Novum Alpha - Daily Analysis 22 December 2021 (10-Minute Read)
A wonderful Wednesday to you as stocks wind their way higher after Biden's US$1.75 trillion package with higher taxes stalls.
In brief (TL:DR)
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In today's issue...
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Market OverviewThinner trading volumes heading into the Christmas holidays could exacerbate market swings, leaving strategists reluctant to read much into day-to-day gyrations during the period.
Markets continue to be shadowed by escalating mobility curbs to fight omicron and a diminishing stimulus tailwind.
Sentiment got a boost after U.S. President Joe Biden said he still has a chance to strike a deal with Senator Joe Manchin to get his roughly US$2 trillion economic plan, Build Back Better, through Congress.
In Asia, in contrast, markets rose slightly Wednesday with Tokyo's Nikkei 225 (+0.11%), Hong Kong's Hang Seng (+0.52%), Sydney’s ASX 200 (+0.06%) and Seoul's Kospi Index (+0.19%) all up in the morning trading session.
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1. America's Honeymoon with Chinese Listings Ends
Between Beijing preventing its companies from listing offshore to Washington demanding more disclosures from already listed Chinese firms, Wall Street’s love affair with the Middle Kingdom’s most promising corporations may be coming to an unceremonious end.
For years, Wall Street bankers would brave the intercontinental flights (albeit ensconced in the luxury of the business class cabin) to meet with Chinese executives, consuming copious amounts of Moutai (a fiery clear spirit brewed from sorghum with a 53% alcohol content) all in a bid to win the rights to underwrite some of China’s biggest companies.
But these literal flights of fancy may be drawing to close and not just because pandemic restrictions are limiting travel into China but as Sino-U.S. relations chase new lows and Washington and Beijing take tit-for-tat shots at each other, threatening to derail a US$2 trillion market with 248 companies listed on U.S. exchanges.
Washington is demanding greater disclosure from Wall Street-listed Chinese companies just as new rules from Beijing wiped billions of dollars from Chinese education companies and compelled ride-hailing app Didi Global to delist from American exchanges.
On Monday, the U.S. Securities and Exchange Commission required Chinese companies to provide more information on their use of variable interest entities (VIEs), many of which are incorporated in the Cayman Islands, and which allow foreign investors to hold shares in these offshore entities but contractually control the Chinese operating companies.
These convoluted legal structures have been used for decades by Chinese companies, including high profile tech giants to circumvent Beijing’s stringent foreign investment restrictions for internet companies and soaked billions of dollars from international investors.
While Beijing was well aware of the practice, Chinese Communist Party apparatchiks looked the other way until it was time to strike and that time has crystalized, putting in danger a list of some of Wall Street’s former Chinese tech darlings, including Alibaba Group Holdings (+0.44%), Pinduoduo (+8.27%) and Baidu (+1.83%).
One of the bigger risks facing investors into these Chinese firms is that the use of VIEs is untested and in July, Beijing unilaterally declared that foreign investors were no longer able to use VIEs to invest in the country’s afterschool education sector, wiping out billions of dollars in market cap at the stroke of a brush.
In a statement, the SEC said,
“Recent events have highlighted the risks associated with investing in companies that are based in or that have the majority of their operations in the People’s Republic of China.”
And the SEC is now advising Chinese firms listed in the U.S. to repeatedly convey to investors that shareholders do not own the VIEs contributing to the bulk of their sales in China.
To be sure, the risks that investors into VIEs have had to carry has been present for some time, but mostly ignored on the assumption that both Washington and Beijing would preserve this symbiotic relationship that was lucrative for both sides of the Pacific.
But these chickens have finally come home to roost and investors will need to ask themselves if they want to continue risking the uncertainty of the relationship between VIEs and the companies that they claim to represent.
The SEC has already demanded that Chinese companies must explain if VIE contracts have been tested in Chinese courts (they have not) and break out financials for the VIE subsidiaries and outline how cash is transferred in and out of the business.
