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Shanghai on Tuesday reported a surge in local asymptomatic cases as the entire city of 25 million people remains in lockdown. The city reported 268 local symptomatic cases and 13,086 local asymptomatic cases, including 6,788 from Pudong. That’s a 48% increase from the previous day. China’s Vice Premier Sun Chunlan ordered local officials to curtail the outbreak “as soon as possible,” on a visit to the city. Media outlet, Caixin, has reported that close contacts of infected people will be moved to neighbouring provinces. This could potentially involve hundreds of thousands of Shanghai residents.

The US, EU and G7 group of nations are set to impose broad new sanctions on Russia, after President Macron accused Russia of war crimes and President Joe Biden called for a war crimes trial. The US will ban all new investment in Russia. The EU proposal, which will need backing from the 27 member states, will include a ban on Russian coal. Germany said it would temporarily take control of a German unit of Russian state-owned Gazprom, which operates some of Germany’s largest natural gas storage facilities. in a bid to secure gas deliveries. 

The US Treasury said Tuesday that it will not permit any dollar debt payments to be made from Russian government accounts at US financial institutions. The move is designed to heap further pressure on Moscow and force it into a choice between using dollar reserves held in its own country to pay bond investors, spending new revenue, or going into default.

Federal Reserve governor, Lael Brainard, who is awaiting Senate confirmation to become the next vice-chair, said yesterday that the Fed will begin a “rapid” reduction of its US$9tn balance sheet as soon as its next policy meeting in May and is prepared to take “stronger” action when it comes to raising interest rates in order to bring down inflation. She added, the Fed was prepared to take “stronger action” when it came to tightening monetary policy, suggesting support for delivering half-point rate rises at forthcoming meetings.

On today’s Money Talk we’re joined by Iris Pang at ING Wholesale Banking, Jack Siu from Credit Suisse and on the phone from the USA, Tony Nash of Complete Intelligence. 

Show Notes

PL: Good morning. I hope you have a great day off yesterday. This is Peter Lewis back with your business and finance news on Money Talk on Radio Three. The Times 8:03 in Hong Kong on Wednesday, the 6 April. Shanghai on Tuesday reported a surge in local Asymptomatic cases as nearly the entire city of 25 million people remains in lockdown. The city reported 268 local symptomatic cases and 13,086 local Asymptomatic cases, including 6788 from Poo Dong. That’s a 48% increase from the previous day. The US, EU and G seven group of nations are set to impose broad new sanctions on Russia after President Macron accused Russia of war crimes and President Joe Biden called for a war crimes trial. The US will ban all new investment in Russia. The EU proposal, which will need backing from the 27 member States, will include a ban on Russian coal. Germany said it would temporarily take control of the German unit of Russian stateowned Gas Prom, which operates some of Germany’s largest natural gas storage facilities, in a bid to secure gas deliveries. The US Treasury said Tuesday that it will not permit any dollar debt payments to be made from Russian government accounts at US financial institutions.

PL: The move is designed to heap further pressure on Moscow and force it into a choice between using dollar reserves held in its own country to pay bond investors spending new revenue or going into default. Federal Reserve Governor Lyle Brainard, who is awaiting Senate confirmation to become the next vice chair, said yesterday that the Fed will begin a rapid reduction of its $9 trillion balance sheet at its next policy meeting in May, and it’s preparing to take stronger action when it comes to raising interest rates in order to bring down inflation, suggesting support for delivering half point rate rises at forthcoming meetings. On today’s Money Talk, we’re joined by Iris Pang at Ing Wholesale Banking, Jack Siu from Credit Suisse, and on the phone from the USA Tony Nash of Complete Intelligence. On Wall Street. Overnight, US stocks have fallen following Fed Governor Lao Brain odds comments suggesting support for 50 basis point rate increases and a rapid reduction in the Fed’s balance sheet. The SP 500 fell 1.3%, to 4525. The Nasdaq Composites lost 2.3% to 14,204. The Dow slipped 281 points to 34,641. Shares of Twitter rose 2% overnight following a 27% jump on Monday after it was revealed that Elon Musk had bought a nine 2% stake in the company.

