China

[Viking]

Lots of super interesting things going on in China today as they attempt to deleverage and pivot their economy away from a real estate/infrastructure investment model to one driven more by personal consumption. For years Michael Pettis has been one of my sources in trying to understand China. The 30 minute interview below lays out Michael’s thesis. Bottom line he is thinking GDP growth in China will be coming way down to something closer to 3% moving forward and that this could be too optimistic. 
 

 

[Spekulatius]

yeah, I think Xi is in big trouble. He has to deal with

1) real estate slow motion crash (likely takes of several percent off from GDP growth)

2) zero COVID policy failing with  no end game in sight (also impeding GDP growth and causing civil unrest)

3) failed foreign policy (getting aligned with Putin who seems to be losing a war or at best gets into stalemate) and US hardening stance on Taiwan

4) Fallout from tech crackdown( impeding innovation and causing wealth destruction for the elite)

 

I think there is a bigger risk that Xi get's canned somehow than people think.

[maplevalue]

@Spekulatius I am sympathetic to your view about Xi's vulnerability, but the more I read on it the more I am convinced he is not very vulnerable (many China experts believe his next 5 years a done deal). Xi has essentially purged most of his opposition via anti-corruption campaigns. Plus we are at the beginning of China opening up and he will be able to say "yes it was hard, but I saved millions of lives at the expense of a few percentage points of GDP growth". 

 

Good article below (paywall)

 

Rumours that Xi Jinping is losing his grip on power are greatly exaggerated

https://www.ft.com/content/5e14bfb2-f0a9-4259-9d4c-a1b0ff607560

 

 

[Spekulatius]

3 minutes ago, maplevalue said:

@Spekulatius I am sympathetic to your view about Xi's vulnerability, but the more I read on it the more I am convinced he is not very vulnerable (many China experts believe his next 5 years a done deal). Xi has essentially purged most of his opposition via anti-corruption campaigns. Plus we are at the beginning of China opening up and he will be able to say "yes it was hard, but I saved millions of lives at the expense of a few percentage points of GDP growth". 

 

Good article below (paywall)

 

Rumours that Xi Jinping is losing his grip on power are greatly exaggerated

https://www.ft.com/content/5e14bfb2-f0a9-4259-9d4c-a1b0ff607560

 

 

Yes, he possibly has a strong grip on power. Traditionally, China was run by a party committee (post Mao) but that seems to have changed. That said, it is very difficult to access the vulnerability of a regime from the outside and possibly even from the inside.

[backtothebeach]

8 hours ago, Viking said:

Lots of super interesting things going on in China today as they attempt to deleverage and pivot their economy away from a real estate/infrastructure investment model to one driven more by personal consumption. ...

 

 

Sounds bullish for BABA. Incidentally BABA has stealthily marched up ~50% from its lows.

[Gregmal]

1 hour ago, backtothebeach said:

 

Sounds bullish for BABA. Incidentally BABA has stealthily marched up ~50% from its lows.

It’s hard to get a real picture of some of this because the truth gets censured all over the world to fit the political agendas, however the general rule of thumb is that whatever MSM in NA is shouting, something closer to the opposite is true. Remember how following Russia in February, China was next? China was a pariah and uninvestable? Whoops!

[Gregmal]

American centric media outlets

 

[sleepydragon]

China has its human rights problem, but American have people mass shooting kids while having a gun convention next week near by. They don’t think they have a problem, and nor do many American think we have a problem.

 

But China has changed a big way from the past. Of course younger people are still fooled by propaganda etc, but they are largely intelligent and rational. And Chinese people work damn hard and they are mostly damn smart. Most people in CCP leadership is very smart too, so I don’t completely buy the idea that Xi has unlimited power. The trend of the last 30 years is just too powerful and people will not want to come back. They want a good western like life.

 

[Gregmal]

The Americans...go read the BABA thread or the Russia Ukraine thread, are under the illusion that China is all evil and uninvestable. Meanwhile CCP is taking unprecedented measures to boost financial markets, provide not only stability, but also transparency never seen before. Of course, nothing is perfect and there is warranted skepticism. But never IMO have I seen the Chinese markets and ADRs greenlighted by CCP like we've seen recently. Meanwhile you have the US agencies attacking and aggressively pouring cold water on any positive foreign development, continuously moving the goalposts on what they want from Chinese listed companies, and oh yea, labeling anyone they dont like "oligarchs" and using that as an excuse to steal their assets. Quite the dislocation between narrative and reality. Since the greenlight a few months ago, Chinese stocks have done quite well. 

