Tag Archives: China

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.

 

 

Macau casinos, February 25, 2015

February 25, 2015 By in Casinos, China, Entertainment, Hong Kong, Macau, Recent Market Action Tags: , , , , Leave a comment

Macau casino stocks in Hong Kong took a drubbing overnight, continuing weakness shown by US parents in Wall Street trading yesterday.  The US stocks are down again as I’m writing this.

Why?

Analysts had been estimating (guessing/hoping is probably a more accurate description) that the amount lost by gamblers during the current Lunar New Year month would come in at slightly more than half what they left at the tables during the comparable period last year.  With the month nearly gone, data so far indicate that the actuals will come in at somewhat less than half the 2014 take.  Hence the selloff.

If there’s a positive story for the Macau casinos–and I think there is a strong one–it has little to do with whether this month is good or not.

Current weakness is the result of  a campaign by Beijing that’s now deep in its second year.  The idea is to restore faith in the Communist Party by discouraging flashy over-the-top consumption by the politically well-connected.  It’s also aimed at quashing corrupt local government get-rich-quick schemes involving crazy real estate developments and unneeded, heavily polluting basic industry projects.  This two-pronged attack, which has had a negative effect on high-roller gambling in Macau, has lasted much longer than anyone, myself included, had predicted.  The February-to-date casino results seem to indicate that Beijing has not yet taken its foot off the regulatory accelerator.

The positive case has three parts:

–the development of the Cotai Strip along Las Vegas lines is creating a new, more lucrative, less volatile gambling market in Macau.  It’s for middle-class Chinese visitors who want a gambling vacation that also includes resort dining and entertainment.  This business has been expanding very rapidly.  It now accounts for about three-quarters of the SAR’s gambling profits.  Non-gambling attractions in Macau are still in their profit childhood.  In pre-recession Las Vegas, however, resort profit equaled that of the casinos.  So there’s plenty of room for expansion

–at some point–who know when–the current anti-corruption campaign will abate and high-roller business in Macau will begin to stabilize and then gradually expand again.  Beijing’s crackdown began in 2013 but only started to cause serious high-roller attrition in Macau in late spring last year.  So positive year-on-year earnings comparisons are unlikely before autumn.

–the stocks are reasonably priced–cheap, if you believe the first two points.

The Macau casino stocks are now what I would call a value idea–meaning that we have a good sense of what will happen but are pretty much at sea about when.  High dividend yields argue that we’re gin paid to wait.

One technical note:  the stocks hit relative low points about a month ago and have come back to those lows over the past few days.  It would be a sign that they may be finally bottoming if they can stay above the month-ago lows as the weak February results are officially announced.   Technicians would regard a breakdown below these lows would be a good thing in the US, but bad news in Hong Kong.

crude oil

January 7, 2015 By in Energy, Industry Analysis, shale oil Tags: , , , , , , , 3 Comments

starting with the basics…

A barrel of crude oil is a container filled with flammable liquid that weighs about 300 lb and occupies a volume of about 5.6 cubic feet.  A cube measuring a yard on each side would hold about 7 barrels and weigh a ton.  In other words, storing and transporting oil is a major issue.

According to OPEC, world oil demand is now about 91 million barrels daily.  That figure is likely to grow by about a million barrels daily during 2015.

World supply is just under 93 million barrels daily.  The difference between supply and demand, 2 million barrels daily, is enough each week to fill three of the largest oil tankers around.

Oil producers prefer to keep output steady,  because that optimizes the amount of oil that can be recovered through a given well.  Oil usage, on the other hand, is seasonal, with peaks in the US–the world’s largest consumer of petroleum products–during the summer driving season and the winter heating oil season.  Temporary storage, either in tanks or on the seas in oil tankers, holds the “extra” oil in the slack seasons.

…and on from there

What happens to the 2 million barrels of daily output that consumers more or less don’t want?

The standard answer is that speculators with access to storage bid a price on the spot market that they figure will allow them to cover their costs and make a profit when they eventually sell.

There have also been press reports that China has been buying large amounts of oil recently to build its strategic oil reserve.

The issue of imbalance between supply and demand has been developing for several years.  High prices prompt conservation, for one thing.  They also make high-cost shale and tar sands extraction economically feasible.  And until  relatively recently continuing instability in the Middle East has kept output from this important producing region below normal–offsetting the growth of shale oil from the US.

near-term potholes

In a few weeks, we’ll be entering the lowest-demand time of the year for oil.  It will be too late to manufacture and deliver heating oil to customers for winter use; driving doesn’t pick up until April-May.

Paradoxically, lower prices can trigger a spate of new output entering the market.  This could come from oil-producing countries trying to offset the price-related shortfall in their inflows of hard currency, or from financially leveraged private companies needing cash to service bank loans, or from companies whose oil inventories now look much too big.

 

More tomorrow.