Insight #1 – A few theories why China is stockpiling commodities

It looks like China’s stockpiling of commodities has continued even after the US election. Crude oil imports year-to-date are now up double-digits despite a big drop in demand. We are seeing similar trends for meat, rice and wheat, copper, aluminium, cobalt, semiconductor chips and a number of other commodities. Chinese imports of copper are almost double what they were in 2018, for example. So why would the Chinese government go on a massive shopping spree in the middle of a pandemic? One theory is that they are taking advantage of low commodity prices. Another theory offered by GaveKal is that capital inflows are so massive that the Chinese government needs to acquire foreign assets to neutralize the flows. And a last theory is that China is preparing to be cut off from global commodity markets. As I have mentioned in the past, I fear that China might be preparing to attack islands belonging to Taiwan or even Taiwan itself.

Insight #2 – A potential conflict over Taiwan does not seem priced-in

According to Ian Easton’s excellent book “The Taiwan Invasion Threat”, a pact was made at China’s 18th National Congress in 2012 to retake Taiwan by 2020. Tensions are definitely heating up. Xi Jinping recently told marine corps in Guangzhou to focus on preparing for an attack. And earlier this year, Beijing think tank head Li Su predicts a Taiwan contingency by 2021. Chinese ships have now started staying anchored at the Senkaku islands to prevent Japanese ships from interfering. In a first-page headline in October, People’s Daily told the Taiwanese government “Don’t say we didn’t warn you” (勿谓言之不预也), which over the past 70 years has led to full-scale war 9% of the time. Taiwan’s foreign minister said that China could use the US election uncertainty to target Taiwan. Biden has repeatedly said that the US should not interfere. With this backdrop, I find it odd that Taiwan’s 10-year government bond yields just 0.23%. And China just issued a 5-year Euro-denominated bond at a negative yield of -0.152%. Those yields seem far too low. If a conflict does break out, we will see budget deficits balloon in both China and Taiwan. The most important rule of investing during a war is to avoid all fixed income instruments, as inflation can easily shoot up to 20%+ per year. And never, ever invest in a country that is at risk of occupation. Investors in Taiwan still seem very complacent about the threat.

Insight #3 – The Biden administration is likely to constrain US oil production, pushing prices higher

It looks like the Biden administration will limit drilling for oil & gas on federal land, and also limit fossil fuel infrastructure approvals. Oil production on US federal land accounts for more than 2mbpd of supply - a very significant amount in a global context. Most of this production takes place offshore in the Gulf of Mexico. While restrictions will not impact current production, supply will get increasingly tight over the next few years. With global exploration spending at record lows, I think we are going to see much higher oil prices in the next 4-5 years, benefitting Asian oil producers such as CNOOC.

Asian stock ideas

• Asian Century Stocks on Japanese karaoke bar operator Koshidaka Holdings

• Rowan Street Capital sharing their thesis on 18% holding Alibaba

• Write-up on Singaporean IT distributor Multi-Chem

• Value Pendulum on Korean bank Shinhan Financial

• FT on how online finance platform Lufax has become a consensus short (paywall)

• WSJ Heard on the Street on the IPO of JD Health, valued at ~$29 billion (paywall)

Articles worth reading

• Dan Harris on how Biden is likely to deal with China

• Trump administration is close to declaring that 89 Chinese companies have military ties, restricting them from buying US goods and technology

• HK Exchange’s Northbound Connect will soon enable foreign investors to buy and sell mainland STAR board technology stocks and pre-profit biotechs

• Front Month Substack on Asia as a growth driver for major securities exchanges

• Philippine Airlines is seeking court protection from creditors

• Asia Times: China quietly fuels India and Pakistan’s next conflict

• Victor Shih’s database of Chinese Communist Party officials

• Mindset Capital on the electric vehicle bubble

• Thailand offers 5-year visas to anyone who buys an apartment >US$330k

• India’s population will soon overtake that of China

• Nikkei: COVID pushes Asia to embrace big government

Podcasts and videos

• Out of Gobi-author and PE mogul Weijian Shan on China’s recovery from COVID-19

• Kyle Bass interviewing Stephen Clapham on the accounting schemes used by Chinese tech giants (paywall)

• Professor Simon Zhao on China’s housing bubble

• Interview with Trump’s National Security Adviser HR McMaster

• China Tech Investor with Joe Ridsdale on why short sellers are targeting GSX

• Citi’s EM FX and fixed income strategist Dirk Willer on the recent EM rally

Chart of the week – China’s copper imports have almost doubled compared to 2018

Source: GaveKal

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