[maplevalue]

There is probably something to be said for the fact that there has been no post in the BABA thread today, on one of its biggest moves in awhile (+15%). Maybe sentiment is just really bad?

[Gregmal]

Ya the scareds got shook out on fake news back in February and March. Charles Munger included. 

[sleepydragon]

I bought a lot of baba, between 85ish to 120, average cost of $106. Still holding.

 

this is a truely “blood on the street” moment for Chinese ADRs — massive layoffs, Covid lock downs, even suicides of tech startup CEO.  all the founding CEOs (PDD, JD, Baba) are pushed out. 

 

But Baba has about $20ish cash per share and $20ish investment in Ants.(seems Ants is still hiring now and people are posting interview experience on Zhihu. this is interesting, could be IPO is not far). Business ROI is north of 15%.   
 

 

[cubsfan]

^^ I'll be quite happy to see BABA come back. Pain seems to be my name.

[Dave86ch]

16 hours ago, Gregmal said:

The Americans...go read the BABA thread or the Russia Ukraine thread, are under the illusion that China is all evil and uninvestable. Meanwhile CCP is taking unprecedented measures to boost financial markets, provide not only stability, but also transparency never seen before. Of course, nothing is perfect and there is warranted skepticism. But never IMO have I seen the Chinese markets and ADRs greenlighted by CCP like we've seen recently. Meanwhile you have the US agencies attacking and aggressively pouring cold water on any positive foreign development, continuously moving the goalposts on what they want from Chinese listed companies, and oh yea, labeling anyone they dont like "oligarchs" and using that as an excuse to steal their assets. Quite the dislocation between narrative and reality. Since the greenlight a few months ago, Chinese stocks have done quite well. 

In the meantime I keep buying baba shares at a marvellous price.

[Castanza]

https://www.benzinga.com/news/22/06/27713137/xi-jinping-signs-order-directing-chinese-troops-to-take-special-military-operations-abroad?utm_campaign=partner_feed&utm_source=SmartNews&utm_medium=partner_feed&utm_content=site

 

Clickbait but could cause some more waves in the Chinese Equity market

Edited June 15, 2022 by Castanza

[Spekulatius]

I do wonder if China is heading for a meltdown. The real state crisis with boycotts paying mortgages , developers going broke (Evergrande) sort of looks like a meltdown to me.  Zero COVID adds to this disaster. The tech crackdown reduces economic growth. Aligning with Putin. “Belt and road” a monumental failure. The list of planned economic policy failures failures goes on and on. Xi as a leader is a disaster. That’s what happens without checks and balances. Maybe not an outright meltdown, but I would not be surprised if China’ economic growth just matches the US going forward or even turns out to be lower.

 

[Parsad]

2 hours ago, Spekulatius said:

I do wonder if China is heading for a meltdown. The real state crisis with boycotts paying mortgages , developers going broke (Evergrande) sort of looks like a meltdown to me.  Zero COVID adds to this disaster. The tech crackdown reduces economic growth. Aligning with Putin. “Belt and road” a monumental failure. The list of planned economic policy failures failures goes on and on. Xi as a leader is a disaster. That’s what happens without checks and balances. Maybe not an outright meltdown, but I would not be surprised if China’ economic growth just matches the US going forward or even turns out to be lower.

 

 

I think they've had enough time to stretch out their liabilities.  This was all supposed to come to a head shortly after the GFC...never did and they've slowly dealt with much of it.  They'll probably get hit now as we're seeing, but they can likely manage the total exposure at this point better than 5-6 years ago.  Cheers!

[Spekulatius]

The GFC was a very different situation and China was not in the center of it. They had 9.8% GDP growth in 2008. They could growth out of problems easily back then. They also had good demographics back then and now it’s rapidly turning worse (1 child policy effects lead to labor force shrinking)

 

Its different now, their economy is growth I’m much slower and their real estate sector has been growing in leaps and bounds since then, as it is the preferred way to store wealth for the Chinese, which they may find out to be a boondoggle now. Thats why I think some are refusing to pay their mortgage. 

