Asia links 26 Nov 2020: China's stockpiling of commodities, Taiwanese government bonds, Biden's impact on oil prices
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
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
How would you rate this week's newsletter? 🤔
Thanks for reading!
If you’re finding this newsletter valuable, consider sharing it with your friends.
Or subscribing if you aren’t already.