David R. Kotok
Tue Jan 25, 2022

I asked my colleague Matt McAleer to calculate the weight of the total China stock market exposure in our International ETF portfolio strategy. He sent back: “No direct exposure. Pick up an allocation thru ACWX. We are 2% vs. benchmark 8%”.

Cumberland Advisors Market Commentary - China by David R. Kotok (Jan 2022)

This is Cumberland’s position as of the morning, January 25, 2022. Matt notes that the selloff in China shares has been intense and that a trading opportunity may develop at any time. The situation remains fluid and we intend to adjust in reaction to the changing circumstances.  Anyone interested in the details of our International Equity ETF portfolio strategy may email me, and I will have a colleague provide them to you.
Today’s missive is about China and some issues about whether to invest in China. We will not discuss short-term trading opportunities in Chinese stocks or near-term buy-sell-hold decisions.  We note that public news outlets have discussed repeated incursions of Taiwan’s airspace by the PLA and a possible link between Putin and Xi ahead of their forthcoming Winter Olympics meeting on Feb.4. 
We do want to add an important reflection to the public news flow.  Former Australian Prime Minister Kevin Rudd, now head of the Asia Society think tank, used a phrase during a zoom meeting I was fortunate enough to hear.  Kevin Rudd became president and CEO of Asia Society in January 2021 and has been president of the Asia Society Policy Institute since January 2015.
Rudd warned about the geopolitical risk that occurs when a “Man of Destiny is meeting geography.”  We now have two men (Putin and Xi) who each see themselves as men of destiny and each is meeting geography.  In my view, world stock markets are repricing this rising risk premium.  That doesn’t mean a war; it does mean the risk of war or an accident is rising. 
Cumberland Advisors clients can see in their portfolio composition that Cumberland has been in the “underweight China” camp.  Our International Equity ETF strategy is non-US and is ETF-driven. It includes rest-of-world choices with a possible 40-plus countries, with regions, sectors, and developing or mature or frontier markets. Our team includes Bill Witherell (Chief International Economist), Bob Eisenbeis (Chief Monetary Economist), Leo Chen (our Quant Strategies Lead Portfolio Manager), me, and last but not least, Matt McAleer, who serves as Director of Equity Strategies at Cumberland Advisors and who, as Executive Vice President, supervises the entire ETF and stock market trading desk. It is Matt who makes the final buy-sell-hold decision in the International Equity ETF portfolio strategy. We discuss that strategy and the world situation as part of our morning portfolio management calls. When necessary, we bring our bond team in for comments about credit market impacts. The recent defaults and restructuring of Chinese real estate debt is an example. Billions of Chinese debt issuance is denominated in US dollars. Cumberland did not own and does not own any of it in our managed bond portfolios.
My personal view is that there is much evolving risk in China under present market conditions and with the geopolitical landscape in front of us. I’ve traveled in China several times both as a tourist and in business meetings and in those pre-Covid days and on those trips, I felt reasonably safe and welcome. I’ve also written from China and watched the piece I wrote come back through Chinese censors. Couple recent events and how China treats its own journalists and guest journalists, I wouldn’t go there today. If I had to, I wouldn’t bring my phone; I would instead use a “burner phone.” By the way, when I say China, that now includes Hong Kong, which I believe is now entirely under the Beijing policy thumb. The old notion of “one country, two systems” is dead, in my opinion.
Let’s get to two specific items.
First, we note how China blames the rest of the world for its Covid problems. This has been the case since the first news from the City of Wuhan in Hubei Province in 2019. Even today, with China hosting the Winter Olympics, the recent Omicron variant outbreak in Beijing is blamed on a Canadian letter as the transmission mechanism: “Did Omicron arrive in China’s capital Beijing by mail from Canada?”
We also see China punishing a citizen journalist who reported to the world, at great personal risk, about Covid as it spread in and beyond Wuhan: “China: Release jailed Wuhan activist ‘close to death’ after hunger strike,”
And we see that China is directing its efforts inward and is closing up, opting for growing isolationism while simultaneously exerting its power globally under the Xi Jinping government. Xi also plays the propaganda war well on the world stage. On Jan. 17 at the (virtual) Davos forum, Xi warned of “catastrophic consequences” if there are confrontations between major powers:
Next we see the PRC’s Vice Foreign Minister Le Yucheng attempting to contrast themselves versus the United States by ticking off a list of systemic blows the US has recently suffered, including a largely out-of-control Omicron outbreak, the storming of the Capitol, the fall of Afghanistan to the Taliban after the exit of US troops, and soaring inflation: “China Diplomat Calls U.S. Omicron Surge ‘Greatly Out of Control,’”
A recent Foreign Affairs piece delves into Xi Jinping’s long-term strategic aims: “Xi Jinping’s New World Order: Can China Remake the International System?”
And in a January 13 interview with Joe Rogan, US General and National Security Advisor H.R. McMaster addressed mitigating supply chain vulnerabilities and the US’s “transparent competition” with China. Here’s an eight-minute excerpt:

