Chief Economist & Political Strategist, CrossASEAN Research

Prasenjit K. Basu

Chief Economist & Political Strategist

CrossASEAN Research

At CrossASEAN Research we strive to produce unbiased and differentiated on the ground insights on companies across South East Asia. Our Research is produced for the most part after face to face meetings and conversations with company management to dig deep into the long term vision and strategy of the companies we cover. We seek to deliver investable and actionable themes on sectors and markets across SE Asia, often in collaboration with other Insight Providers across the region, pooling the vast experience of the analysts within the Smartkarma Ecosystem. We also offer bespoke work and tailor made trips for our clients. 

Insights across South East Asia

Macroeconomics

With the rest of the world still in various stages of lock-down, China has returned to its traditional export- and investment-driven economy -- fueled by a surge of TSF (which rose 56.9% YoY faster in Jan-Jul 2020), implying a new burst of shadow-financing. Exports rose 9.5% YoY in August, and China's steel production rose 9.1% YoY (while the rest of the world's declined 16.1% YoY) in July. So it is worth staying Overweight China for now. But its imports contracted 2.1% YoY in August, and retail sales have declined YoY each month of 2020, illustrating the continuing slump in domestic demand; once the rest of the world has no need to absorb the massive new capacities China has added in the past 4 months, China's imbalances will become a major dampening factor for its financial system in 2021.   China's total social financing (TSF) has increased by RMB22.39 trillion  (US$3.26 trillion) in January-July 2020, 56.9% faster than for the same period in 2019, with shadow-banking seeing a powerful rebound. This boosted FAI (fixed asset investment), albeit mainly public FAI (+3.8% YoY in the year-to-date), while private FAI declined 5.7% YoY. But after a severe decline in 1Q 2020, FAI began growing in April, and was up 9.3% YoY in April-July 2020, resuming its role as the main driver of China's economy. Retail sales, meanwhile, declined YoY in every month of 2020. As the originator of Covid-19 (or the "Wuhan Coronavirus"), China had a two-month headstart on dealing with the crisis, and was able to contain it within Hubei province (of which Wuhan is the capital), the only part of China that was fully locked down in January and much of February. Once the rest of the world began to lock down, China was in position to reopen, and its exports have consequently accelerated steadily, growing 7.2% YoY in July and 9.5% YoY in August 2020. The rebound in FAI is, for now, being partly validated by the rebound in global demand for China's exports, at a time when much of the rest of the world is partially locked down.  This is well illustrated in the steel industry, where China's output has increased 5.9% YoY in the past 3 months (May-July 2020) while the rest of the world's steel output has declined 20.5% YoY. As long as the rest of the world's economy remains in various stages of lock-down, China's relatively undisrupted economy will gain global market-share. During this phase (likely to last at least through October 2020), investors should remain Overweight China. The weakness of private consumption means that any setback to China's exports (likely once the rest of the world's supply-chains begin normal functioning by November-December 2020) will be impossible to counter with domestic demand. The imbalances of excess capacity built up over the past 4 months of strong FAI (particularly public FAI) will then rebound on China.