Biggest problem is Xi - he is the worst leader since Mao. The zero COVID policy alone is costing them several percent of GDP growth, but I guess that he and other leaders are now so invested in the idea that they can’t let go of it. Same with the common prosperity theme that’s not working out that great either.

 

While it’s difficult to predict China or a meltdown , I think the chances are much much higher now than they were in 2008.

Edited July 29, 2022 by Spekulatius

[sleepydragon]

If Xi doesn’t get “re-elected “, the market is going to turn around.

so far, it seems be still most likely going to get re-elected.

But nowaday, impo,  a lot more Chinese, maybe most Chinese don’t support him anymore (unlike a few years before when he first came to power and vowed to crack  down corruptions). this could make a difference.. i think there could be a possibility that he’s “re-elected “ but eventually sidelined over time.

 

 

[Spooky]

I agree and hope Xi doesn't get a third term - his sharp pivot towards Marxism and nationalism and away from Deng Xiaoping's reforms is bad for China's economic growth long term and the world. Real estate is a huge part of China's GDP (~30%) and it involves significant amounts of leverage. Average people boycotting their mortgage payments leading to government censorship. Seems like a huge meltdown in the works to me. The narrative that China can handle it no problem seems odd to me and I haven't seen any good evidence to this effect - similar to the GFC we don't know the extent of the contagion to the different banks from this fallout and real estate is a much higher percentage of GDP than it was in the US at the time. Combined with most average citizens' wealth being tied up predominantly in real estate and there is a big problem there. Add on top of that zero covid and like 20% youth unemployment and things could get ugly quick. Also, they have crushed what was a vibrant VC ecosystem and replaced it with central / state directed investments in certain industries. 

 

[Lazarus]

I wouldn't count China out simply because of Xi. In any massive economy, business will find ways to ignore dumb rules. And on the macro side, China has huge geopolitical influence throughout Asia and into the Middle East and Africa. Even if the Belt and Road initiative isn't working yet, it's infrastructure and could still bear fruit. 

 

I think the biggest intangible is the ongoing effect of the single child policy and the strong work ethic. One grandchild among 4 grandparents - huge pressure to succeed. The surplus of males compared to females just fuels competition even more among the men. Combined with a 9-9-6 work ethic, their society is pretty much guaranteed to succeed. I'm happy putting a high % of my investments in FXI for the long term.

[sleepydragon]

I follow some Chinese activist’s YouTube channel and there’s almost daily speculation that Xi has already been sidelined, but I speculate it’s more likely wishing thinkings from these guys.

 

I try to be optimistic. It’s not Xi’s China. People will not easily give back what they’ve gotten. 

[mcliu]

If you follow western media, China has been heading into a meltdown every year for the last 20 years.

[Castanza]

1 hour ago, Lazarus said:

I wouldn't count China out simply because of Xi. In any massive economy, business will find ways to ignore dumb rules. And on the macro side, China has huge geopolitical influence throughout Asia and into the Middle East and Africa. Even if the Belt and Road initiative isn't working yet, it's infrastructure and could still bear fruit. 

 

I think the biggest intangible is the ongoing effect of the single child policy and the strong work ethic. One grandchild among 4 grandparents - huge pressure to succeed. The surplus of males compared to females just fuels competition even more among the men. Combined with a 9-9-6 work ethic, their society is pretty much guaranteed to succeed. I'm happy putting a high % of my investments in FXI for the long term.

 

9-9-6 = guarantee to succeed as a society? That's a bold statement. Historically being overworked and having no time for social life is a guarantee for failure. Why would China be any different. That type of environment just sows dissent, anger, jealousy and ultimately corruption as people look for ways to climb the ladder and beat the grind. Humans are humans.

[crs223]

I might just have "grump old man syndrome", but:

 

• US: students focus on race/inequality/mouthing_off/no_homework.  China: math/engineering/beatings
• US: Glued to tik-tok 7 hours per day.  China: working 9-9-6
• US: Theft, drugs, decriminalized.  China: executions galore
• US: guilty are let free.  China: innocent are punished
• US: companies regulated by lobbyists.  China: companies regulated by party
• US: propaganda says opposite political party is the enemy.  China: propaganda says americans are the enemy

 

... we'll see how things go after ~20 years... hopefully US is doing the right thing... for our kids' sake.

 

PS: never been to China... so I'm just imagining what it's like over there.