The China/U.S. chill is extending beyond the tariff war … but don’t let that derail you from the long-term investment opportunity
Tonight, the Brooklyn Nets and Los Angeles Lakers are scheduled to play a preseason basketball game in Shanghai.
Until hours ago, it wasn’t certain whether the game would take place. And even though the game is going ahead, it won’t be broadcast anywhere in China. Furthermore, Chinese officials won’t allow any news conferences in connection to the game.
The growing tension between China and the National Basketball Association (NBA) began when Houston Rockets general manager Daryl Morey posted a tweet that supported pro-democracy supporters in Hong Kong.
The Houston Rockets are perhaps the most popular NBA team in China, in large part due to Yao Ming, the Chinese center who was a star for the Rockets from 2002 through 2011.
Chinese broadcasters suspended some aspects of cooperation with the NBA after Chinese state media objected to a statement from NBA commissioner, Adam Silver, accusing him of supporting “indiscriminate violence” by Hong Kong protesters chasing a “secessionist pipe dream.”
Many Chinese merchandisers have pulled Houston Rockets merchandise off shelves. A video has surfaced showing a wall with the Houston Rockets logo being painted over. Other Chinese consumer brands are now rethinking their relationships with the NBA.
Pulling back, this is highlighting a new challenge to any U.S./China trade agreement — namely, an increasing chill between the countries that extends beyond the trade frictions.
***Another example of this chill just occurred with the TV show, “South Park”
“South Park” is an award-winning, animated comedy show on the TV network, Comedy Central. It’s known for its irreverent humor that thumbs its nose at political correctness and lampoons, well, everyone.
Last week’s episode, titled “Band in China” gained a great deal of attention after it poked fun at the way Hollywood often shapes its content to avoid offending Chinese government censors in any way.
In response, Beijing has deleted all “South Park” clips, episodes, and discussion of the show from Chinese streaming services. They’re also trying to scrub social media and fan pages.
A search of the Chinese equivalent to Twitter (Weibo) returns zero mentions of “South Park” among the billions of past posts. The streaming giant, Youku, has also erased all links to clips, episodes and even full seasons of the show.
This past Monday, “South Park’s” creators, Trey Parker and Matt Stone issued a tongue-in-cheek apology that’s directly in-line with the show’s sardonic humor:
Like the NBA, we welcome the Chinese censors into our homes and into our hearts. We too love money more than freedom and democracy. Xi doesn’t look like Winnie the Pooh at all. Tune into our 300th episode this Wednesday at 10! Long live the great Communist Party of China. May the autumn’s sorghum harvest be bountiful. We good now China?
***The tensions are spreading beyond popular culture as well — venturing closer to your portfolio
News this week is that the Trump administration is going ahead with discussions regarding possible restrictions on portfolio flows into China. The primary focus is on investments made by U.S. government retirement funds.
In 2017, The Federal Retirement Thrift Investment Board decided that by mid-2020, the international fund offered to workers in the government’s retirement savings plan would reflect the MSCI All Country World Index. This index includes China.
China hawks are pushing to reverse this decision. Their argument is that Americans are harmed by investing in Chinese companies that are allegedly involved in either human-rights violations, or at the center of U.S. national security concerns (such as Huawei).
Investors holding Chinese stocks in the MSCI ACWI benchmark are holding makers of Chinese military equipment, such as drones and anti-ship missile manufacturers.
China Mobile, a telecom that was rejected for an FCC license, is also in the index.
The index also has a weighting in China Unicom, a telecom firm that produces equipment used in communications signals intel in the South China Sea, a bone of contention for the U.S. Department of Defense.
Then there is Hikvision, a company that manufactures surveillance equipment used in China’s ever-expanding Big Brother society and whose camera equipment adorns facilities holding ethnic minorities in Western China.
Another telecom, ZTE, was once sanctioned by Washington and is also in the index. Federal agencies are banned from doing business with them, but they would be in a retirement fund held by the employees of some of those agencies.
If the decision is reversed, it would affect about $50 billion of federal retirement assets. While this value is relatively small compared to the overall market, its messaging would be far more significant — in effect, it’s a democratic government taking steps toward capital control.
***Regular Digest readers know that we’re very bullish on China from a long-term investment perspective
Matt McCall is our resident China bull. This past summer, he was in China doing “boots-on-the-ground” research, and he found so many opportunities that he now has a “China” basket in his Investment Opportunities portfolio and a “Chinese Biotech” basket in his Early Stage Investor portfolio.
Matt is so bullish on Chinese biotechs that he’s even called them “an investment that may have the biggest upside potential I have ever seen.”
These latest tensions between the U.S. and China are troubling, but they don’t change the investment potential Matt has identified. After all, Matt isn’t recommending the MSCI All Country World Index, which could be affected by the Trump administration.
Going beyond this, some of Matt’s recommendations trade on the Hong Kong exchange (HKSE) itself, which would completely sidestep current capital control decisions being considered.
We’re hopeful that cooler heads will prevail and we’ll reach a trade agreement sooner than later, but even if it drags out, we’re still bullish on the long-term opportunities in China.
***On that note, Trump is scheduled to meet with the Chinese vice premier tomorrow at the White House
Per usual, there’s lots of posturing going into this meeting. Here’s Trump’s tweet from earlier today:
Of course, reports from the South China Morning Post dispute Trump’s tweet, claiming that the two sides have not made progress and Liu will cut his visit short.
But then, earlier this morning, Liu was quoted in Chinese state-run media as saying:
The Chinese side has come with great sincerity and is willing to make serious exchanges with the U.S. on issues of common concern such as trade balance, market access and investor protection, and promote positive progress in the consultations.
At this point, who knows? In just the last 24 hours, there has been a barrage of rumors and speculation about the state of these talks — whether they’re happening, whether some tariffs might be suspended, and the scope of what each side wants in the talks … At this point, let’s just watch and see.
We’re crossing fingers for signs of progress. But even if news is lackluster, the investment potential in China isn’t.
Have a good evening,