We will focus the rest of this missive on Hong Kong. Why? Hong Kong is the source of the billions in market cap of Chinese “H” shares that trade in the US. It was a respected, globally transparent financial center. I use the word was even though I know some folks will criticize our viewpoint. In our view, the Hong Kong we knew is gone forever. Like mainland China, we visited Hong Kong in the past; I personally would not go there today.
Here’s a release about Hong Kong that escaped the radar screens of many observers: “Ex-Xinjiang paramilitary anti-terror chief appointed commander of China military’s Hong Kong garrison,” Here’s an excerpt: “Major General Peng Jingtang was previously the deputy chief of staff of China’s paramilitary police force, the People’s Armed Police, according to Chinese media. Peng’s appointment was signed into order by China’s leader Xi Jinping, state news agency Xinhua reported.” We thank Paul Schulte of Singapore for sending us the link.
I asked Paul for his analytical view about this appointment. He replied, with permission to quote him: “I would leave (HK) if I were an expat. You are suspect until you are not. Plus, people will start ratting each other out. A feeling of fear will permeate the city. China is not messing around.” Paul added: “New message to HK. Get in line with CCP policies or you will be crushed. Don’t think about independence. Also, China is watching Russian encroachment on Ukraine closely. If Russia takes Ukraine, China will be emboldened to take Taiwan. This is how imperial wars start.”
We solicited views of friends and organizationally diverse colleagues who are skilled China watchers. Several declined to be on the record for reasons (business or personal) that we can well understand. We will keep their views private, and we thank them for responding to us. 
The following comments are offered with full permission from the writers. We will begin with Paul, who sent this follow-up.
Paul Schulte, founder and editor of Schulte Research
At 10 o’clock in the evening, I suddenly saw the news of the personnel appointment of the Hong Kong Garrison. When I looked closely, I was shocked. This is definitely big news. Peng Jingtang, deputy chief of staff of the Armed Police Corps, has been appointed as the commander of the Hong Kong Garrison. This is the first time that a general of the armed police system is at the helm of the Hong Kong Garrison. More importantly, Commander Peng was also the chief of staff of the Xinjiang Armed Police Corps. He has been in charge of counter-terrorism in Xinjiang for many years. The famous “Shanying” commando was led by him.
Hong Kong has experienced social turmoil in 2019. The police also said that the threat of terrorism has not been lifted. For the first time, the central government sent armed police with rich anti-terrorism experience to lead the Hong Kong garrison. Stability is a good thing. Of course, Hong Kong is also an important line of defense for the country, and the strategic deployment of personnel this time is absolutely conducive to safeguarding national security.
According to Xinhua News Agency, Wu Tao, spokesman for the PLA Hong Kong Garrison, announced that Xi Jinping, chairman of the Central Military Commission, recently signed an order to appoint Major General Peng Jingtang, deputy chief of staff of the Armed Police Force, as the commander of the Hong Kong Garrison. General Wang Xiubin, commander of the Southern Theater Command, announced the appointment a few days ago.
Peng Jingtang, the new commander of the Hong Kong Garrison, said that he will work with all officers and soldiers of the garrison to resolutely follow the command of the Party Central Committee, the Central Military Commission and Chairman Xi, fully implement the “one country, two systems” policy, perform defense duties in accordance with the law, and resolutely defend national sovereignty, security, and development interests and firmly safeguard Hong Kong's long-term prosperity, stability and long-term stability. On the surface, this is an ordinary personnel appointment news, but if you look closely at Peng Jingtang’s background, you will understand that this appointment is definitely not simple.
When I first saw that the new commander was from the Armed Police Force, I thought it was a bit unusual, because the previous commanders of the Hong Kong garrison were from various military regions, and Xiaoji was not familiar with the name, so I couldn't find too many on the Internet. Information, there is very little public information about Peng Jingtang. On Baidu, there is not even a date of birth, just a brief introduction. He is the current chief of staff of the Xinjiang Armed Police Corps. He was promoted to major general on July 19, 2018, but did not mention when he was transferred to Xinjiang.
Check the news reports again, and there is only relevant information in 2013 and 2019. In 2013, Peng Jingtang’s title was still the head of the military training department of the Jinan Military Region Command. In 2019, he accepted the name of the chief of staff of the Xinjiang Armed Police Corps. The Armed Police Force is the main force in Xinjiang’s counter-terrorism, especially in the Urumqi terrorist attack on July 5, 2019. The state has also affirmed them. On July 5, 2021, President Xi Jinping also presented the award flag to a special warfare squadron of the Xinjiang Armed Police Corps.
As the chief of staff of the Xinjiang Armed Police Corps, Peng Jingtang is the leader of Xinjiang's counter-terrorism operations. He has led his subordinates to experience many actual counter-terrorism battles. The “Shanying” commando under his command is the top fighting force of the People’s Liberation Army. It is [one of] only three in China with armbands…. The other two, “Falcons” and “Snow Leopards,” mainly guard the capital. Quick and accurate marksmanship is one of the characteristics of “Shanying.” Peng Jingtang said that “Shanying” has been practicing practical anti-terrorism shooting methods, such as memory shooting, instinct shooting, and target-pointing shooting. In 2018 alone, the ammunition consumption of the “Shanying” reached the sum of the three years of other troops, and the ammunition consumption before the first August of 2019 has far exceeded the entire year of 2018.