With the rest of the world still in various stages of lock-down, China has returned to its traditional export- and investment-driven economy -- fueled by a surge of TSF (which rose 56.9% YoY faster in Jan-Jul 2020), implying a new burst of shadow-financing. Exports rose 9.5% YoY in August, and China's steel production rose 9.1% YoY (while the rest of the world's declined 16.1% YoY) in July. So it is worth staying Overweight China for now. But its imports contracted 2.1% YoY in August, and retail sales have declined YoY each month of 2020, illustrating the continuing slump in domestic demand; once the rest of the world has no need to absorb the massive new capacities China has added in the past 4 months, China's imbalances will become a major dampening factor for its financial system in 2021.   China's total social financing (TSF) has increased by RMB22.39 trillion  (US$3.26 trillion) in January-July 2020, 56.9% faster than for the same period in 2019, with shadow-banking seeing a powerful rebound. This boosted FAI (fixed asset investment), albeit mainly public FAI (+3.8% YoY in the year-to-date), while private FAI declined 5.7% YoY. But after a severe decline in 1Q 2020, FAI began growing in April, and was up 9.3% YoY in April-July 2020, resuming its role as the main driver of China's economy. Retail sales, meanwhile, declined YoY in every month of 2020. As the originator of Covid-19 (or the "Wuhan Coronavirus"), China had a two-month headstart on dealing with the crisis, and was able to contain it within Hubei province (of which Wuhan is the capital), the only part of China that was fully locked down in January and much of February. Once the rest of the world began to lock down, China was in position to reopen, and its exports have consequently accelerated steadily, growing 7.2% YoY in July and 9.5% YoY in August 2020. The rebound in FAI is, for now, being partly validated by the rebound in global demand for China's exports, at a time when much of the rest of the world is partially locked down.  This is well illustrated in the steel industry, where China's output has increased 5.9% YoY in the past 3 months (May-July 2020) while the rest of the world's steel output has declined 20.5% YoY. As long as the rest of the world's economy remains in various stages of lock-down, China's relatively undisrupted economy will gain global market-share. During this phase (likely to last at least through October 2020), investors should remain Overweight China. The weakness of private consumption means that any setback to China's exports (likely once the rest of the world's supply-chains begin normal functioning by November-December 2020) will be impossible to counter with domestic demand. The imbalances of excess capacity built up over the past 4 months of strong FAI (particularly public FAI) will then rebound on China. 

China: Investment-Driven Growth Exacerbates Imbalances--For the Future

2Q 2020 will be the best quarter of this year for China; with the rest of the world locked down, China was able to expand steel &amp; aluminium output, and exports were merely stagnant in April-May. But the surge in public FAI (+18.1% YoY in May) is only adding to excess infrastructure. As the rest of the world restarts production, anti-dumping actions against China will accelerate. Labour market slack will keep consumer spending weak. We recommend taking advantage of near-term strength in China equities to take profit over the next month, as the Chinese economy likely deteriorates in 2H 2020 as demand drivers evaporate. Despite a spectacular gusher of new total social financing (TSF), which has already risen this year by RMB17.36 trillion (+57.8% YoY faster than in Jan-May 2019, and almost equal to all new TSF in the whole of 2018), retail sales still declined 2.8% YoY in May 2020, and were down 13.5% YoY in the year-to-date.  But surging TSF has enabled FAI to expand 7.1% YoY in April and 9.7% YoY in May 2020, with public (government-linked) FAI surging 18.1% YoY in May. FAI cannot be sustained at this pace, and will likely lose MoM momentum in 2H 2020. Consumer spending too will likely stay sluggish. And BRI partners will continue to face debt-related constraints, eroding all the main sources of potential incremental demand, going forward. The supply side of China's economy has rebounded quite handsomely, with industrial output growing 3.9% and 4.4% YoY in the last two months. Among the 5 main industries afflicted by over-capacity in China (in most of which China has "globalized" over-capacity by expanding to more than half global production of steel, aluminium, cement and a third of autos and chemicals), China has actually increased steel and aluminium production this year (while global output of both slumped). Given that it isn't possible to export by sea, China has been obliged to reduce cement output in the past 3 years. The same decline has happened in autos and chemicals (because of a global glut), but China's auto output has begun rebounding in the past two months. As the US, India and (perhaps) the EU begin restricting China's exports, the domestic output glut will worsen sharply. Increasingly, non-Asian markets are likely to seek to restrict China's exports ("dumping") of steel and aluminium, while product-relocation strategies gather pace, reducing additional sources of demand for China's output. Excess capacity will worsen, especially in the September-December period, and into 2021. We recommend using the next month of good results for 2Q to take profits in China equities, and switch to other emerging markets.

