Insight #1 – The US State Department’s 2018 US Framework for the Indo-Pacific states it wants to accelerate India’s rise

The just-declassified 2018 US Framework for the Indo-Pacific outlines the US approach under Trump on how to deal with an expansionist China. It predicts that Communist China will take increasingly assertive steps to compel “unification” with Taiwan. It wants to enable Taiwan to develop an effective asymmetric defense strategy. It outlines stronger cooperation with India, Korea, Japan and Australia. The most interesting part of the document is that the US wants to “accelerate India’s rise”, including helping the country with its domestic economic reforms. Lastly, the US states that it wants to invest in capabilities that promote uncensored communication between Chinese people. Smart commentary on the document here and here.

Insight #2 – The restrictions on Chinese property lending are halting the rise, not popping the bubble

The new Chinese credit cycle is now 12 months old and is likely to continue until the 100-year anniversary of the CCP in mid-2021. The shadow banking sector has been booming throughout 2020, leading a boom in the Chinese property market. December pre-sales numbers for the major developers were fantastic. As CXJ Research reported, prices of many existing projects went up 20% or more in the last few months of 2020. It’s with this backdrop that we should view the PBOC’s recent curbs on property-related lending. The PBOC has set caps of 31/25% on banks’ exposure to total property loans / mortgages. These numbers can be compared to sector-wide blended averages of 29/20%. In addition, the banks will have 2-4 years to comply. That means that the type of runaway growth in mortgage lending as we saw in 2016 is unlikely to recur. But with the Chinese property market hotter than ever, I don’t think we should expect the bubble to pop just yet.

Insight #3 – Brent is already back to $55/barrel, yet many oil stocks remain far below pre-pandemic levels

Saudi Arabia’s surprise 1mbpd output cut in early January led to a strong recovery in oil prices. We’re almost back to a $60 Brent oil price. Spot prices may have run ahead of fundamentals, as argued by oil specialists HFI Research. But pent-up demand for travel might ultimately lead to oil demand exceeding 2019 levels, as some hedge funds are betting on. So I’m still amazed at how undervalued some oil producers and oil services stocks still are. It would require a +48% rise in the OIH to reach 1 January 2020 levels. It would require a +43% rise in the XLE to reach 1 January 2020. It’s probably not too late to invest. Just be prepared that a full recovery might take 12 months or even longer.

Asian stock ideas

• Asian Century Stocks on Dairy Farm International

• Searching 4 Value blog on Japanese karaoke operator Koshidaka

• Not Boring Substack on Alibaba

• Redditor on Hong Kong microcap Yorkey Optical

• Profit Hunting blog on Chinese MSG producer Fufeng

• J Capital short case for Chinese bitcoin mining company Bit Digital

Articles worth reading

• JP Morgan’s Guide to the Markets 1Q21

• Jason Geopfert: Investors were optimistic, now euphoric

• Katsuji Nakazawa making the case that Xi Jinping’s trip to Yunnan in mid-January worsened the COVID-19 pandemic

• Chinese officials further delete Wuhan lab Coronavirus studies, including all those produced by Shi Zhengli

• Trump’s 2018 strategic framework for the Indo-Pacific now declassified

• Trade deal allows Chinese staff to work in EU for 3 years

• WSJ: How to interpret Chinese data

• Americans won’t be banned from investing in Alibaba, Tencent, Baidu

• Chinese public sentiment on Jack Ma has shifted, reason unknown

• Chinese ADRs seeking secondary listings in HK: TME, Vipshop, Joyy, Baidu

• MSCI to drop China Mobile, China Telecom, China Unicom

• Blackrock plans to keep selling its shares in Chinese telcos

• Carson Block’s Muddy Waters had a great year in 2020

• Michael Dunne with six 2021 predictions for the Chinese EV market

• Chinese electricity shortages is leading to online criticism

• Investors have a new default worry in China’s debt market

• HSBC grooms top bankers for make-or-break push into China

• China removes restrictions on credit card interest rates

• Long read: How I survived a Chinese 're-education' camp for Uighurs

• China is considering building an Internet firewall in HK prior to elections

• Intel mulls outsourcing production to TSMC (and maybe Samsung)

• WSJ op-ed on how Biden will have to coordinate a military buildup to avoid a Taiwan invasion

• Strange Bloomberg headline: U.S. Unveils Plan to Counter China’s Rise

• US lifts self-imposed restrictions on the US-Taiwan relationship

• Xi Jinping's China and Hitler's Germany: Growing parallels

• Infosys raises outlook as COVID-era digital shift quickens

• Malaysia leader accused of power grab After Parliament Suspended

• New Zealand abandons Five Eyes, pivots towards China

• East Asia Forum: No simple solution to China’s dominance in Cambodia

Podcasts and videos

• BCA thinks Chinese stocks will underperform in 2021

• Kyle Bass interviewing Stephen Clapham on the dubious accounting of US-listed Chinese Internet stocks

• Paul Gillis & Herb Greenberg on Alibaba

• Anne Stevenson-Yang discussing J Capital’s Bit Digital report

Chart of the week – Hong Kong outward migration since 1 July 2020 amounts to 130,723 or 1.74% of the population

Source: @webbhk

How would you rate this week's newsletter? 🤔

Thanks for reading!

If you’re finding this newsletter valuable, consider sharing it with your friends.

Share

Or subscribing if you aren’t already.