Malcolm Riddell, founder, CHINA Debate and editor, CHINA Macro Reporter
My lens for this – and for analyzing everything Mr. Xi does this year – is the runup to his ‘re-election’ to a third term in October. Right now this looks like a done deal. And he wants no glitches and no crises that his detractors and enemies among the elite could use to derail this. He himself has said the watchword for the year is ‘stability.’
Regarding Hong Kong, during the turmoil a couple of years ago, rather than sending in PLA tanks, Mr. Xi imposed an elegant solution for quashing dissent: the National Security Law, the police, the courts, and the prisons. Together these struck sufficient fear in the people of Hong Kong that only the foolhardy would have continued to publicly oppose Beijing. Even with this in mind, what I would guess is Mr. Xi’s nightmare scenario is that during, say, the upcoming election of Hong Kong’s Chief Executive in March, the opposition coalesces en masse, in numbers greater than police, the courts, and the prisons can handle. And we have not only huge demonstrations but bloody and deadly violence in the streets.
Mr. Xi will appear to have lost control of Hong Kong – again. So he might threaten to send in the PLA garrison and the tanks. But would the anti-Beijing demonstrators believe him, would they call his bluff? Quite possibly. He didn’t use force last time, and they know a Tiananmen redux – complete with strident international condemnation – would be just what Mr. Xi’s enemies would love to use to make him a two-termer.
If you’re Mr. Xi then, you don’t want to have to use force, but you have to make that threat so credible that any Hong Kong dissidents would think twice before moving. One thing he could do would be to appoint a commander in Hong Kong who brooks no nonsense and acts without hesitation or remorse in carrying out Mr. Xi's and the Party’s orders. Someone like, say, Major General Peng Jingtang, the man who boasted that his Mountain Eagle squad had fired as many rounds of ammunition at ‘Xinjiang terrorists’ in 2018 as all other Xinjiang security forces combined had done over the previous three years. Now it will look to all those even contemplating some anti-government actions that Mr. Xi is not bluffing – because Mr. Xi now has an honest-to-goodness, proven, shoot-to-kill general in their city – and, given the general’s reputation, the dissenters now have no reason to doubt that he will do just that.
Before the appointment of General Peng, Mr. Xi already had Hong Kong under his thumb; with the general’s appointment, Mr. Xi ensures that no enemies of the state squirm out and jeopardize his third term. The same logic applies to Mr. Xi’s decisions about the economy, the markets, real estate, and Taiwan, to name a few. Mr. Xi will do more and more to win the support of the people (that support being his bulwark against his elite enemies) and to avoid a crisis that his enemies would use to send Mr. Xi into retirement. And that is what he has done in Hong Kong.
Fred Feldkamp, author, Financial Stability: Fraud, Confidence and the Wealth of Nations
US financial market developments that I have observed during the past 55 years inform me that it is more difficult to overcome barriers to efficient free enterprise bond markets that approach the US success of the past nine years (excluding Trump’s blunders of 2018, -19 and -20) than it was to create the Manhattan Project’s "device" to detonate a plutonium-fueled nuclear bomb in 1945. Certainly, America's free market capitalist system will face future challenges, but its past market development success offers the US such an advantage in correcting future crises that it is understandable for opposing nations to be frustrated. Simply stated, I am aware of no authoritarian financial process by which the advantages now enjoyed by US corporate bond market participants can be overcome or duplicated. The US can, of course, destroy itself, but it faces no meaningful “market” threat from elsewhere. Who, moreover, would actually wish to destroy these miraculous markets when the US makes them available to anyone that will participate on terms the US offers?
Leland Miller, Chief Executive Officer, China Beige Book International
It means that far from being a black mark on their resumes, service to the motherland in Xinjiang is increasingly seen as a jumping off point to more high-profile positions. Recall just a few months ago, one of the Xinjiang officials recently sanctioned by the US was promoted to the top party position in Tibet. It’s clearly Beijing thumbing the eyes of the international community.
John Mauldin, Chairman, Mauldin Economics, and author of Thoughts from the Frontline
The appointment of Jingtang is clearly meant to send a message. Xi had at a minimum dozens of other generals that he could have appointed. It does not bode well for the future of my friends in Hong Kong or the democracy movement. Why send him if you’re not planning to have a crackdown? One question for which I have no answer: Does this mean that Hong Kong will be the focus of the current government policy rather than Taiwan, or is it a precursor?
Samuel Rines, Managing Director, Corbu 
This is not your father’s Hong Kong. This is a truly Chinese Hong Kong. That is not going to change, and it has profound implications for doing business there and the mainland.
Peter Boockvar, CIO of Bleakley Advisory Group and editor of The Boock Report

It’s just another unfortunate step in the mainland takeover of Hong Kong and the further assimilation of this once great experiment in freedom into the Chinese system.
We thank all who responded to our question about the new “military master” of Hong Kong.

David R. Kotok
Chairman & Chief Investment Officer
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