2Q 2020 will be the best quarter of this year for China; with the rest of the world locked down, China was able to expand steel &amp; aluminium output, and exports were merely stagnant in April-May. But the surge in public FAI (+18.1% YoY in May) is only adding to excess infrastructure. As the rest of the world restarts production, anti-dumping actions against China will accelerate. Labour market slack will keep consumer spending weak. We recommend taking advantage of near-term strength in China equities to take profit over the next month, as the Chinese economy likely deteriorates in 2H 2020 as demand drivers evaporate. Despite a spectacular gusher of new total social financing (TSF), which has already risen this year by RMB17.36 trillion (+57.8% YoY faster than in Jan-May 2019, and almost equal to all new TSF in the whole of 2018), retail sales still declined 2.8% YoY in May 2020, and were down 13.5% YoY in the year-to-date.  But surging TSF has enabled FAI to expand 7.1% YoY in April and 9.7% YoY in May 2020, with public (government-linked) FAI surging 18.1% YoY in May. FAI cannot be sustained at this pace, and will likely lose MoM momentum in 2H 2020. Consumer spending too will likely stay sluggish. And BRI partners will continue to face debt-related constraints, eroding all the main sources of potential incremental demand, going forward. The supply side of China's economy has rebounded quite handsomely, with industrial output growing 3.9% and 4.4% YoY in the last two months. Among the 5 main industries afflicted by over-capacity in China (in most of which China has "globalized" over-capacity by expanding to more than half global production of steel, aluminium, cement and a third of autos and chemicals), China has actually increased steel and aluminium production this year (while global output of both slumped). Given that it isn't possible to export by sea, China has been obliged to reduce cement output in the past 3 years. The same decline has happened in autos and chemicals (because of a global glut), but China's auto output has begun rebounding in the past two months. As the US, India and (perhaps) the EU begin restricting China's exports, the domestic output glut will worsen sharply. Increasingly, non-Asian markets are likely to seek to restrict China's exports ("dumping") of steel and aluminium, while product-relocation strategies gather pace, reducing additional sources of demand for China's output. Excess capacity will worsen, especially in the September-December period, and into 2021. We recommend using the next month of good results for 2Q to take profits in China equities, and switch to other emerging markets.    

Supply Side Recovering, but Sluggish Demand Will Exacerbate Excess Capacity

China and US Equity Analyst

Roger Xie

Cross Asset Strategy

We see China A-share market moving higher in 2nd half of 2020 as earnings bottomed in 1Q and rebound in the subsequent quarters. After China economy shrank by 6.8% in 1Q, China GDP is expected to grow 3.8% in 2Q, 5.6% in 3Q, and 6.0% in 4Q compared with last year. And our China A-share earning model will likely grow in the similar way with economy rebound. Sell-side has revised down CSI300 index by 7% from beginning of the year. We estimate the downward earning revision is closed to the end and investors will start to see upward earning revision after 2Q earning season. The liquidity remains abundant in 1st half of 2020. May total social financing (TSF) data came in above market expectations, with sequential growth rebounding modestly. This is the third month in a row that TSF sequential growth was above 15%, significantly higher than the prior 11-12% trend level. The surge in government bond issuance likely crowded out corporate bond issuance. The policy-maker will likely keep TSF growth broadly stable on a sequential basis. Capital market reforms will serve as the catalyst for market upside. China is taking another step to reform the NASDAQ-style ChiNext board at Shenzhen Stock Exchange, which hosts some of the world’s fastest growing technology and pharmaceutical A-shares. The most anticipated IPO registration system reform will be rolled out in ChiNext board in 2nd half of 2020. The reform would remove the major bottleneck of IPO applications and market-based pricing. With more foreign investors participation in A-share market, we expect China A-share <a href="https://www.smartkarma.com/entities/shanghai-shenzhen-csi-300-index" target="_blank" rel="noopener" data-smartkarma-citation="entities:22906:1">Shanghai Shenzhen Csi 300 Index (SHSZ300 INDEX)</a> could generate 15% more upside in 2nd half of 2020.

