MoneyFitt

09 January 2023

Happy Monday!

US large-cap S&P 500 closed 2.28% UP ▲▲Tech-heavy Nasdaq Composite closed 2.56% UP ▲▲Pan European STOXX Europe 600 closed 1.16% UP ▲ HK’s Hang Seng Index closed 0.29% DOWN 🔻 Japan’s Nikkei 225 closed 0.59% UP ▲

📊 IN THE MARKETS

Good good jobs news, Record High Eurozone Core Inflation, Microsoft adding ChatGPT to Office

📝 FOCUS

Chinese mRNA vs Reunion Dinner vs The KrakenJack Ma Loses Control (of Ant Financial)

📖   MoneyFitt EXPLAINS

🎓 Variable Interest Entity or VIE 

📊 IN THE MARKETS

GOOD GOOD JOBS NEWS

US stocks were strong on Friday and closed out a volatile first week of the year in the black on good jobs data from the Labor Department of the US. What counts as “good” for the market these days?

Nonfarm payrolls (i.e. jobs) increased by 223k for the month, which was some way above the Street estimate of 200k, while the unemployment rate fell by 0.1% to 3.5% instead of rising by 0.1%. Both show how resilient the US labour market still is. The market is fixated with inflation and the risk of the red-hot labour market causing a wage-cost spiral, so you might expect markets to sell off, but actually, the focus turned to wage growth, which showed average hourly earnings rose by less than expected at 0.3% compared to the end of November and 4.6% compared to a year ago. Still up, but, importantly, lower than Wall Street estimates at 0.4% and 5% (and getting close to the 3.5-4.0% that the SF Fed thinks is consistent with the 2% inflation target.) Assuming inflation is still roughly around November’s 7.1%, this means workers’ buying power is still falling. 

Wage growth is a key driver of inflation, so this massively boosted sentiment as traders read it as showing the Federal Reserve’s rate hikes may actually be succeeding in slowing the economy and squeezing out inflation without causing a massive spike in unemployment. (We will see December CPI inflation numbers out this Thursday, with consensus looking for headline CPI to fall to 6.6-6.7%, which would actually mean prices were either unchanged or up by only 0.1% compared to the month before.)

A contrary reading of the data would be that the Fed can continue to hike rates to levels that are higher and hold them there for longer as it can continue to squeeze inflation down to its 2% target since unemployment (which is also the Fed’s responsibility thanks to its dual mandate of price stability and maximum -not 100%- employment) remains low enough. The risk is then that the Fed inadvertently triggers a harder-than-necessary slowdown as the hikes feed through into the economy. BUT for last Friday, that’s not the narrative the market was going with as the S&P 500 added 2.3% on Friday for a 1.7% gain for the week.

The market actually rose again later in the day when the ISM non-manufacturing purchasing managers’ index showed that the services industry contracted in December, another sign that the Fed’s cooling measures are taking effect. Given the importance of the sector in the US and for its labour market, this was another bullish signal.

RECORD HIGH EUROZONE CORE INFLATION

Earlier in the day, Europe had its own moment of inflation excitement as average Eurozone inflation dropped by more than expected in December and returned to single digits. Consumer prices rose by 9.2%, below the 9.5% expected by economists in a Bloomberg survey. It was down from 10.1% in November and a record 10.6% in October. The range of inflation prints in Europe remained wide, from 5.6% in Spain up to 20.7% in Latvia. Unfortunately, core inflation (which excludes food and fuel, which are volatile) hit a new high of 5.2%, which was above the 5% seen in November and expected for December. (If you mechanically string the 0.6% monthly rise in December into a compounded annual figure you get 7.4%.)

MICROSOFT ADDING CHATGPT TO OFFICE

In another scoop from The Information, Microsoft is looking to add OpenAI’s ChatGPT to the Office productivity suite, which is now known as Microsoft 365. This would mean any users of Word, Outlook, Powerpoint and other offerings including Email will be able to generate stretches of text-based off a simple prompt.

Just last week it was reported that Microsoft could use ChatGPT to provide natural language search results in Bing, instead of, or most likely in addition to, a list of links. (One challenge is that ChatGPT produces confident and plausibly right answers that are factually incorrect, partly because it doesn’t continuously scrape the Internet for news or updates.)

Also, Microsoft engineers have been working to create personalized AI tools by applying OpenAI’s machine-learning training models to customers’ private data to pick up on individual- or company-specific language, such as the names of individuals or projects, and to learn commonly used phrases, but needs to manage the risks of leaking it to others.

OpenAI, in which Microsoft invested US$1 billion in 2019, is reportedly raising funds at a valuation of US$29 billion, according to the WSJ, up from about US$20 billion in 2021, though the FT is pointing to a potential speculative bubble in the making. OpenAI expects US$1 billion in revenue by 2024.

