010, the ILWU demanded–and was given–control over the two slots.  After ILWU members were unable to do the work satisfactorily, the port returned control to the IBEW.  That triggered local work stoppages and slowdowns.  In addition to this, the Portland local of the ILWU participated in the recent four-month work slowdown that affected all West Coast ports.

A month ago, Korean shipper Hanjin, which represented about 2/3 of the port’s container business, ceased operations at Portland.  Last week, German shipper Hapag-Lloyd, which is virtually all of the rest, did so as well.

This leaves Portland with two problems:

–exporters to Asia of agricultural products from Oregon and Idaho, which had been using the return leg of trans-Pacific shipping routes to get their output to market no longer have that possibility.  Their (more expensive) choices:  truck goods to Tacoma, Seattle or LA.

–the ILWU contract calls for full-time workers to be paid $35.58/hour for 37.5 hours per week, whether there is work or not.  If the recently negotiated contract is ratified, those figures will rise to $36.68 and 40 hours.

 

The Oregonian estimates that the loss of Hanjin will eliminate work for 657 longshoremen, being paid $225,000 a day–and put 5,000 more jobs in the community at risk.  The earliest it sees possible replacement traffic is in two years.  By then, however, the Panama Canal expansion should be complete–or very close.

 

surging Hong Kong stocks

April 10, 2015 By in Asian economic development, China, Current Market Thoughts, economics, Hong Kong, Stock Connect, stock market Tags: , , , , , , , 1 Comment

a rising Hang Seng

The Hang Seng index is up by close to 10% over the past five trading days.  The Hang Seng China Enterprises index, which measures the performance of stocks dually listed in Hong Kong and on the mainland, has risen by 13%+.

Both figures understate the performance of many individual issues in the Hong Kong market over that span.  Hong Kong Exchanges and Clearing (HK: 0388), for example, is up by 40% over the past week.  BYD (HK: 0285), the battery/electric car company, has risen by 30%; Air China (HK:  0753) is 40% higher.

The bulk of the money fueling these purchases is coming from the mainland, through the Stock Connect mechanism (see my post on SC) that Beijing established about half a year ago.  The purpose of Stock Connect is to gradually allow larger flows of portfolio capital between Hong Kong and the mainland stock exchanges.  The idea is that at some point the two areas will act effectively as one.

Up until the past few days, SC flows between Hong Kong and Shanghai have been disappointing.  That changed drastically when Beijing gave the okay on March 27th for mainland mutual funds to use the SC mechanism.  I don’t know whether it happened again overnight, but Chinese mutual funds have been forced to stop buying because the daily limit to Stock Connect transfers has been reached early in afternoon trading over each of the past several days.

What is causing the surge?

Two factors:

–sharp upward movement in mainland stock markets had left the Hong Kong shares of dually-listed Chinese companies trading at extremely deep discounts to their equivalent shares in China (shares in Hong Kong still average around 20% cheaper), and

–strict market regulation, properly audited financials and the existence of companies traded in Hong Kong but not available on the mainland all make Hong Kong an interesting destination for Chinese portfolio money.

my take

As long as Hong Kong’s China-related shares trade at a steep discount to their Shanghai counterparts, arbitrage should be a support both for these individual issues and for the Hong Kong market as a whole.

For the first time ever, Hong Kong investors have got to keep a close eye on mainland exchange activity, since arbitrage can work both ways.

To the extent that any Hong Kong stocks are still about the physical place, Hong Kong, and not about the mainland, they’ll likely be significant laggards.

A tiny voice in the back of my head says that there’s something artificial about this week’s sharp rise.  If this were 1980s Japan, I’d be convinced that mutual funds had been strongly urged by some government ministry to use Stock Connect vigorously this week.  Could something like that have happened in China?  Maybe.  I think next week’s stock action will give us a hint as to whether the week’s exuberance is voluntary.

I have a lot of Hong Kong exposure already.  I have no inclination to chase stocks solely on the idea I’ll surf a mega-wave of incoming money.  Still, if this is genuine Chinese investor interest, I think we’re unlikely to see prices back at their week-ago levels any time soon.  And we’re probably going to see pretty regular mainland support for Hong Kong shares.  So I might be tempted to add on weakness.