We see China A-share market moving higher in 2nd half of 2020 as earnings bottomed in 1Q and rebound in the subsequent quarters. After China economy shrank by 6.8% in 1Q, China GDP is expected to grow 3.8% in 2Q, 5.6% in 3Q, and 6.0% in 4Q compared with last year. And our China A-share earning model will likely grow in the similar way with economy rebound. Sell-side has revised down CSI300 index by 7% from beginning of the year. We estimate the downward earning revision is closed to the end and investors will start to see upward earning revision after 2Q earning season. The liquidity remains abundant in 1st half of 2020. May total social financing (TSF) data came in above market expectations, with sequential growth rebounding modestly. This is the third month in a row that TSF sequential growth was above 15%, significantly higher than the prior 11-12% trend level. The surge in government bond issuance likely crowded out corporate bond issuance. The policy-maker will likely keep TSF growth broadly stable on a sequential basis. Capital market reforms will serve as the catalyst for market upside. China is taking another step to reform the NASDAQ-style ChiNext board at Shenzhen Stock Exchange, which hosts some of the world’s fastest growing technology and pharmaceutical A-shares. The most anticipated IPO registration system reform will be rolled out in ChiNext board in 2nd half of 2020. The reform would remove the major bottleneck of IPO applications and market-based pricing. With more foreign investors participation in A-share market, we expect China A-share Shanghai Shenzhen Csi 300 Index (SHSZ300 INDEX) could generate 15% more upside in 2nd half of 2020. 

China A-Share Strategy: More Upside in 2nd Half of 2020

Deputy Chief Economist

Sharmila Whelan

Independent and original Asian investment research

Aletheia Capital

Aletheia Capital (HK) Ltd. (previously known as Asianomics) combines the extensive knowledge of its experienced team with technology and regulatory changes to disrupt Global Markets business in Asia. The firm is completely independent with no conflicts of interest either on Investment Banking advisory or Capital Markets execution.

Of all the countries  still officially forecasting growth this year – Korea, Indonesia and until recently India – Taiwan has the best prospects of recovering early from the Covid-19 economic shock, even if the government’s forecast is not quite met. The economy was growing strongly before the crisis and entered it with strong corporate, fiscal and monetary fundamentals. The Covid-19 outbreak was quickly contained and importantly the economy never went into full lockdown, limiting demand destruction and the consequent hit to profits. The economy is functioning normally and benefiting from the post-Covid-19 recovery underway in China.

Of all the countries  still officially forecasting growth this year – Korea, Indonesia and until recently India – Taiwan has the best prospects of recovering early from the Covid-19 economic shock, even if the government’s forecast is not quite met. The economy was growing strongly before the crisis and entered it with strong corporate, fiscal and monetary fundamentals. The Covid-19 outbreak was quickly contained and importantly the economy never went into full lockdown, limiting demand destruction and the consequent hit to profits. The economy is functioning normally and benefiting from the post-Covid-19 recovery underway in China.

Last week, US Senate passed the <a href="https://www.kennedy.senate.gov/public/2020/5/senate-passes-kennedy-and-van-hollen-s-bill-to-kick-deceitful-chinese-companies-off-u-s-exchanges" target="_blank" rel="noopener">Holding Foreign Companies Accountable Act</a> by unanimous consent. The proposed bill states that if the SEC/PCAOB determines a covered entity has 3 consecutive “non-inspection years” , the SEC shall prohibit the securities of the covered issuer from being traded on a US securities exchange.  This has generated a lot of concerns whether China ADR will be forced to de-list in US. We will use this note to explain our view.We estimate there is a 40% probability that Congress will enact this legislation in 2020. The bill has already passed the Senate by unanimous consent, it needs to pass the House and let the President sign into law. The process depends on how Democrats can gain more upside on China issue. Investors need to watch House Speaker and the House Financial Services Committee getting involved with this bill. If the Act has become law, the SEC would then issue specific rules for regulatory oversight and implementation. There could be a 3-year "non-inspection" transition period starting from the date of enactment. We will also explain how this Act applies to different securities listed in US. We view this development a long term positive for <a href="https://www.smartkarma.com/entities/hong-kong-exchanges-clearing" target="_blank" rel="noopener" data-smartkarma-citation="entities:490:1">HKEX (388 HK)</a> , as it has reformed the listing rule to be more favorable for WVRs and secondary listing of tech-oriented companies. We expect the process will reenergize Hong Kong market in offerings and trading volume. We have written in the note: <a href="https://www.smartkarma.com/insights/hkex-388-hk-us-listed-china-adr-homecoming-a-long-term-positive" target="_blank" rel="noopener">HKEx (388.HK): US-Listed China ADR Homecoming, A Long-Term Positive</a>. For Chinese equity investors (including ADR, H-shares and A-share), US-China tension could rise in near-term and the development of this Act needs to be monitored near term. Last week, Hong Kong national security legislation was unveiled during China National People's Congress. Given the importance of the issue, we expect the legislation process could accelerate in coming 2 months instead of the normal process time of 6 months in China. We believe this legislation will pave a better foundation for Hong Kong market. Given the increasing weights of Chinese equities in global indices, the market is too big to be ignored. We remain bullish in Chinese equities long term.