PL: Earlier today, Twitter announced that the company will appoint Musk to the company’s board of directors, and shortly afterwards, Elon Musk tweeted that he looked forward to making significant improvements to Twitter in the coming months. In Europe, the stock 600 index rose zero. 2%. London’s Footy 100 climbed three quarters of a percent Hong Kong and mainland China markets were closed yesterday for the Chingling festival. In the commodities markets, oil prices fell slightly, with Bunk crew settling down 1.8% at $106.64 a barrel. Futures linked to Europe’s wholesale coal prices rose more than 10% $290 a ton after European Commission President Ursula von der Leyen said the EU would impose an embargo on Russian coal. Gold is down half a percent at $1,922 an ounce, and following Leo Brain odds remarks, the sell off in US Treasury has accelerated. The yield on the ten year bond surged 16 basis points to an almost three year high of two point 55%, the biggest daily move in two years. And the yields on policy sensitive two year notes also rose, jumping ten basis points to two point 53%. In the currency markets, the US dollar index is up half a percent.

PL: The Euro is trading at 1.9 cents, the Bucks at 123.5. Japanese yen Sterling is worth one point 33 quarter cents, and Hk$10.24 the Chinese yuan is at six point 38 versus the dollar in offshore markets this morning. And Bitcoin is trading 1.3% weaker at $45,500 round. Asian stock markets this morning. It’s all looking to the downside. The SX 200 in Australia is off a third of a percent. Stocks have just opened in Japan, where the Nico 225 is down 1.3%. Similar story in South Korea. Stocks there of zero. 7% at the open futures markets, pointing to a decline of about 70 points for the Hang Segue later on this morning. At the Open, the time is eight or eight and a half. Let’s welcome our guests. We have on the phone Iris Pang, chief greater China economist at Ing Wholesale Banking. Morning to your Iris.

IP: Morning, Peter.

PL: And also with us is Jack Sue, chief investment office of a Greater China at Credit Scores. Morning, Jack.

JS: Good morning, Peter.

PL: And on the phone from the USA, we have Tony Nash, founder and CEO and chief economist at Complete Intelligence. Welcome back, Tony.

TN: Thank you. Good morning, Peter.

PL: Let’s start in Shanghai. A surge in local cases there. The city has reported 268 symptomatic cases over 13,000 local Asymptomatic cases. That’s up almost 50% from the previous day. And the city remains in lockdown for mass testing. It was supposed to have come out of testing yesterday. A media outlet, Kaishin, has reported that close contacts of infected people will now be moved to neighboring provinces. Iris, this sounds it’s getting serious, isn’t it? It’s lasting a lot longer than we thought. This lockdown, the cases seem to be getting worse. What are the consequences of this going to be on China’s economy?

IP: It is actually quite long from my perspective, and because they also come to close contact. So the number of people affected is a large group. So these people cannot work, because if the close contact is moved to another province, they cannot work. And I believe that they will be isolated. So it depends on now how many days they will be isolated. I believe that it will be at least 40 days. So almost the whole month of April is wiped out and Shanghai is a big city. So it’s wiped out around two percentage points of GDP.

PL: Two percentage points for this quarter.

IP: Yeah, for this quarter.

PL: So that means that China is not going to meet its growth target of 5.5% for this year because Shanghai is what, 4% of the country’s GDP.

IP: Yeah. Anyway, my focus originally before this cold outbreak is actually 4.8% lower than the target of 5.5% and now it is 4.3% even lower.

PL: Jack, what are your thoughts on this and also in particular its impact on Chinese markets?

JS: Well, we have a less pessimistic forecast at quite a twist. We think in the second quarter GDP for China, the Shanghai situation will knock off about 1.2% to the quarterly GDP. But in a full annual GDP hit, we calculated about 9.3% hit to the full cars. But the thing is the situation is leading to the authority to come up with more stimulus and setback is regulatory crackdown. And so similar measures are coming to offset the situation right now. So if the tariff situation lasts for the next few weeks, we do see some downside risk. So we are hopeful that in two to three months time we will be returning back to Nova. This is exactly what we expect to happen in Hong Kong, which is about two months ahead of the mainland. In terms of the culprit situation.

PL: We haven’t seen much signs of stimulus so far from the authorities. They seem to be fairly restrained. Do you think it’s coming?

JS: Well, we have seen that workership policy for housing market has continued relaxed. We have seen that the listing rules for us listed companies have relaxed. We have seen that the claim, the message from the central party that they will reduce the crackdown pressure on tech companies. There’s a lot for the investors that digest. We think we are hopeful that it’s impact that lifting the crackdown itself will add a 0.3% GDP. This is an indirect impact. It’s hard to calculate, but we are quite hopeful. We are above consensus and GDP forecast. We’re still sticking to our 5.9% above consensus forecast for this year.

PL: Okay, Tony, let me ask you for sort of an international perspective on this because obviously Shanghai is China’s largest Port. There’s a lot of factories there that are crucial to global supply chains. Is this being noticed and talked about in the US and how do you see it from there?

