Asia links 7 Jan 2021: RCEP, Chinese telecoms, Asian cinema

Jan 07, 2021

RCEP: 15 Asia Pacific countries including China sign world's largest trade deal — The 4th RCEP summit held in November 2020

Insight #1 – Asia’s RCEP agreement is a win for China, but not so much for other Asian countries

RCEP stands for “Regional Comprehensive Economic Partnership” and is the new trade pact closed between 15 Asian nations. It will come into effect in late 2021 or early 2022. On the face of it, RCEP looks like it’s benefitting smaller Asian countries, with lower tariffs across the board. But it's a massively inferior deal than what the alternative TPP could have achieved. The main issues with RCEP are that there are no rules covering competition, subsidies to SOEs or product standards. Rules on environmental standards were dropped at the last minute. While TPP followed the Union Nation’s declaration of labour rights, RCEP does not make any commitments on fair labour practices such as worker exploitation or prison labour. With no unified food safety standards, cheaper tainted products will find it easier to cross borders. At the last minute, the Chinese Communist Party managed to insert a special provision, making state-owned enterprises exempt from oversight. And in contrast with TPP, there are no rules at all for cross-border data transfers and cyber security. As economics textbooks tell us, free trade usually increases overall utility. But if there is a lack of IP protection, environmental rules, labour laws and product safety standards, free trade is likely to lead to a race-to-the-bottom. The cheapest product wins and other countries will be forced to copy China’s lax regulation in order to compete.

Japan and Korea will experience lower tariffs… but at a cost

Insight #2 – We might see bargains in Chinese telecom operator stocks early next week

NYSE confirmed it will halt trading of the ADRs of all three Chinese telecom operators on 11 January. In addition, US Treasury confirmed that subsidiaries of companies on the entity list will also be subject to sanctions. That means that Americans from 11 January onwards can no longer buy shares in China Mobile, China Telecom and China Unicom - not even the shares listed in Hong Kong. Funds will probably scramble to get out of the shares, because otherwise they would not be able to take on new American investors. Sounds like a deadly combination to me. Perhaps the Chinese government’s “National Team” will step in and buy. If not, we will probably see bargains among these three stocks as we get closer to Monday. The valuation multiples are very attractive at 7x earnings and 3-7% dividend yields, so I can see why you might want to buy on a dip.

China Mobile’s EV/EBIT reaching record lows

Insight #3 – The Asian cinema industry is recovering nicely

Some interesting data out of Japan about how the Asian cinema industry is recovering from the pandemic. A record number of people saw movies in IMAX theatres in Japan over the weekend. In China, December IMAX customers jumped 28% year-on-year. Those numbers should probably not be extrapolated to the industry as a whole. But I remain bullish. Here in Singapore, it seems that individuals are willing to go back to the cinema, as long as they don’t run the risk of getting infected. Vaccines will help assuage such fears. Some investors think that delays in Hollywood blockbusters is a negative for the industry. But at the same time, those delays also mean that the 2021 movie slate will be the strongest in many years.