Thursday Morning Reads

China strategy?

President Biden has held his first telephone call with China's Xi Jinping since taking office in January as tensions remain high between the leaders of the world's two largest economies. In fact, it was the first call between a U.S. president and Xi since the latter spoke with President Trump in March 2020. Since then, relations between the two countries have sunk to their worst level in decades, with Trump blaming China for the coronavirus pandemic.

Biden started the meeting by prioritizing a free and open Indo-Pacific and voicing concerns about China's "coercive and unfair economic practices." He also addressed Beijing's "crackdown in Hong Kong, reported human rights abuses in Xinjiang, and increasingly assertive actions in the region, including toward Taiwan." In response, Xi warned a confrontation would be a "disaster" for both nations and the two sides should re-establish the means to avoid misjudgments. Xi also noted that Hong Kong, Xinjiang and Taiwan were matters of "sovereignty and territorial integrity" and hopes the U.S. will deal with them cautiously.

Thought bubble: Under the Trump administration, the U.S. launched a trade war against China, as well as export controls, entity lists and executive orders against firms perceived to be security threats. China also failed to meet its 2020 targets under the Phase One trade agreement, buying just under 60% of the $172B worth of goods it was supposed to purchase. Biden has recently touted what he said was his friendship with the Xi, but gave a harsher assessment on the campaign trail last year, calling him a "thug" who "doesn't have a democratic bone in his body." He's likely to maintain pressure on China (no quick lift for tariffs), but via a more multilateral approach.

Meet the task force: On Wednesday, Biden also unveiled a new Defense Department team aimed at assessing the U.S. military's defense policy toward China. "That's how we'll meet the China challenge and ensure the American people win the competition in the future," he declared during his first visit as commander in chief to the Pentagon. The 15-member panel will "look at our strategy and operational concepts, technology, and force posture." (13 comments)

Global semiconductor shortage

General Motors (NYSE:GM) became the latest automaker yesterday to warn about a chip shortage, saying the semiconductor crunch could cut its earnings by $1.5B-$2B in 2021. It's not alone. Many companies across multiple industries have been flagging the problem in recent months, such as AMD (NASDAQ:AMD) and Qualcomm (NASDAQ:QCOM), which sell chips to most of the top electronics firms, or Sony (NYSE:SNE), which blamed the shortage for why it's so hard to get a PS5.

What's going on? The COVID-19 pandemic triggered a surge in demand for PCs and other electronics as remote work and online learning became the new normal. Demand still remains at highs. In December, the Semiconductor Industry Association said global chip sales would grow 8.4% in 2021 from 2020's total of $433B (up from 5.1% growth between 2019 and 2020). Other reasons include shifting semiconductor models that have created a bottleneck among outsourced chip factories, as well as effects from the years-long trade war with China.

Go deeper: Many top semiconductor companies are now "fabless," meaning they only design the chips and the technology inside of them. Other companies, known as foundries, are contracted to actually make the chips, such as TSMC (NYSE:TSM) in Taiwan and Samsung (OTC:SSNLF) in South Korea. The shift to outsourcing has had a big effect on structural changes and related capacity (i.e., if a company cut orders in the early days of the pandemic, they had to go to the back of the line).

"We need more chips and we need more jobs," CNBC's Jim Cramer said on Mad Money. "Why not kill two birds with one stone? It's time for our government to invest in building the biggest and best complex of semiconductor foundries in the world." To put it in perspective, even if a "$0.10 chip is missing, you can't sell your $30,000 car," added Gaurav Gupta, semiconductor analyst at Gartner. Another problem for automakers is that they generally use "just-in-time" production, which avoids having to stock extra parts in storage. (24 comments)

Net-zero emissions

Under enormous pressure to speed up its response to climate change, the oil and gas industry is accelerating plans away from fossil fuels. Royal Dutch Shell (RDS.A, RDS.B) has become the latest to outline its hastened timeline, unveiling near-term and long-term plans to transition to cleaner energy.

The goal: Cutting net carbon emissions by between 6% to 8% by 2023 when compared to 2016 levels. It climbs to 20% by 2030, 45% by 2035 and 100% by 2050. Previously, Shell only committed to reducing its net carbon emissions by at least 3% by 2022, 30% by 2035 and 65% by 2050. Shell also announced schemes to boost the use of nature-based carbon offsets, like forestation projects, and carbon capture and storage technology, to compensate for emissions.

Quote: "Our accelerated strategy will drive down carbon emissions and will deliver value for our shareholders, our customers and wider society," Royal Dutch Shell CEO Ben van Beurden said in a statement. "We must give our customers the products and services they want and need - products that have the lowest environmental impact. At the same time, we will use our established strengths to build on our competitive portfolio as we make the transition to be a net-zero emissions business in step with society."

Shell's total carbon emissions might have already peaked. The oil major said total carbon emissions maxed out in 2018 at 1.7 gigatons per annum and confirmed total oil production did the same in 2019. (6 comments)

Cannabis stocks light up

Marijuana names are again higher this morning as the Reddit forum WallStreetBets turns its attention to the sector. Cannabis stocks were already having a party since the beginning of February, given Jazz Pharmaceuticals' (NASDAQ:JAZZ) $7.2B deal for medical cannabinoid firm GW Pharma (NASDAQ:GWPH) and Tilray's (NASDAQ:TLRY) pact to distribute medical cannabis products in the U.K. Canopy Growth's (NYSE:CGC) fiscal Q3 revenue beat also helped boost sentiment, while Senate Majority Leader Chuck Schumer unveiled plans to put forward and advance "comprehensive cannabis reform legislation."

Latest movement premarket: Tilray (TLRY) is ahead by 10% following a 51% surge on Wednesday. Others are tacking on more big gains like OrganiGram Holdings (OGI) +15%; AdvisorShares Pure Cannabis ETF (YOLO) +13%, Aurora Cannabis (ACB) +11%, Cronos Group (CRON) +10%, Aphria (APHA) +9%, Global X Cannabis ETF (POTX) +9% and HEXO (HEXO) +5%.

Analyst commentary: "It seems that institutional investors are finding pathways to access the U.S. cannabis opportunity despite U.S. operators' shares being traded on the CSE and US OTC markets with relatively limited liquidity," wrote Stifel GMP analyst Andrew Partheniou. "In addition, it seems the perceived risk profile stemming from the conflict between federal and state laws, which has also narrowed the availability of custodians that deal in the industry, has not deterred investor enthusiasm." (95 comments)

What else is happening...

Fed's Powell stays dovish, calls for more fiscal action.

TikTok sale to Walmart (NYSE:WMT), Oracle (NYSE:ORCL) is shelved - WSJ.

Space race... China joins UAE in successful mission to Mars.

AstraZeneca's (NASDAQ:AZN) COVID-19 jab recommended by WHO for adults over 18.

Microsoft (NASDAQ:MSFT) made an approach to buy Pinterest (NYSE:PINS) - FT.