TN: Oh, sure it is. Yeah. Today a friend told me that the wedding all bonded area at Shanghai Port was closed, I think until April 11 because they found one Kobe case. And I think the view from here is very surprised because I live in Texas. We have been open since June of 2020 effectively. And we’ve had a lot of covered cases and business and life has pretty much gone on. People come to the office when they’ve tested positive for COVID. I know Texas is a little bit extreme, but from this side the concern is the impact on supply chains. So obviously we have inflation with commodities, but the constrained supply of goods of manufactured goods, the secondary impacts of inflation that we would see in manufactured goods simply because of commodities, inflation will be accentuated because of the bottlenecks for manufacturing. So what I have been telling recommending people in the west is that Western governments have to have a discussion with China to accept that Kobe is endemic, that has to be accepted for the health of the global economy.

PL: They don’t seem to want to discuss that, do they? I mean, they are sticking adamantly with this, what they call dynamic zero plan, right.

TN: But it’s Peter, countries cannot live this way and societies cannot stay locked down this way. And the global economy will have that double accelerator of inflation if manufacturing bottlenecks continue. I mean, we already have a double accelerated, but it will accelerate even more. So you talked about the Fed activity. The Fed potentially in intermediate rise and the 50 basis point rise in May and June is becoming more likely. And you can’t necessarily offset supply side shocks with monetary policy. All they can really do is demand destruction. And so with Brennard talking about both interest rate rises and reducing the balance sheet, the Fed is really focused on demand destruction and they’re going to have to accelerate that if China remains closed. So I believe that behind closed doors Western governments are having discussions with China saying, look, you have to accept this as endemic because most of the rest of the world already have.

PL: Iris, do you agree with that? Do you think this zero covert policy that’s being maintained on the mainland is not going to be sustainable? And if it does, it’s not only going to damage China’s economy but it’s going to damage the global economy?

IP: I think it is not a question for us. It’s a question for the Chinese government. Back in the two sessions in early March, there was a signal that the government seems to decide to move away from dynamic clearing because they didn’t mention it in the two sessions and the government work report. But then the outbreak in Hong Kong makes them really worried. And therefore, for example, in Sunshine before Shanghai, the government moved very swiftly to have the mass test and then broken the infection link. But Shanghai is a bigger city than Shenzhen and can’t escape from this. So I think it is the willingness of the central government to move away from the idealistic dynamic clearing. It seems that they are not because of several things that is different between China and the Western side of the world. The first thing and the most important thing is the capacity of hospital. China’s capacity of hospital per capita is actually very low. So in such cases life is more important than economic growth.

PL: Jack, this is all coming at a difficult time because just as we’re seeing the slowdown on the mainland, we’re also getting talk of even more aggressive interest rate rises from the Fed. Markets are pricing in now nine rate rises, nine quarter point rate rises this year, which means there’s going to have to be some half point rate increases. We had loud bridge last night talking about an aggressive reduction in the balance sheet. Is this going to start to affect stocks? It already is clearly on the bond markets. But do you think this is going to start to affect stocks?

JS: Well, number one, on the previous topic, I think China is fully aware of the situation that it cannot live in a serial corpus strategy forever. What we are waiting for is the availability of treatment such as Paxlon which is a proof drug for onshore China. When the supply of drugs become widely available to mainland hospital or healthcare system which would likely at the beginning of the year end or beginning of next year, we will have a gradual shift to lift with Colbert in 2023. This is our forecast number one. Number two, in terms of rate hikes, the third is expected to hide rates by 50 basis point in our view in an early May meeting and followed by another 125 basis point by year end and then another 100 basis points by next year subject to the development of Russia’s Ukraine situation and whether there is a rate hike related hit to the economy that would lead to less consumption in the United States. These are very concerning factors to consider because if I think about my mortgages in Hong Kong which is linked to the Fed rate, if mortgage rate increased by another 150 basis points in Hong Kong, if say you have a mortgage of HK$5 million, $87,000 this year, the money that’s been giving out to the population is only $10,000.

I mean the consumption impact is definitely a concern in terms of how it’s going to hit economy. But in terms of investment, right. We have to focus on areas that is not really driven by consumers. Like in China we have infrastructure led policy where we do see earnings rising in later sectors. In the new energy sector we do see earnings rising because of the global transaction in the green energy. And in terms of global investment we do see in the short term US Equities can go higher. I think beyond that we have to be very selective in this sector strategy because the banks are going to be beneficiaries of rising interest rates and high inflation. The energy companies, we think oil price will remain above 100 this year and therefore they will still be profitable and we have to be invested in SME sectors where because they are able to reprice because inflation pressure is coming. At the same time as business we open in the west, they are able to charge slightly higher price on the back of high inflation, and they can do that. And those companies will be more profitable than the last couple of years.

