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Dont fight the CCP?


ANP301191
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Following the recent up and downs of Chinese tech/education/housing etc. stocks, how does one tackle the challenge of investing in China?

 

Cards on the table - Im in my early 30s so pretty okay with some risk also looking to grow capital over a long period of time. Additionally, I am a large proponent that the next 20-30 years of economic growth/development is going to come from the "East" and China as the worlds second largest economy (soon to be the largest) will probably play a massive role in that growth. Yet whenever I try to underwrite an investment in China in recent months, I find it difficult to comprehensively understand the political risk that the CCP may decide that the business/segment/industry goes against the needs/requirements of the government/people of China. How would one go about understanding and investing in China when so many of its largest and most prominent companies seem to be on the government's radar for infractions of some sort? Additionally, does one invest in China at all, or take strategic bets on "Western" companies with large exposure to China (i.e. Nike).

 

Any advice/opinions would be helpful.

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I would say think what is the long term objective of China and how they will want their policies to go with that objective. There is a well documented 50 year plan that aims to put China as the premier economic power by 2048.

 

After you understand that ask yourself if what we hear contradicts the plan or not.

 

BeerBaron 

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5 hours ago, ANP301191 said:

Any advice/opinions would be helpful.

 

China's current approach is not sustainable, and most would look at the lessons learnt from Japan when they tried this - and where Japan is today....

The old Styx song 'Domo Arigato, Mr Roboto' personifies it. https://www.youtube.com/watch?v=uc6f_2nPSX8

 

The 996 work thing is a well-known Asian cultural characteristic, not unique to either China or Japan.

Attempting to clamp down on it is akin to telling Americans that you are going to take some of their freedoms away; could be done, but not sustainable, or realistic - even for a CPC. What is new is 'tang ping', and it scares the hell out of everybody - especially when you are communist country, benchmarking against 'social harmony'.

https://www.theweek.in/news/world/2021/07/01/100-years-of-burnout-chinas-youth-are-fighting-back-against-overwork-culture.html

https://www.cnn.com/2021/08/27/tech/china-supreme-court-996-intl-hnk/index.html

 

Wings are being broken, and there is no need for a foreigner to take the risk. If anything, most would prefer a long term short.

Share price is NOT the metric, long term political survival is - and the CPC is very, very good at it.

 

Different POV.

 

SD

 

Edited by SharperDingaan
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I dont think "fighting" anything is worth it. You want to be a contrarian, but in the sense of seeing a turn or pivot before others. You could have made fortunes buying REITs, especially retail related stuff during covid. It was ugly. You were "fighting" the tape. But you also knew the world would go back to normal, that they had vaccines coming; they in fact told everyone when the vaccines would likely be here, and even indications in more democratic cities/states that people wanted to return to normal regardless. Was just a matter of time. With China, where's your catalyst for the situation turning? Shorting the market bc of the Fed or "valuations"..why??? Same with malls. What causes the turn. Same with office? Who flips a switch, en masse, to get everyone back? Cable? Who wants it anymore? This is not to say China is a secular decliner, but the worthwhile question is...what causes the fundamental change, when, and how long does it take the narrative to follow? There in lies the money. 

Edited by Gregmal
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There is no rule of law in China. The CCP needs money and technology from the West today. So they will keep the economy ‘open’ enough to achieve this objective. 
 

I view putting money in China today more of a speculation than an investment. Lots of money to be made (similar to all speculations). 

 

There is no safety of principal. It is a communist country. CCP runs the show and they really do not give a shit about shareholders or long term shareholder rights. 
 

Look at their approach with Hong Kong - brutal and effective. They have learned the West/US is all talk with no bite. South China sea is next. Taiwan will also be brought to heel much quicker than people realize. 
 

We are just getting glimpses of the new China flexing its muscle. Nationalism is on the rise. 
 

Speculate in China. Invest in Western liberal democratic economies that have property rights, rule of law, free press (better information disclosure) etc.

