Insight #1 – Key policy targets announced during China’s National People’s Congress
A few different reports were released at the National Congress: Li Keqiang’s government work report, one from NDRC and the 14th five-year plan for 2021-2025. A major difference vs prior plans is that it does not contain a five-year economic growth target. It did give a target for 2021, however, of 6%. This suggests that the growth in bank lending might decelerate in the second half of this year. Another target is to keep manufacturing as a percentage of the economy stable until 2025. The new trade agreements RCEP and CAI are meant to achieve that objective. Further, the government wants to increase R&D spending by 7% per year through tax deductions and heavy state investment. The government wants another 10 million new urban residents per year and it wants the country to reach a 65% urbanisation rate by 2025. It also set a new target of 70GW nuclear generation capacity by 2025, implying 20 new reactors. And by 2025, NEVs should represent 20% of total new car sales. This Soviet-style setting of five-year policy targets will most likely be counter-productive in my view. The targets will be met - but often at an unnecessary cost. Either way, state-owned enterprises are likely to continue to take market share.
Insight #2 – “The Last Kings of Shanghai" provides a parallel to today’s asset bubbles and capital account restrictions
I finally got around to reading The Last Kings of Shanghai. The book describes the trials and tribulations of two Jewish families who controlled trade with China in the 19th and 20th century. The Sassoon family fled Baghdad in the 1830s to set up a trading business in British-controlled Bombay and later Shanghai. The Kadoorie family also had roots in Baghdad and ended up working for the Sassoons in China. A key take-away from the book is how vibrant Shanghai was in the 1920s. Truly one of the greatest cities in the world. Property prices skyrocketed and and new wealth was created. But part of that new-found wealth was a mirage - built on excessive government budget deficits. Capital controls were eventually imposed and fortunes were stuck inside the country. And when Communists took power in 1949, their assets were eventually expropriated. The lessons to be learnt were: 1) Don’t keep all your eggs in one emerging market, given the threat of capital controls and / or communism 2) Rising asset prices might reflect inflation rather than underlying productivity growth. Don’t get too carried away.
Insight #3 – How do you get money out of China?
Ever since China imposed stricter capital controls, it has been more difficult to get money out of the country. US$50,000 can be transferred out, but you have to pledge not to buy property or foreign securities. This Bloomberg article shows how individuals can get around the restrictions. It’s relatively easy to set up a USD or HKD account online, transfer up to the quota amount of US$50,000 and then transfer on the money to somewhere else. The second option is to contact a Hong Kong insurance agent and try to find a matching flow in the other direction. Only problem: it’s illegal. A third way is to use RMB to buy Tether, and then trade Tether for an offshore currency. But the seller of Tether must still accept RMB and who knows if Tether is fully backed by USD. And lastly, if you are an entrepreneur or wealthy, you can fake invoices or inflate the purchase price of overseas M&A.
Asian stock ideas
Asian Century Stocks on Japanese Hello Kitty-licensor Sanrio
Lilian Li on Youzan, a stock that’s being marketed as China’s Shopify
Open Insights reports on the data that the number of flights globally has started to pick up. There were also a few positive comments about the potential for recovery in air travel in The Transcript’s latest newsletter.
Rob Arnott is absolutely right in its criticism of EV stock valuations. The auto industry is competitive, and the majority of current EV start-ups will probably disappear within 3-5 years - especially if subsidies are eventually phased out in Europe and in China.
This article from Trader Ferg makes a compelling case for buying coal stocks. Not sure if “moat” is a word I would use in the same sentence as coal. But if a miner enjoys a low-cost advantage by virtue of its geographical location, then it might have a competitive advantage.
Koneko Research does a victory lap on his or her investment in Jardine Strategic following its controversial US$5.5 billion privatisation. Hong Kong investor David Webb also criticised the deal. Jardine Strategic remains undervalued and if the deal goes through, the Keswick family will end up as the winners - at the expense of minority shareholders.
In a seemingly desperate move, Chinese regulators banned social media platforms from displaying search results related to the stock market. It didn’t work. The move bears resemblance to the measures imposed after the stock market bubble in 2015, when the government pushed SOEs to buy stocks in order to save the market from crashing. For more information about that episode, check out Chapter 11 in Turner & Quinn’s book Boom & Bust.
The Chinese regulator is telling banks to scale back lending. The 6-month credit impulse has also turned negative. I think it’s too early to become bearish on the Chinese credit cycle but we are certainly getting closer to that point.
Podcasts and videos
John Hempton on recent speculation in equity markets
Professor Jay Ritter on the IPO market in 2021
Jeff Gundlach and Felix Zulauf discuss long-term bond yields
China Beige Books Leland Miller discussing Chinese statistics (paywall)
Adam Rozencwajg on mania in EV and other green energy stocks
Chart of the week – Possible inverted head-and-shoulders pattern for USDCNY
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