The Six Areas of China Aggression and Short and Intermediate Trades to Play It

Amid the constant reports about Europe’s reopening, a new €750 billion stimulus, America’s slide back into Covid-19, and the upcoming election, chances are that any news you’ve seen about China lately has been on the periphery.

Despite being the origin of the pandemic sweeping the globe, Big Media has largely stopped covering China. The country’s draconian measures seem to have brought the virus under control, although we may never know the true cost to the Chinese people.

But we ignore China at our own peril. Because even as it struggles to recover from Covid-19, the Chinese government is taking full advantage of the global disarray caused by the pandemic.

Europe is slowly reopening its economy, and has been distracted with intense negotiations over stimulus bills and Brexit.

Here in America, Covid-19 is resurging, Congress is debating the fifth round of stimulus, and the November elections are sucking up more and more attention.

That’s left China able to do pretty much whatever it wants. Already, we’ve seen the country take six highly aggressive moves.

As it’s facing limited opposition, there are surely more to come.

But don’t worry. It’s not all bad news…

And there’s a way to protect yourself and play this Chinese aggression for a big win…

2020 Was Always Going to Be the Year China Rose Up

Even before Covid-19 struck, China’s diplomatic and military stance was growing more belligerent.

The ruling Chinese Communist Party (CCP) was founded in 1921. That makes 2020 the last year when China’s achievements can still happen in the CCP’s first 100 years.

To you and me, that may not seem like much of a reason to do anything.

But even here in America, voters and Big Media spend an inordinate amount of time talking about what Presidents will do in their “first 100 days.”

China’s ruling party needs symbolism like this more than most. After all, the CCP is nowadays communist in name only. The party has long since abandoned ideology, in favor of a state-controlled capitalist economy.

That’s come with the welcome appearance of the 400 million-strong Chinese middle class, as well as a huge drop in poverty, starvation, and disease.

But without an ideology, the only thing keeping the CCP in charge is continued economic growth and displays of power. So it’s no surprise that both have become cornerstones in Chinese President Xi Jinping’s rule.

In fact, back in 2012 when Xi was first made head of the CCP, the party decided that by the centenary year of the party’s founding, China was to double its income per person from 2010’s levels.

That leaves Xi with under six months to accomplish this feat, despite the havoc the Covid-19 pandemic has wrought on China’s economy and trade.

And it’s not like anyone is going to forget this goal. During his tenure, Xi has incorporated this centenary goal into every aspect of the CCP’s propaganda, news, slogans, and party training.

And it’s not just about the economy, either. 100 years after the party’s founding, the pressure is on Xi to show that the CCP can restore China to the position of power the country sees itself as deserving.

Especially as Xi has grabbed more power for himself than any previous Chinese leader since Mao Zedong himself.

So, with the rest of the world distracted by Covid-19 and the global economic slowdown, Xi is taking this opportunity to reassert China’s position.

In only the last few months, he’s launched or reinvigorated six aggressive strategies to put China on top:

1. Standoff in the South China Sea

For years, China has claimed 90% of the South China Sea for itself, based on dubious historical claims. If accepted, most other countries in East Asia would barely have any sea for themselves at all, while China would have all the oil and gas deposits found under the surface.

More importantly, about one-third of all shipping goes through the sea. That’s some $3 trillion in trade annually, and its China’s only real way to access global markets.

For years, China has been muscling other countries out of the sea, ramming or seizing fishing boats and oil drillers, building military bases on the barren islands there, and ignoring the international ruling that denied its claims.

Xi has only turned up the temperature here this year. In April, for example, China sank a Vietnamese fishing vessel near one of the islands China has claimed for itself. China’s navy has kept intruding on islands claimed by other countries even during the pandemic, and continues to install missile systems there.

When the U.S. government officially dropped its neutral stance and rejected China’s claims to the South China Sea as “unlawful” earlier this month, things really took a turn for the worse.

The White House sent two aircraft carriers to the sea to show it doesn’t belong to China and to hold drills there, at the same time as the Chinese navy was holding its own wargames there. China has since reinforced its military presence there, and neither the U.S., China, or the other countries around the South China Sea are showing any signs of easing up.

2. Use of lethal force on Indian border

In a gruesome story that got lost amid the Covid-19 pandemic, 20 Indian soldiers were clubbed to death or thrown off ledges on June 15.

The culprits were Chinese soldiers who had move past the unofficial truce line separating India and China in a region of the Himalayas disputed since 1962. China hasn’t said how many Chinese soldiers died in the battle, but blames India for encroaching on Chinese territory.

This little-known conflict in one of the highest and least welcoming places in the world is a part of the long-standing dispute between Pakistan and India over Kashmir.