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The Asian FANGs of Baba, Ten Cent, etc are being brought to heel. The west attempted to use regulation and failed, the east breaks wings; the bird still lays golden eggs, but as a puppet on a string. It is just a different approach - but users recognize they are doing business with the CPC and NOT the FANG. Hence the ban on Huawei tech in the 5G networks, and the need to question China tech valuations.

 

The good news is that China remains the 2nd largest economy in the world (depending on the day), and like all economies - it consumes resources that it doesn't have. Invest in China via the boom/bust pressure it puts on commodity markets, and make volatilty your friend.

 

SD

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if you can't beat them, join them: https://www.youtube.com/watch?v=DpkCV2Hd62Y 

 

:)))

 

Seriously thought, I think this is a major opportunity of one in a 10 year kind. I would also agree with Viking, that it is considerably more speculative than investing in similar US companies. But I would argue that a lot of US companies, especially smaller, are more speculative than China big tech companies. 

 

I would answer the question "what causes the fundamental change", that nothing (except maybe for education stocks:)) has changed in big picture in the first place, only valuations, because of this temporary "regulation noise":)

 

 

Edited by UK
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And since question is specifically re CCP, I will repost this chart. Another day read somewhere "No matter how much I disagree with Brussels, I'd sure as rather trust EU over CCP". Now, I live in EU (and am one of the biggest fan on earth of US), but gee, in the last 10 years all EU managed to produce was crisis after crisis: Euro, Brexit, migration, energy policy, etc, while nurtured zero tech champions, now losing EV battery game. China meanwhile went from strength to strength every time and I still should trust EU more? Based on what? Only because it is democracy? Thanks god US has done better and I hope still will do in the future, but only because China's system is different, that does not mean it is necessarily inferior in every way and doomed to fail. It already successfully lasted 50 years. 

 

https://www.nytimes.com/interactive/2018/11/18/world/asia/china-rules.html

 

2021-08-29 17.11.42.jpg

Edited by UK
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I just try to stick to things that come easy to me. And if they arent easy, things that I understand or can handicap. There's like 8,000 public companies out there that dont have anything to do with China so I dont really see why the average person thinks this is their best playground. 

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14 minutes ago, Gregmal said:

I just try to stick to things that come easy to me. And if they arent easy, things that I understand or can handicap. There's like 8,000 public companies out there that dont have anything to do with China so I dont really see why the average person thinks this is their best playground. 

 

To one his own, I agree and also do not do like zillion things:), also did not owned or even looked at China stocks in the last 20 years before this debacle, except one stock in 2010, but it was a wash:)

Edited by UK
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5 hours ago, beerbaron said:

I would say think what is the long term objective of China and how they will want their policies to go with that objective. There is a well documented 50 year plan that aims to put China as the premier economic power by 2048.

 

After you understand that ask yourself if what we hear contradicts the plan or not.

 

BeerBaron 

 

https://www.theatlantic.com/international/archive/2017/05/what-china-wants/528561/

 

If China reaches the first goal— which it is on course to do—the IMF estimates that its economy will be 40 percent larger than that of the U.S. (measured in terms of purchasing power parity). If China meets the second target by 2049, its economy will be triple America's.

 

What does China’s dramatic transformation mean for the United States and the global balance of power? Singapore’s Lee Kuan Yew, who before his death in 2015 was the world’s premier China-watcher, had a pointed answer about China’s stunning trajectory over the past 40 years: “The size of China’s displacement of the world balance is such that the world must find a new balance. It is not possible to pretend that this is just another big player. This is the biggest player in the history of the world.”

 

Will Xi succeed in growing China sufficiently to displace the U.S. as the world’s top economy and most powerful actor in the Western Pacific? Can he make China great again? It is obvious that there are many ways things could go badly wrong, and these extraordinary ambitions engender skepticism among most observers. But, when the question was put to Lee Kuan Yew, he assessed the odds of success as four chances in five. Neither Lee nor I would bet against Xi. As Lee said, China’s “reawakened sense of destiny is an overpowering force.”

 

Yet many Americans are still in denial about what China’s transformation from agrarian backwater to “the biggest player in the history of the world” means for the United States.

