It’s been a big week for news and China, and it looks like unfortunately that we are in the early stages of a long, contentious relationship with the US and China. Let’s highlight some of the recent headlines and try and determine whether it can equate into tradeable action.
- China has made it policy to crackdown on the elite, especially the tech and entertainment titans, and have used Alibaba’s Jack Ma as the poster boy for Chairman Xi’s “common prosperity” campaign.
- US regulators are continuing to ramp up financial disclosures for foreign entities (i.e., China) and there are valid concerns that such stalwarts as Alibaba, JD.com, and Sea Limited could be delisted. The Krane Shares CSI China Internet ETF, which tracks large cap tech businesses trading in the US, is down 44% year-to-date.
- On Monday, December 6th, China’s central bank said it would cut its RRR by 50 basis points and release 1.2 trillion yuan (approximately $188 billion) in long-term liquidity to bolster growth (and likely help ease conditions for the Evergrande debacle that is slowly unfolding)
- Speaking of which, Evergrande has missed a Monday deadline to repay coupons totaling $82.5 billion and are now officially in default. Evergrande has approximately $19 billion in outstanding debt with over $300 billion in liabilities. Also, Kaisa, an Evergrande competitor, failed to repay a $400 million bond that was due Tuesday.
In political news, the White House announced on Tuesday a diplomatic boycott of the 2022 Winter Olympics in Beijing, citing “ongoing genocide and crimes against humanity in Xinjiang.” China, not surprisingly, has threatened the Biden administration with retaliation over the decision. This is the latest flare up between the two nations. The biggest being the simmering feud over control of Taiwan, which continues to escalate and is a “red line” according to the Biden administration.
There was once hope that China’s opaque markets would become more available to western investors. And for a while, that indeed looked to be the case. But now there is little argument that both diplomatic relations and financial progression has taken a turn for the worse. Whether the relationships can be salvaged is up for debate, especially on the political front. However, it’s hard to fathom that with the hundreds of billions worth of Chinese market caps listed here in the US that it just all goes away. There are just too many interested parties (exchanges, investment firms, brokers) that would be sanguine with that slice of business evaporating.
So, 2022 is setting up to be a pivotal year for China/US relations. Likely, underscored by the Beijing games slated for February 4th-20th. It’s our opinion that the financial side of the relationship ledger will remain intact in some form. The political side we will let others more versed debate. Looking at the chart below of KWEB, or even worse Alibaba, there sure appears to be substantial upside appreciation in a host of names if these tensions can simmer some.
But for now, we will keep up with the headlines and look for any bottoming action in these truly putrid charts of the Chinese ADR’s. 2022 is already shaping up to be some kind of year.