When China invaded Tibet in 1950, it also took the northern part of the Ladakh province from India. That area now hosts a crucial highway connecting Tibet with Xinjiang, allowing China to quickly move troops between its two most rebellious provinces. India lost a war in 1962 trying to reclaim it, and there have been clashes there ever since. No one had died since 1975, however, and not since 1967 had there been so many casualties.

In fact, both countries agreed years ago that their troops in the Himalayas would not carry firearms, to reduce the chance of starting a war there. Earlier this year, in May, Indian and Chinese troops engaged in a fistfight but no one died.

In the June attack, the Chinese soldiers were apparently armed with clubs full of spikes.

Over time, China has managed to forcefully beat down most unrest in Tibet. But as the CCP started an unprecedented attempt to erase Xinjiang’s native culture in recent years, unrest there has spiked. That makes the Himalayan highway, and China’s military bases there, more important than ever.

With India recently building up its own bases there, and last year removing the autonomy India’s Kashmir had officially enjoyed, Xi may have felt threatened.

Not to mention that beating up some Indian soldiers played very well in Chinese media, shoring up Xi’s support even as the botched early days of Covid-19 have sapped his popularity.

With both the Indian and Chinese governments looking for more domestic support, this conflict will continue, and might even escalate.

3. Hong Kong’s new security law

China ceded Hong Kong to the British in 1842, and the city was a British colony until 1997. That’s when the trade hub and financial center was handed back to China, with the CCP officially promising to leave Hong Kong’s capitalist system unchanged for at least 50 years.

However, the free speech and freedom of assembly guaranteed to Hong Kongers allowed them to criticize China’s communist government, inform people about the Tiananmen Square Massacre and other CCP atrocities, and provide a refuge for Chinese dissidents.

So the CCP has long been interfering with Hong Kong’s elections, government, and laws. Every few years, Hong Kongers organized mass protests to give all Hong Kongers an equal right to vote and to free their government from CCP control. Each time, the proposals were defeated by allies of the CCP, often backed by veiled threats from mainland China’s government.

Things came to a head last year, as the CCP-supported Hong Kong government suggested a law that would allow mainland China to extradite Hong Kongers who broke Chinese law.

This would in effect make it a crime to criticize or contradict the Chinese government while in Hong Kong, even though that’s supposed to be legal in the city.

The mass demonstrations closed the city down for months, were met by extreme violence from the China-backed police. While the proposal was eventually retracted, China took advantage of Covid-19 to bring it back with vengeance.

On May 21, Chinese state media reported that China was about to draft a law that would change Hong Kong’s constitution. This new law would make “secession, foreign interference, terrorism, and subversion” against China’s communist government a crime in Hong Kong.

In effect, Hong Kong’s freedom of speech, elections, and freedom of assembly would be eliminated. Hong Kongers didn’t like it, but amid the Covid-19 pandemic, police violence, and the rest of the world being distracted, this “national security” law came into effect on June 30.

This is despite the Hong Kong constitution requires that national security amendments to its constitution be passed by the Hong Kong legislature, not by mainland China’s.

But what’s done is done. Almost immediately, Hong Kong police arrested hundreds of people, opposition parties closed down out of fear of being next, and international banks and other businesses began considering moving out of the city.

The U.S. has since revoked Hong Kong’s special trade status, as the city is now considered simply another part of China. The EU and the UK have also joined in protests, but there’s no doubt this takeover of Hong Kong has been a huge success for Xi, and one he’s neither been punished for nor is likely to take back.

4. Trade gamesmanship

If you recall, America and China spent most of 2019 in a dispute over tariffs and trade, sending stock markets on a wild ride.

Eventually, the countries came to an agreement. Known as the “Phase One” trade deal, it was signed on January 15. Under the deal, America lowered tariffs on Chinese products while China promised to buy about $200 billion more of U.S. goods and services over two years, as well as do more to protect American companies in China from patent and copyright theft.

But China does not seem to be living up to its promises. China is still buying less U.S. soybean than before the 2019 trade dispute. Pork purchases have quadrupled, but because of Chinese tariffs U.S. farmers are still getting less money on the trade than Spanish ones, for example.

Meanwhile, there is no sign that China is importing more manufactured goods from the U.S. Boeing’s 737 Max debacle means America isn’t exporting many airplanes to China, while Tesla and other car manufacturers now make cars for the Chinese market in Chinese factories, not in American ones.

With tensions between the U.S. and China rising even as President Xi gets away with more and more, he may well decide sabotaging the trade deal would be a good show of power.

5. Technology-based industrial and national espionage.

China’s technology giant Huawei has long had close ties to China’s military and intelligence agencies, and is a key player in the CCP’s massive surveillance and so-called “education” camps in the western Xinjiang region.