 

Edited by UK
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China graduates more engineers every single year than the US has in total. Hard to ignore the R&D capability. But the political sphere makes it un-investable to me. The success of China and the CCP does not necessarily mean the success of individual companies or further the shareholders. 

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No doubt that China's growth and trajectory are extremely impressive. However, as others have point out above, how can you buy stock which is essentially a bundle of legal rights in a country that does not have rule of law or respect individual property rights? Any investment you make in the country is subject to the whims of the CCP. What are the odds that the CCP comes along and nationalizes a company or rewrites the rules resulting in a permanent loss of capital? Not zero. What are the percentage of returns captured by shareholders of Chinese companies resulting from China's economic growth? Lower than US stocks. Personally, I have no ability to estimate these percentages with more certainty than others in the market and am unwilling to take an unknown risk of a permanent loss of capital. Especially when I can invest in other jurisdictions with robust legal systems and shareholder rights where this risk is virtually non-existent. Maybe Li Lu and other investors can properly evaluate and navigate these risks but I can't. Also, to me it seems like China is actively taking steps to prevent US citizens and Westerners generally from benefiting from China's growth by limiting overseas listings and IPOs. Only favoured institutions like Blackrock / Bridgewater that toe the party line get access to Chinese markets. 

 

To capitalize on the China growth opportunity I landed somewhere similar to SD - look for investment opportunities / companies in safer jurisdictions that have things China can't acquire or build at home that will benefit greatly from China's growth thus avoiding any CCP risk.

 

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I agree China is not the same as US and risks related to government are higher. But not sure if it is only black and white, especially re respect to individual property rights, they still have and produces a lot of billionaires, are they not? Also, while investing, usually you still accept bigger or lesser risk. So it is different, but is the risk is really lower if you invest today in Intel instead of Tencent? Or you invest in smaller companies (or even large) and are being screwed by a management (or majority owners) instead of CCP? Is that somehow better? Destruction of value by management in perfectly fine jurisdictions in largest companies is sometimes quite amazing, just look at things like Bayer's acquisition of Monsanto or Bank of America's of Countrywide. And do you remember circumstances under which BAC acquired Countrywide? It was called shotgun wedding if I recall correctly:), was forced by the government and almost killed the company. Was it uninvestable after that? 

 

Also I would like to ask: If Apple is good enough and safe then? Let say only 1/5 of their sales is China related, so no existential threat, but if you take that out while a company trades at like 40x earnings, I think you can go for a permanent loss of capital situation there also. And in a more nuclear scenarios, Apple is dependable on China for like 4/5 or 2/3 of its manufacturing. So is it investable or not? 

 

Also, because it is related to regulatory risks of a very strong and moaty company in a perfect jurisdiction,  I like this example so much, that I will post it perhaps third time:). So forgive me but once again: 

 

"Archie McCardell was named president of the company in 1971. During his tenure, Xerox introduced the Xerox 6500, its first color copier. During McCardell's reign at Xerox, the company announced record revenues, earnings and profits in 1973, 1974, and 1975. John Carrol became a backer, later spreading the company throughout North America.[citation needed] In the mid-1970s, Xerox introduced the "Xerox 9200 Duplicating System". Originally designed to be sold to print shops to increase their productivity, it was twice a fast as the 3600 duplicator at two impressions per second (7200 per hour). It was followed by the 9400, which did auto-duplexing, and then by the 9500, which was which added variable zoom reduction and electronic lightness/darkness control. In a 1975 Super Bowl commercial for the 9200, Xerox debuted an advertising campaign featuring "Brother Dominic", a monk who used the 9200 system to save decades of manual copying. Before it was aired, there was some concern that the commercial would be denounced as blasphemous. However, when the commercial was screened for the Archbishop of New York, he found it amusing and gave it his blessing. Dominic, portrayed by Jack Eagle, became the face of Xerox into the 1980s. Following these years of record profits, in 1975, Xerox resolved an anti-trust suit with the United States Federal Trade Commission (FTC), which at the time was under the direction of Frederic M. Scherer. The Xerox consent decree resulted in the forced licensing of the company's entire patent portfolio, mainly to Japanese competitors. Within four years of the consent decree, Xerox's share of the U.S. copier market dropped from nearly 100% to less than 14%."