So we have to be selective when investing in this new environment we’re in.

PL: Okay, Tony, let me ask you about Laurel Bernard’s comments overnight. She’s talking about an aggressive reduction in the balance sheet. She seems to be suggesting that she supports now 50 basis point rate hikes. We’ve obviously seen a big reaction over the last couple of weeks in the bond markets to this idea that the Fed is going to get more aggressive, not really so much in stocks. Maybe today more concern. But do you think at some point investors are going to have to take more notice of just how aggressive the Fed is talking at the moment?

TN: Oh, absolutely. And I think Brennan’s speech today was an important milestone because Lornad is seen as an Uber Dove in the Fed. She is seen as not wanting to get bullish at all. So when she comes out with a speech like she did today, talking about rate rises in QT, at the rate that she was discussing today, people have to sit up and notice because she is probably at the extreme end of dovish of the Fed group. So I think people are finally starting to realize that this is serious in January. If somebody would have said that we’d see 50 basis point rises in May and June, you would have been lapsed out of a room and QT on top of that. But things have changed really quickly on the inflation front, and the treasury is pushing very hard to have some action taken on inflation because it’s an election year in the US and they don’t want to see double digit inflation going into elections in November.

PL: Okay. Iris, we seem to be facing a trifecta of shocks at the moment. Don’t we have the Fed talking a lot more aggressively? We have the Ukraine war, which is creating a global supply problem, and the slowdown in China as well. This is all coming together at a bad time.

IP: Yeah, you’re right. But for China itself, the economy, I think the most important thing for this time is whether to control covet successfully within a short time frame. So I expect it only affects April. Hopefully it doesn’t expect it doesn’t expect May because the long holiday in May. And I am also looking for stimulus, but not those mentioned by Jack. I’m looking for stimulus in infrastructure projects, so that could be really fast kick off of the growth.

PL: Again, Jack, switching topics, I want to ask you about US listed Chinese stocks. Chinese authorities look like they’re preparing to give US regulators full access to the audit reports in the hope that that will keep them mainly listed in the US. The Csrcs confirmed that it’s going to change confidentiality laws that prevents its overseas listed companies from providing sensitive financial information to foreign regulators. How big a game changer is this and is this supportive for Chinese markets?

JS: I think this is very supportive and quite positive to the Chinese equity market in general, because removing the listing risk for more than two thirds of the company listed in the United States suggests that the selling pressure in these equities will substantially reduce because the listing risk no longer exists for most of them. Secondly, the market would begin to price out the listing or regulation risk premium from both the US and the China side. In other words, the discount we’ve been seeing in these stocks in the last one year or so will continue to reduce. And now we are left with whether earnings can continue to rebound in the current environment because despite this risk premium being removed, what we’re seeing is the valuation of these companies have been increasing, but the earnings of these companies have not been increasing and not being revised higher. So what we are looking for now is there’s probably more room, more upside for valuation of these companies to rise further. But investors have to be aware if in the next couple of quarters earnings do not start stabilizing or rebounding, then there may be an opportunity to take some profits after the rebound.

JS: For now, we think there’s more upside. We think the Hang Seng Tech index, which is the main Beneficiary listing in Hong Kong, are likely a better investment than the Hangstang index itself.

PL: Tony, I’m wondering out here, as you’ve heard there from Jack, people are taking quite a positive view of this that’s going to be quite supportive of stocks. But I’m wondering if investors here maybe getting ahead of themselves because we still don’t know yet what the view of US regulators is on this. I know it’s hard to look into their minds, but do you think there’s enough here to satisfy them?

TN: Yeah, I think you’re right to be cautious, Peter. I think it is getting a little bit ahead of itself now, but also the large US portfolio managers that I’ve talked to have said that they’ve been told that they must be very cautious with investments in China. So if that is happening among the large portfolio managers in the US, then this change could be helpful. But I don’t necessarily see it clearing the way for a massive kind of acceleration evaluations of Chinese companies. I think the best thing that can happen for Chinese companies, for example, in tech is a big stimulus that’s going to funnel money into tech that would help evaluation. So investors say in the west could see that those profits, as Jack talked about, are actually coming in to match some of the revenue rises. But while the regulatory aspects will help.

PL: I don’t necessarily see that they will provide a major thrust of investment from American portfolio managers and also the companies themselves under these rules have to decide what is sensitive information and what can’t be handed over to US regulators. So there’s still pressure on them.

TN: That’s right. And it’s political, right? What? Sensitive information is very political.

