Asia links 21 Jan 2021: China's "second wave", southbound flows, Biden reversing sanctions

Insight #1 – China is experiencing a new wave of infections

It’s hard to judge how serious the new wave of Wuhan virus infections across Northern China really is. Official numbers are modest, with only a hundred or so cases per day. But given that the government has completely locked-down several cities with multi-million populations, it has to be serious. Journalist Katsuji Nakazawa thinks that the heavy-handed measures are meant to ensure the March National Congress and the July CCP 100-year anniversary go smoothly. With Chinese New Year coming up in mid-February, the government has issued new orders to control physical gatherings under 10 people and control traffic to public venues. Travel restrictions have also been imposed. This “second wave” is clearly a net negative for Chinese travel and entertainment related stocks in the short-term.

Insight #2 – Southbound flows via the Hong Kong Connect programs are hitting multi-year highs

Record southbound flows from mainland investors into Hong Kong lifted the Hang Seng index past 30,000 in the last week. Flows reached multi-year highs. Keyword searches related to Hong Kong stocks on WeChat hit 6.3 million hits on Tuesday, suggesting enthusiasm among retail investors. Hong Kong stocks have always been cheaper than on the mainland, with an average discount of about 40% right now. What’s interesting this time is that the recent pick-up in southbound flows coincided with American sanctions on US telecom stocks, banning US investors from buying them. I think the Chinese government felt a need to support them, mobilizing state entities (“The National Team”) as well as brokers to push these stocks higher. That’s why Chinese telcos have rallied recently, despite seemingly negative news about US sanctions on them.

Insight #3 – Biden could potentially reverse sanctions on China, benefitting some stocks and hurting others

I’m starting to think that a profitable 2021 theme might be to invest in companies that have so far suffered under US sanctions. The new National Security Council’s man for the Indo-Pacific Kurt Campbell said the “administration would initially seek to build consensus with allies on China... take confidence-building steps, such as reversing tit-for-tat moves on expelling journalists, easing visa restrictions and reopening closed consulates." The November 2020 executive order banning US investors from investing in PLA-military linked companies could easily be reversed. If that happens, I think we’ll see a rally in a range of Chinese stocks, including the telcos, CNOOC, Huawei suppliers, ZTE, SMIC, Hikvision, etc. On the other hand, other companies that have benefitted from the trade war-related build-up in semiconductor chips - including TSMC - will probably suffer.

Asian stock ideas

  • Rondure Global’s 4Q20 letter with some Asian ideas

  • Aikya on why they don’t own shares in Alibaba

  • Tao of Value blog on Haidilao-connected condiment maker Yihai

  • Searching 4 Value on Hong Kong tech stock Tradelink

  • Japan Insights Substack on software company Money Forward

  • Grizzly short report on live streaming company Douyu

  • Sogou merger arb idea

Articles worth reading

  • Bronte Capital December 2020 letter (LINK)

  • Apollo Investment’s Claire Barnes’s 4Q20 letter (LINK)

  • Longriver Investments 4Q20 report (LINK)

  • Mule on TSMC’s 4Q20 earnings and capex guidance (LINK)

  • Exante Data: the mechanics of central bank retail deposits (LINK)

  • Klement on Investing: The economic incentives in the South China Sea (LINK)

  • Nakazawa: Beijing scolds local governments for COVID 'war' footing (LINK)

  • Christopher Balding on the incoming Biden administration (LINK)

  • Jamie Catherwood: the EV market in the early 20th century (LINK)

  • American Enterprise Institute thinks China’s economy shrank in 2020 (LINK)

  • Truck flows suggest China’s 1Q20 economic numbers were fake (LINK)

  • SCMP on why China’s new defense law is a game changer (LINK)

  • China expands naval base on Hainan island in the South China Sea (LINK)

  • Anti-trust rules to hit China’s mobile payment market (LINK)

  • Li Ka-Shing and son are buying shares in property developer CK Asset (LINK)

  • Google / Bain / Temasek report on Southeast Asia’s digital economy (LINK)

  • Variant Perception thinks that energy is the only sector with room to surprise on the upside (LINK)

  • Chinese state media accounts on Twitter hit by disclosure rules (LINK)

  • China’s new campaign to discredit Western vaccines (LINK)

  • Two senior managers of Chinese vaccine companies suddenly fired (LINK)

  • Bank of Korea warns against steep rise in leveraged lending (LINK)

  • Moon Jae-in says South Korea will not take sides in US-China rivalry (LINK)

  • Samsung heir sent back to prison for 30 months (LINK)

  • Thailand unveils stimulus program (LINK)

  • Indonasia president Jokowi’s son has become a stock market influencer (LINK)

  • Singapore is considering additional virus measures (LINK)

Podcasts and videos

Chart of the week – Chinese margin debt hitting the highest level since 2015

Source: Bloomberg

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