 

It was one of those nifty fifty companies, very expensive at that time (like most US tech companies now) and as you can see, it was killed not even by technological disruption.  It was done by a democratic government. How about Xerox shareholders property rights? Are you sure that similar risks today are "virtually non-existent" while investing in some western tech/payment/etc darlings? 

 

Also take for profit education, which is being exterminated now in China, but they were not treated much better in US: 

 

"As for-profit colleges began to falter, for-profit online program managers gained momentum. Under the Obama administration (2009–2017), for-profit colleges received greater scrutiny and negative attention from the U.S. government. State Attorneys General, the media, and scholars also investigated these schools. For-profit school enrollment reached its peak in 2009. Corinthian Colleges and Education Management Corporation (EDMC) faced enrollment declines and major financial trouble in 2014 and 2015. In 2015, Corinthian Colleges filed for bankruptcy. Enrollment at the University of Phoenix chain fell 70% from its peak In 2016, ITT Technical Institute closed, and the US Department of Education stripped ACICS of its accreditation powers. In 2017, the advocacy group the Debt Collective created its own, unofficial "Defense to Repayment App" allowing former students of schools accused of fraud to pursue debt cancellation. In 2017, Harvard Business School professor Clayton Christensen who developed the theory of disruptive innovation, predicted that “50 percent of the 4,000 colleges and universities in the U.S. will be bankrupt in 10 to 15 years.”

 

So what is risk free? I would argue, that even Coca-cola is not, and its shareholders can be robbed by some kind of sugar tax in the future. But i think it is the wrong question, because the right one, as with all investments, is what risk is already priced in.  

 

 

 

 

 

Edited by UK
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4 hours ago, Spooky said:

To capitalize on the China growth opportunity I landed somewhere similar to SD - look for investment opportunities / companies in safer jurisdictions that have things China can't acquire or build at home that will benefit greatly from China's growth thus avoiding any CCP risk.

 

 

It would be very interesting to know what are those companies? Are they commodity companies or something else?

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Oh, thanks for reminding these "10 baggers", though I would argue, that they have fucked themselves up well before government came, of course by wonderfully payed "stewards of capital". I was burned so much times (of course self inflicted, in pursuit of "value", usually deep:), so not any governments fault, sometimes they do what they do) by such situations, that I almost forgot some (or maybe do not want to remember?). A lot of situations with utility companies also, especially in EU, water tariffs were changed over night (to a almost no profit), one was nationalized back in my own country (price was calculated based on maybe book value or something:)), or some onerous regulations was introduced on whole sector. If I was forced to name "risk free" (not only from regulations, but also from disruption) company list today, like I said, am not sure I would even put KO in it, surely not V/MA types, but maybe Nestle, Nike and similar. But all of them today trades at least at 25x forward earnings, most more like at 30-40x.

Edited by UK
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Also, again, I am biggest fan of US (and very greatfull from prospective of my countries geopolitical situation:)), majority of my portfolio is still invested there and I am rooting for its success far in the future. but, despite this all common prosperity scare in China (which is by name a socialist country), have you noticed what is going on in US (EU is far ahead already)?

 

Like: https://www.wsj.com/articles/transforming-america-in-17-days-democrats-spending-bill-entitlements-nancy-pelosi-11631221827?mod=hp_opin_pos_1

 

"Now with merely 50 Democrats in the Senate and a five-member House majority, Democrats are planning to rush through the biggest tax and spending increase in half a century. We’ll do our best to report and dissect the details in the coming days, but here’s a taste from the text that the two House committees deigned to release:

• A universal paid leave mandate administered by Treasury that provides up to 12 weeks of family and medical leave for all workers including those self-employed at up to 85% of their weekly pay. It’s unclear how the new entitlement would interact with existing state paid leave and employer programs. The federal bureaucracy will iron out the complications later.

