11/8 Daily Market Note: U.S. and China are set to see a recovery in relations in the context of ongoing struggles
11/8 Premium China Strategy Note: A 2-3 Month "Friendlier" Window Has Opened
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Folks-
China’s President Xi and U.S President Biden are set to meet on November 15th (a week from today) at the Asia Pacific Economic Cooperation conference, and leading up to this event, I am observing constructive signals that suggest ongoing efforts to heal a fraught geopolitical relationship.
China’s Vice President Han Zheng recently said that high-level discussions between the two countries have opened up dialogue for further discussion. These conversations are happening at a time when China’s export figures continue to fall as aggregate foreign demand for Chinese goods have taken a toll due to high interest rates in Western Europe and North America. China’s weak exports is an indirect sign that production/manufacturing at their largest trading partners is likely subdued for the time being. Translated into public markets, it means that spot commodity prices and related goods may need to soften further before finding a durable bottom. This partially may explain why commodity producers like Alcoa, Mosaic, CF Industries, and others have seen their equity prices stay range-bound over the past couple months.
In terms of an improving U.S. & China relationship, I believe warmer rhetoric between the two countries is likely to last about 2-3 months until early 2024 where (hopefully) some of the thorniest issues like Taiwan, National Security, and Semiconductor exports are more concretely fleshed out. The reason I see a warmer rhetoric to last about 2-3 months is that once 2024 kicks off, U.S. media outlets will be charging forward election viewpoints from Democrats and Republicans. One bipartisan area that both Democrats and Republicans can agree on is how to “manage” the competitive relationship with China while the U.S. continues being the world’s top economy. For this reason, I expect tough talk on China to resume in early 2024 and intensify closer to the election months.
In the face of this context where rhetoric is friendlier for about 2-3 months, I see a window of opportunity for the China Internet sector to take its recent rangebound pricing to make a directional move, which I believe will be on the upside. Make no mistake, however, any strong gains from China’s internet sector on the premise of warmer geopolitics is purely ephemeral and any sustained advance will rely upon domestic strong data from the Mainland. One point of caution already is the fact that Representative Mike Gallagher (a republican who chairs a committee on China) along with several democrats have gotten in touch with U.S. Trade Rep Katherine Tai to talk about raising tariffs on China EV cars. Policies such as this will restrict EV players like Nio/Li/XPeng trying to expand into the U.S.
At this moment, I would say that investors should not rely on market share growth from the U.S. for the China EV players. Protectionism in the U.S. auto industry as well as in Western Europe poses significant challenges for Chinese EV players attempting to expand into their markets. The only company that I have seen be successful in expanding into North America’s consumer base (with much dismay from U.S. Lawmakers of course) is Pinduoduo’s (PDD) TEMU marketplace. But even PDD is not immune to heightened U.S and China geopolitical developments as taking TEMU off the app store is not completely off the table if the relationship significantly deteriorates.
What I’m watching for Hang Seng/China ADRs…