Is the Low Finally in For China?

Hey There Income Hunters,


Yesterday has to be the biggest day for Chinese stocks since the Great Financial Crisis!


Check out some of these one-day returns ….



Now, long China/short US happens to be one of my highest conviction trades for Q1 2022 and today I’ll show you why.


KraneShares China Internet ETF (Ticker: KWEB)


This is the ETF, along with Alibaba Group Holdings (Ticker: BABA), that I have been focused on.


Tax-loss selling has been huge this year to offset the massive gains in mega-cap names (FAANGMT). It’s a strategy in which you dump stocks that have performed poorly in order to reduce capital gains taxes as the year draws to a close. 


When the S&P 500 is up 20% or more, the emphasis on tax-loss selling is exponentially higher. 


Now, here is the good news …


Historically, the sectors that experienced heavy tax-loss selling typically do very well in the first half of the following year.


I am very bullish on China tech outright and also hedged against US Tech. Here are a few of the reasons:


  1. China has recently triggered a credit impulse cycle, which is their phrase for an easing cycle that is ignited to generate an acceleration in economic growth.


Here is a graph of China’s credit impulse cycle. Notice how it has turned up recently and correlates very well with the manufacturing new orders index.



My bet is China will ease credit for most of H1 2022.


  1. Just last year Wall Street firms had an average price target for Alibaba (Ticker: BABA) over $340. Today, their target is $200 dollars and the stock is trading at $122 after a capitulation trade down to $109.


A good example of this type of a capitulation trade was the US energy sector in 2020. Covid and the green energy revolution had investors convinced it was death for energy stocks … However, once the selling dried up, the energy sector rallied from 75 to 100%.


  1. The threat of delisting Chinese companies in the US has forced many funds to liquidate their shares – but that is just a lot of noise. 

First of all, if it ever happens, it is at least two to three years away. Secondly, China is not looking for trouble here and Beijing has proven they will play tough with tech companies and any company that defaults on its obligations. 


That is just a great governmental practice. My bet is the US ultimately will play nice and the listing across borders will work itself out.  


Classic Capitulation Trade


BABA corrected more than 66% in just over a year. The second-to-last day of the year brought in buying on volume that was well above the average: 



According to Bloomberg data, after a sector trades down close to 70%, the following 3-year return averages 87%! 


Bring It Home


As a contrarian investor I look for opportunities like this all the time.


Start with the global macro forces, which include China’s reversal from tightening to easing. It’s happening at the same time the US is going from easing to tightening. 


This is a lethal combination that will send money flowing from the US financial assets to China financial assets, as well as commodities and precious metals.


As usual, I was a bit early – but to catch these types of trades you want to be early. Once the tide turns they are hard trades to chase. 


In the next Power Income, I’ll run through the critical issues on the US side. One of the best strategies here will be to have a paired trade long China/short US trades.


Have a wonderful New Year!


Until then …


Live and Trade With passion My Friends,


Griff

Leave a Reply

Your email address will not be published. Required fields are marked *

This site uses Akismet to reduce spam. Learn how your comment data is processed.