• December 3, 2022

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President Joe Biden will talk with his Chinese counterpart Xi Jinping on Monday in Bali, Indonesia, and the question for markets will be – does their meeting cement existing geopolitical tensions and a U.S.-China drift, or not?

The MSCI China Index is up nearly 4% on Friday. Markets seem pretty happy about things, even if that really means the status quo largely remains, with a little bit of upside.

Friday’s stock market gains in China (better than U.S.) come after hedge fund money manager and CNBC pundit Kyle Bass warned on his Twitter feed that companies and investors should be prepared to leave China. He said Xi was on war footing, and the U.S. was not going to tolerate it.

Monday’s talks on the sidelines of the G20 meeting will let us know what the White House will tolerate and what it will not.

Since Biden took office, he has kept Trump’s Section 301 tariffs on over $300 billion worth of Chinese imports, and increased Trump’s capital market sanctions on Chinese publicly traded defense contractors. That took investors out of Shanghai or Hong Kong listed companies that make weapons and spy equipment for the Chinese government. Recently, Biden’s Commerce Department added new products and new companies to the so-called Entity List – which is a list dominated by Chinese tech firms that face increased restrictions when purchasing American-made computer hardware.

Whether or not this impedes China’s burgeoning semiconductor industry is unknown, but it will unlikely stop Chinese consumer electronics from dominating U.S. brands in its backyard. As it is, Huawei and Xiaomi rival Apple
AAPL
and Motorola throughout Latin America.

The main concern for the markets on the Bali talk on Monday will be whether Biden will push Xi on Taiwan, making the CCP boss more apt to remain on the war footing Bass mentioned earlier this week. And whether or not the White House can count on Xi to talk to Vladimir Putin about ending the Russia-Ukraine war.

Both Volodymyr Zelensky and Putin himself have an equal ally in Xi, and not an equal ally in Washington and Brussels. Xi saying he will help end the war in Ukraine, and Biden not saber rattling over the South China Sea will be moderately bullish.

Biden hinting at the removal of Section 301 tariffs will also be seen as very bullish for China. And Xi saying he is all done with Zero Covid would be a double-plus win for China’s A-shares.

“There has to be a way to frame the relationship as, look, we are going to be rivals in this or that market, like microchips, but we are not going to be military competitors,” says Vladimir Signorelli, head of macro investment research firm Bretton Woods Research out of Long Valley, NJ. “I don’t think it serves the U.S. interests to keep China in a box and hand them over to Russia. Since the days of Nixon, Washington has not wanted Russia and China aligning, and Russia and China are aligning,” he says.

On the tariff front. “I can see Biden saying tariffs will lower inflation, but I wouldn’t bet the house on him removing them,” Signorelli says.

Over the last few weeks, we have heard of talks about the expansion of the BRICS alliance – a tight group of the biggest emerging markets in their respective regions which was formed in the mid-2000s. At the heart of this alliance is an agreement to help each other out via their own central banks should one be in financial dire straits. This was always a way for the BRICS to never have to turn to the Western-led International Monetary Fund.

Given recent problems in Russia, one probable reason why those central bans didn’t come to Moscow’s aid was because of sanctions. If they gave Russia’s central bank a dollar life line, this could have opened the door to sanctions risk; something central banks tend to avoid.

Instead, China and India became huge buyers of Russian commodities, making up for shortfalls lost to Europe following the “bans” on Russian oil and gas. (Europe still imports Russian oil and gas, usually via third-party routes.)

Any unity of an enlarged BRICS consortium could mean less demand for the U.S. dollar, arguably the U.S.’s number one export commodity. This would be a big headwind for the U.S., as lower demand for Treasury bonds on behalf of the world’s biggest emerging market banks would lead to higher interest rates at home. And higher interest rates would make the U.S. multi-trillion dollar debt much more costly to manage.

The Saudis have already said they might sell oil to China in yuan, but it is unclear if any transactions have been made in yuan.

German Chancellor Olaf Scholz was in Beijing just last week, offering what was akin to an olive branch in the EU-China Cold War, led mainly from Washington.

China Stocks: Should You Be a Buyer?

Is it time to be a little more bullish on China?

“It could be, I’m not sure,” says Signorelli. “But if Covid Zero is dead, then China is in play.”

Hong Kong and Mainland China stocks are doing well today because of Thursday’s State Council decision to ease up on restrictive covid policies. Hong Kong local officials will now be given more control over policies, rather than following edicts from Beijing.

Beijing has “demonstrated that it is aware of everyone’s frustration by eliminating mass Covid testing,” says Brendan Ahern, CIO of KraneShares, a huge China ETF firm in New York City. “They’re eliminating quarantines at a government facility to at-home quarantines for those exposed and for those leaving areas where an outbreak takes place. The government will also stop trying to identify close contacts.”

For those who have not yet bailed on this market, it’s welcome news. Investors do not need tariffs to come off of China. Their domestic economy is big enough. It would be like European fund managers not investing in the U.S. because Boeing
BA
and Caterpillar
CAT
face 30% tariffs to sell airplanes and dump trucks to Europe.

China’s biggest ETFs are all down by more than 40% over the last 12 months, dragging emerging market funds down.

For instance, investors who just picked their spots and choose Mexico
EWW
or Brazil
EWZ
would be up 4.8% and 8.8%, respectively, this year. But if they put their lot in with all of the emerging markets, they would have lost 22% because of China, the heaviest weighting in the MSCI Emerging Markets Index.

Zero covid did China no favors.

The housing market did China no favors.

Geopolitical risks did China no favors.

But Monday’s Bali meeting could be a sentiment shift, even as the longer-term geopolitical risks remain.

Auditors from the U.S. Public Company Accounting Oversight Board (PCAOB) left Hong Kong this week, which investors so far have taken as a positive sign that Chinese publicly traded companies will finally allow for their books to be audited by third parties. We shall see how that goes. The CCP is against this, especially for state-owned entities like PetroChina. This could be a typical Chinese move —shake it on now, make promises, and never deliver. PCAOB has been asking China to do this for years, to no avail. The Securities and Exchange Commission is now threatening to delist Chinese companies that do not allow for third-party audits.

Lastly, in a sign China is still alive, e-commerce giant JD.com said that consumers are coming back to its 2022 Singles’ Day, which happened today in China. It’s the Chinese Black Friday.

According to the company, sales data showed “growing consumer confidence”. However, JD did not boast about any record-breaking sales, suggesting China is still not itself.

The Bali meeting will likely be the usual statesman banter. Tariffs will be key. A removal is bullish for China, but a sign of weakness on China for Biden. With the midterms over, that may not matter for the White House. Xi is unlikely to talk about Covid restrictions to Biden, though if supply chain issues come up, he just might. Any sign that Xi is ready to give up on Covid is bullish. After that, the main risk to the China trade comes from Washington. But if Biden removes tariffs under the guise of easing inflation, the wind will be at China’s back.

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