Last week, US Senate passed the Holding Foreign Companies Accountable Act by unanimous consent. The proposed bill states that if the SEC/PCAOB determines a covered entity has 3 consecutive “non-inspection years” , the SEC shall prohibit the securities of the covered issuer from being traded on a US securities exchange.  This has generated a lot of concerns whether China ADR will be forced to de-list in US. We will use this note to explain our view.We estimate there is a 40% probability that Congress will enact this legislation in 2020. The bill has already passed the Senate by unanimous consent, it needs to pass the House and let the President sign into law. The process depends on how Democrats can gain more upside on China issue. Investors need to watch House Speaker and the House Financial Services Committee getting involved with this bill. If the Act has become law, the SEC would then issue specific rules for regulatory oversight and implementation. There could be a 3-year "non-inspection" transition period starting from the date of enactment. We will also explain how this Act applies to different securities listed in US. We view this development a long term positive for HKEX (388 HK) , as it has reformed the listing rule to be more favorable for WVRs and secondary listing of tech-oriented companies. We expect the process will reenergize Hong Kong market in offerings and trading volume. We have written in the note: HKEx (388.HK): US-Listed China ADR Homecoming, A Long-Term Positive. For Chinese equity investors (including ADR, H-shares and A-share), US-China tension could rise in near-term and the development of this Act needs to be monitored near term. Last week, Hong Kong national security legislation was unveiled during China National People's Congress. Given the importance of the issue, we expect the legislation process could accelerate in coming 2 months instead of the normal process time of 6 months in China. We believe this legislation will pave a better foundation for Hong Kong market. Given the increasing weights of Chinese equities in global indices, the market is too big to be ignored. We remain bullish in Chinese equities long term. 

China Equity Strategy: US Holding Foreign Companies Accountable Act -- A Lengthy Process to Watch

China

The MSCI China Index is a free-float weighted equity index. It was developed with a base value of 100 as of December 31, 1992.

MSCI China Index (MXCN INDEX)

China: Investment-Driven Growth Exacerbates Imbalances--For the Future

China's total social financing has increased by

Prasenjit K. Basu

Supply Side Recovering, but Sluggish Demand Will Exacerbate Excess Capacity

2Q 2020 will be the best quarter of this year for China; with the rest of the world locked down, China was able to expand steel & aluminium...

Prasenjit K. Basu

Taiwan: Looking Good

Of all the countries still officially forecasting growth this year – Korea, Indonesia and until recently India – Taiwan has the best prospects of...

Sharmila Whelan

China Equity Strategy: US Holding Foreign Companies Accountable Act -- A Lengthy Process to Watch

Last week, US Senate passed the Holding Foreign Companies Accountable Act by unanimous consent. The proposed bill states that if the SEC/PCAOB...

Roger Xie

China: Investment-Driven Growth Exacerbates Imbalances--For the Future

China's total social financing has increased by

Prasenjit K. Basu

Supply Side Recovering, but Sluggish Demand Will Exacerbate Excess Capacity

2Q 2020 will be the best quarter of this year for China; with the rest of the world locked down, China was able to expand steel & aluminium...

Prasenjit K. Basu

China A-Share Strategy: More Upside in 2nd Half of 2020

We see China A-share market moving higher in 2nd half of 2020 as earnings bottomed in 1Q and rebound in the subsequent quarters. After China...

Roger Xie

Taiwan: Looking Good

Of all the countries still officially forecasting growth this year – Korea, Indonesia and until recently India – Taiwan has the best prospects of...

Sharmila Whelan

China Equity Strategy: US Holding Foreign Companies Accountable Act -- A Lengthy Process to Watch

Last week, US Senate passed the Holding Foreign Companies Accountable Act by unanimous consent. The proposed bill states that if the SEC/PCAOB...

Roger Xie