📝 FOCUS

 Chinese mRNA vs Reunion Dinner vs The Kraken

A new Chinese mRNA Covid vaccine from CanSino Biologics (06185 in HK) announced encouraging clinical results, generating in a Phase IIb trial 23 to 29 times more antibodies than an inactivated jab when given as a booster to those who had already received three jabs. (CanSinoBIO’s existing single-shot Covid-19 vaccine is already among those approved by the WHO.) mRNA vaccines from the West have been prohibited from China despite greater efficacy than the homegrown inactivated vaccines from Sinopharm and Sinovac, so this is potentially great news as China grapples with surging infections and deaths in an under-protected population and under-prepared healthcare system upon the abrupt reversal of its stringent 3-year zero-Covid policy. 

Particularly with the new XBB.1.5 or “Kraken” coronavirus subvariant that was first detected in 2022 and which has quickly become the dominant strain in the US, and spotted in at least 31 other countries, according to the World Health Organisation (WHO.) Fortunately, there is no significant difference in severity compared to previous variants. But Kraken is showing signs of “immunity escape” meaning it can evade natural immunity or previous protection provided by vaccines, and re-infect people who have recovered from an earlier bouts of Covid-19. 

China has yet to report any domestic cases of XBB.1.5, but has seen several imported cases, which could surge as travellers streamed back into China on Sunday as land, sea and air borders reopened after three years. China ended a requirement for incoming travellers to quarantine, dismantling a final pillar of the zero-COVID policy (though they are still required to show a negative Covid-19 test taken within the last 48 hours — a measure China has protested against when imposed by other countries on travellers coming from China.)

Lunar New Year / Spring Festival / Chinese New Year “Reunion Dinners” are just around the corner, and due to take place on Chinese New Year’s Eve (January 21st in 2023). Saturday marked the first day of “chun yun”, the 40-day period of Lunar New Year travel which (pre-pandemic) was the world’s largest annual migration of people. The Ministry of Transport expects over 2 billion passenger trips over the next 40 days. Chinese health authorities are bracing for a huge increase in travelers and the spread of infections, particularly since “the great migration” of workers in cities to their rural hometowns will cause a surge in infections in areas that are less well-equipped with ICU beds and ventilators to deal with them.

Jack Ma Loses Control (of Ant Financial)

Jack Ma, the founder of Alibaba and its finance affiliate Ant Group, which does online payments and loans, will give up control of the Chinese fintech giant after agreeing to give up most of his voting rights. This follows a regulatory crackdown on Ant and China’s other giant tech names that started with the last-minute derailing of Ant’s US$37 billion initial public offering (IPO) in late 2020. Ant was forced to restructure after Ma’s public criticism of the central government, following which Ma stepped out of the spotlight (and country, apparently, with his most recent sightings in Bangkok.) The change of control was first reported in July as part of the restructuring. Ant is not planning a new IPO, according to an email to Reuters. (A change of control would mean holding off on restarting an IPO for at least one year in HK and up to three in China anyway.) 

Actually, Ma only owns a 10% stake in Ant, but through related entities previously had control, with more than 50% of voting rights. The changes will mean his voting rights fall to 6.2%, according to Reuters calculations.

Ma still owns 3.9% of Alibaba (9988 in HK, BABA in NY), China’s largest e-commerce company, both directly and through holding companies. The market capitalisation of Alibaba is US$284 billion based on the HK/US listings of its Variable Interest Entity or VIE 🎓 shares, so that stake is worth about US$11 billion.

Thank you for spending a few minutes of your time with us. Remember to take time for yourself and be thankful for what you have.

📖 MoneyFitt EXPLAINS

🎓 VIEs: You DON’T own those Chinese Companies you think you own! 

Under Chinese law, foreigners are not allowed shares in companies in certain Chinese industries (actually, most of them.)So a Chinese company wanting to raise money by selling shares to foreigners will set up an offshore vehicle (a shell company in the Cayman Islands) called a Variable Interest Entity, or VIEThe VIE enters into a contract with the Chinese company where the VIE gets certain economic interests and rights (profits, control of assets)… but NOT any actual ownership.The VIE (not the “underlying” Chinese company) is then listed in the US or HK or wherever and foreigners can happily buy and sell those shares as if they were actually pieces of the ownership of those companies.The structure was originally designed to circumvent Chinese laws and was technically illegal, but now gets passed by the China Securities Regulatory Commission before listing.But it still isn’t the same thing as actually owning shares in the underlying company, and the assets can get transferred out with no recourse. VIE shareholders have tried to enforce the contracts in Chinese law and failed (like when Alibaba transferred Alipay to a company owned by Alibaba boss Jack Ma).(Little known fact: Accounting scandal poster boy Enron Corp. used VIE structures to get away with its fraudulent practices decades ago.)Well-known Chinese Internet companies like Tencent, Alibaba, Pinduoduo, Baidu, JD.com and NetEase all operate under VIE structures.