• A new employer 401(k) mandate—that is, a tax. Employers would be required to automatically enroll their employees in IRAs or 401(k)-type plans or pay an excise tax. Employee 401(k) payroll contributions would be set at 6% and increase to 10%. There are myriad other legal changes on employer-sponsored retirements accounts that would be land mines for businesses.

• The bill creates new civil penalties up to $50,000 per violation for unfair labor practices (ULPs), which would now include misclassifying workers as independent contractors. Business executives and directors could be held personally liable for alleged ULPs. As a gift to the plaintiff bar, employee arbitration agreements would also be effectively banned.

• Medicare would expand to cover dental, vision and hearing benefits. Health and Human Services would be charged with standing up these expansions, including setting provider payment rates. Cost estimates for this and other entitlements have yet to be announced, but they’re likely to be fictitious anyway. One credible estimate is that the Medicare increase alone would cost $360 billion over a decade.

***
There is much more spending to come, and next week come the tax increases that will also be marked up on a day or so notice. It’s important to understand how extraordinary this is. The Democratic bill would fundamentally alter the relationship between government and individual Americans. Entitlements, once created, will be all but impossible to repeal. Even if they start small, they will inexorably expand."

 

Or all these new green regulations in US, but especially in EU? Banning ICE etc  or nuclear power in Germany? Is it not some grand state planing/intervention? And who and how will pay for that? 

 

Or what does such things tells about future: https://www.wsws.org/en/articles/2020/10/23/soci-o23.html

 

 

Edited by UK
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There is more intervention in the EU than there is in the US. Various shades of grey in Asian countries, some of which also have an authoritarian bend. Indonesia and Thailand come to my mind. South America is generally volatile and the government strongly impacts business conditions.

 

Just looking at Brazil - Headlines there makes one skirm ( and equity investors too):

Brazil's Bolsonaro: Only God will remove me from power

https://www.bbc.com/news/world-latin-america-584790

 

Equity risk abound in these countries. Make sure you get paid well when venturing there.

Edited by Spekulatius
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10 hours ago, UK said:

Or you invest in smaller companies (or even large) and are being screwed by a management (or majority owners) instead of CCP?

 

You still have this risk with investing in China. It is an extra layer of risk on top of what I mentioned.

 

10 hours ago, UK said:

Also I would like to ask: If Apple is good enough and safe then? Let say only 1/5 of their sales is China related, so no existential threat, but if you take that out while a company trades at like 40x earnings, I think you can go for a permanent loss of capital situation there also. And in a more nuclear scenarios, Apple is dependable on China for like 4/5 or 2/3 of its manufacturing. So is it investable or not? 

 

This is definitely a big risk factor to consider when investing in Apple and a serious concern. However, if you are an apple shareholder and for some reason China causes difficulties in manufacturing, you still have an ownership right / legal claim on all of Apple's assets which are not located in China - their giant cash pile, their IP, etc. Apple also has the ability to move / diversify it's supply chain in a worst case scenario.

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When the investor buys their stake, he/she selects their relative risk. Apple vs Ten Cent is just the business proposition, then ADD forecast f/x change, PLUS risk of government action (nationalization, regulation, inflation, dictatorship/revolution, etc). A local 30% ROE, produces SQUAT - if the local currency also devalued 30%.

 

The investor HOLDS based on forecast - business &/or environment getting better/worse. In an Asia, or Russia; very good visibility into the 'underground' elements that 'run' the country (language, 'connections', 'fixers', etc). To 'monetize' on the forecast, access/visibility into local/foreign markets, etc. A 'great' investment that CANNOT be easily monetized, is worth SQUAT.

 

Hence, is it better to 'own' the business, or to 'own' the commodities the business either uses? or produces? When there is low visibility, or forecast disruption, it's almost always better to own the commodity - simply because ongoing bribes cannot be paid, if the commodities cannot be sold. Maintaining power, is an expensive business.

 

In a NA; everything is about 'today', and maximizing the 'paper value' of todays ticket - as long as you can promptly liquidate, you don't give a sh1te. Until one day there is suddenly no liquidity, and you make me an offer that I cannot refuse 😀 Just a different way of playing,

 

SD   

Edited by SharperDingaan
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