Asia links 14 Jan 2021: US Framework for the Indo-Pacific, Chinese property bubble, oil price vs oil stocks

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.

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

Source: @webbhk

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