As the 5G revolution rolls out worldwide, accusations of Huawei spying for China have been surfacing more and more. In May, the U.S. Department of Commerce made it illegal to sell hardware or software made using U.S. intellectual property to Huawei. This effectively bars Huawei from making Android smartphones and most other modern technologies, much as a similar ban on ZTE did in 2018.

This was followed by the Federal Communication Commission designating Huawei a national security threat in June, and the UK government changing course and barring the company from participating in the country’s 5G rollout.

But Huawei and ZTE are only the most visible signs of China using technology for industrial and national espionage. The Chinese government is implicated in the 2017 Equifax hack that compromised the private records of 147.9 million Americans, the 2015 Anthem medical breach that revealed the personal information of 78.8 million Americans, and many others.

According to the FBI, the agency is now opening a new China-related counterintelligence case every 10 hours, with half the open cases relating to China.

With the world distracted by Covid-19, this is only going to get worse. Of course, millions of people suddenly forced to work from home gives China more opportunity than ever to hack national security or industrial secrets.

6. Saber-rattling over Taiwan

Finally, Xi’s success in taking over Hong Kong without any real consequences has emboldened him and the CCP to deal with what they see as their biggest embarrassment.

I’m talking about Taiwan, of course. Taiwan itself is a descendant of China’s national government, which was forced to flee to Taiwan with its 2 million troops in 1949 after losing the Chinese Civil War to Mao Zedong’s Chinese Communist Party.

Ever since, Taiwan has been a reminder that the CCP isn’t even in control of all of China. And since the early 1990s, Taiwan’s transition to democracy has shown that a prosperous and successful Chinese state is possible without the CCP’s dictatorship.

Taiwan may have successfully defeated the Covid-19 virus, but China’s saber-rattling about taking over Taiwan has reached new heights this year. Several Chinese military vessels have been spotted close to Taiwan’s shores, and China’s air force has stepped up flying jets into Taiwanese airspace into a daily occurrence.

China’s first aircraft carrier sailed close by Taiwan in April, and in May the Chinese government threatened to “resolutely smash” Taiwan if it attempted to officially declare independence from China.

China’s state-backed Global Times even quoted a military expert as saying that China’s recent military drills were “literally aimed at” Taiwan.

Of course, the Chinese takeover of Hong Kong has only made the idea of Taiwan once and for all breaking free from China much more popular. After all, Hong Kong was the example the Chinese government gave Taiwan of how a unified China could still respect Taiwan’s democracy.

With freedom in Hong Kong now dead, that’s not a winning argument.

Taiwan’s well-equipped and well-trained military would still not stand a chance in a protracted war with mainland China’s overwhelming number of soldiers. In theory, Taiwan’s independence is guaranteed by the U.S., but the White House has largely remained silent on the issue.

Expect tensions here to ramp up, as Xi looks for a clear win to shore up his support and “unify” China in time for the 100th anniversary of the CCP.

How to Play China’s Aggressive Stance

Now, in the short term, all six of these aggressions will play very well in China’s state-controlled media. Any defeats or losses, like the ones rumored to have happened in the border clashes with India, will be covered up. But victories will be celebrated as proof that the CCP and Xi are wise and necessary for China’s prosperity. This will keep supporting China’s rallying stock market, as well as the country’s general sense of bullishness.

But the fact of the matter is that all-out war between India and China, or the U.S. and China, is very unlikely.

All three states have nuclear weapons, so the costs would be too high. And the benefits of continued trade are too good to give up.

In the short term, I believe China’s aggressive behavior will be difficult to oppose, especially with the U.S. elections coming. That puts more emphasis in the short term on three stocks that I’ve mentioned to you recently – AAPL, NKE, and my favorite China-based play, JD.

For the intermediate term, the U.S. company with the highest exposure to China is Skyworks Solutions (SWKS) who gets over 80% of their revenue from sales into China. The stock is at a clear decision point on the chart:

In addition, a large series of large and bearish block trades went off in the Dark Pools this week, setting up SWKS as a good candidate for 60 – 90 day puts or for shorting the stock. Your stop loss would be two closes above the 7/22 intraday high.

Now, there’s no denying that the markets have been showing a rollercoaster pattern. But despite the volatility my Dark Edge Project readers and I were able to close out seven double- and triple-digit wins since Monday – for an average profit of over 69%!

But believe it or not, the volatility from Covid-19 has actually been a good thing for us…

That’s because it’s caused one of my favorite (and most lucrative) markets – dark pools – to grow in both number and trading volume. That’s why I truly think this week’s incredible success was just the beginning. My proprietary “Dark Edge” algorithm has been sounding the alarm more than ever lately, and I want you to get in before the next round of profits.

Click here now to become a part of the Dark Edge Project.

Great trading, stay safe out there, and God bless you,

D.R. Barton, Jr.

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