These regulatory disclosures may shake even the most compliant Chinese firms listed in New York and may encourage many to head to Hong Kong.
For most investors though, the possibility that their shares on Wall Street will be recognized in Hong Kon should provide some comfort that it’s not the end of the road, but for Chinese firms for whom New York was an aspirational forum to list their shares, that dream may now be over.
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2. Once Again, the Fate of Fiscal Stimulus Lies in the Hands of One Man-chin
This holiday season the epic battle of the Joes comes to a head as U.S. President Joe Biden faces off against the hitherto unknown Democratic Senator Joe Manchin.
At stake is the fiscal stimulus of the free world, well for the United States of America at least.
Senate Democrats met on Tuesday for tense talks to try to revive Biden’s US$1.75 trillion Build Back Better package after Manchin stonewalled the President’s economic agenda.
With most lawmakers already home for the holidays, the odds of the fiscal package which includes a raft of social support measures and infrastructure spending look fraught.
Manchin, a West Virginia Democrat, is one of the most conservative in his caucus and explicitly rejected Biden’s flagship social spending bill, which would make unprecedented investments in early childhood education, public healthcare and measures to combat climate change.
Although the original plan for Biden was to have the bill voted on by the end of the year, Democrats will be lucky if they can get it on the Senate floor by early 2022.
Politics ultimately may get in the way.
Democrats hold a razor-thin majority in the Senate, with the upper house split 50-50 and Vice President Kamala Harris holding the tie-breaking vote.
No support is expected from the Republicans for Biden’s economic package and the Democrats need all fifty Democratic senators to vote for the Build Back Better bill, so even the dissent of one senator can put the kybosh on the entire legislation.
Manchin’s grievances may be beyond just politics, as he was singled out by the White House when the fiscal spending package first hit some resistance.
There is a chance that tempers will cool after the holiday season and the Democrats can come back to negotiations and table a bill that everyone will find acceptable.
For now at least, there’s only a lump of coal in Biden’s Christmas spending stocking.
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Find out more about Novum Alpha as leading luxury portal Luxuo.com interviews our CEO & General Counsel, Patrick Tan...
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3. Manchin May be Crypto's Best Friend (For Now)
West Virginia Democratic Senator Joe Manchin may be the best friend that bitcoin (and friends) have in Washington at the moment.
Manchin’s stonewalling of U.S. President Joe Biden’s Build Back Better bill also means that the controversial cryptocurrency declarations for tax purposes are also on hold, giving crypto lobbyists time to regroup and attempt a rewording of these provisions.
Tucked beneath the layers legalese and legislative jargon in Biden’s Build Back Better bill is a requirement for declarations for cryptocurrency transactions that some have interpreted would also ensnare cryptocurrency miners and developers to bear unnecessarily onerous reporting burdens.
The result of the legislative impasse has seen bitcoin shoot past US$49,000 (at the time of writing) for the first time in five days, amid a general rebound in risk sentiment.
Bitcoin has come down by over 30% in the past five weeks, after setting a record high of almost US$69,000 in early November and some analysts such as Bloomberg Intelligence’s Mike McGlone suggest that the benchmark cryptocurrency may have put in a bottom in the midst of an enduring bull market, mirroring the recent crude oil peak.
In a research note, McGlone wrote,
“The (earlier) 2% Bitcoin future gain on the day the S&P 500 dropped 1% solidifies the recent crypto low around US$45,000 as pivotal support.”
But investors can expect greater volatility ahead nonetheless, with fiscal stimulus being a double-edged sword.
On the one hand, Washington success in passing a US$1.75 trillion spending bill would add fuel to the narrative of government profligacy against a backdrop of inflationary pressures, helping the investment case for bitcoin, which many see as a hedge against rising prices.
Yet on the other hand, if the bill passes in its current form, the potential disclosure burdens placed on cryptocurrency industry participants may create another layer of costs for stakeholders who have become accustomed to relatively frictionless transfers of value and operations.
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Dec 22, 2021