PL: Yes. How do you see this?

IP: I have no comments on this.

PL: Okay. Let me ask you. Tell me why you’re here. As a final thought, let me ask you about Twitter. We’ve seen this 30% share price jump in two days now after Elon Musk said he owns 2% of the company, has just been appointed to the board. Interestingly. When he ticked his box on the regulatory filing, he indicated he was a passive investor in Twitter. Do you believe that? What’s in his mind? Why does he want to do this?

IP: Yes, please, go ahead.

TN: I’m sorry, Iris.

IP: All right. Thank you. I think it is very difficult to find evidence of anything that has happened. Right. Unless we have the CCTV to check again. So it is very interesting that a CEO is saying something like that and it also means that if it is true, then it is more careless. If it is wrong, then what’s behind it? He could be maybe have some other intention that we don’t know. So I would rather stay away from it.

PL: Totally fine. And work for you on this. What do you think is his mind here? Is he really a passive investor?

TN: Well, I think he’ll be very active in terms of his board position. And I think there are a group of technology entrepreneurs, Mark Andreessen, Elon Musk, other people who are becoming more aggressive in trying to pull tech away from a political alignment. Tech in the US is seen as being very leftward aligned. And I think some of these guys who have a more middle ground view are trying to pull tech back to the middle. Twitter has been very left aligned, blocking Donald Trump and a lot of people on the right. And I think these guys understand that if they want to have viable products for half of America, they have to move back toward the middle. And I think this is the first action of what could be many over the next couple of years to try to pull these companies back toward the political metal.

PL: Okay. Well, thank you very much for your comments. You heard that Tony Nash, founder and CEO and chief economist at Complete Intelligence, Iris Pang, chief Greater China economist at RNG Wholesale Banking and Jackson, chief investment officer for Greater China at Credit Suisse. You’re listening to Money Talk on RTHK Radio Three. A final look at the markets for this morning. In Australia, the SX 200 down a third of the K two five in Japan is off about one and a quarter percent. The Cosby is also down in South Korea around about two thirds of a percent. And it looks like the Hang Seng is going to lose about 70 points at the Open coming up after the news on Radio Three Covet updates with Jim Gordon. Anna Fenton, the weather forecast for today five hot and dry during the day, maximum temperature of about 28 degrees, and the outlook is for it to be mainly fine and dry in the next few days. Hot during the day. Temperature right now is 21 degrees and it’s 80% relative humidity coming up to 832. Here’s Andrew Shawski with the half hour news.

AS: Thank you, Peter. Professor John Burns from the University of Hong Kong says the chief executive’s decision to not seek a second term was well expected.

JB: Kerry Lam has had a very hard time, a very difficult five years. She started off with great promise, but by 2019 we had the chaos in Hong Kong, which the government is partially responsible for and has yet to accepted responsibility for that. I think the central government was not happy with that. And then we have the management of COVID.

AS: A spokesman for the restaurant trade says he’s concerned that it won’t benefit from the latest round of consumption vouchers, which will be released tomorrow as social distancing curbs on eateries are still in place. Last year, eateries took a third of the share of vouchers, said the President of the Hong Kong Federation of Restaurants and Related Trades, Simon Wong. But this year, with restaurants only allowed to see two people per table and with dine in not allowed after 06:00 p.m., Mr. Wong expected that figure to fall.

TN: And this time I assume that because of this social distance we can only get about 15% of the share and we still have to wait until the second round of lifting of the social distancing measures.

AS: The Ukrainian President, Vlogalensky, has told the UN Security Council Moscow must be held accountable for the atrocities committed by the Russian Army during its occupation. Mr. Zelensky showed a short graphic video which included pictures of victims and mass graves and called for Russia to be excluded from the Security Council. The BBC’s not atopic, reports.

BBC: President Zelensky’s address to the Council was devastating. He said the most terrible crime since the Second World War had been committed in Ukraine. Civilians in Bucha were killed in their homes, crushed by tanks, women raped and killed in front of their children. He accused Russia of deliberately killing as many civilians as possible to leave the country destroyed. And in Runes, which Moscow denies, he urged reforms for a more effective UN for the next generation.

AS: More than 10 million people have now fled their homes in Ukraine because of the Russian military campaign, and further accounts of devastation and allegations of possible war crimes are emerging from areas of Ukraine from which Russian troops have withdrawn. Police in the town of Bora dyanca, to the northwest of capital KIV, said there could be hundreds of people trapped in the rubble beneath bombed out blocks of flats. Local people claim that Russia troops fired at those who attempted to dig out the victims the news from RTHK.