China

[tnp20]

3 hours ago, Spekulatius said:

This seems to be a classical case where state intervention needs to happen to break a gridlock. Beyond that, a more productive use of capital would be to move away from housing and perhaps infrastructure (which relates to new home builds) to more consumption based purposes. This also reduces Chinas dependency on manufacturing and exports.

The Only Five Paths China’s Economy Can Follow

 

Any economy broadly speaking has only three sources of demand that can drive growth: consumption, investment, and trade surpluses. For that reason, there are basically five paths that China’s economy could take going forward.

1. China can stay on its current path and keep letting large amounts of nonproductive investment continue driving the country’s debt burden up indefinitely
2. China can reduce the large amount of nonproductive investment on which it relies to drive growth and replace it with productive investment in forms like new technology
3. China can reduce the large amount of nonproductive investment on which it relies to drive growth and replace it with rising consumption
4. China can reduce the large amount of nonproductive investment on which it relies to drive growth and replace it with a growing trade surplus
5. China can reduce the large amount of nonproductive investment on which it relies to drive growth and replace it with nothing, in which case growth would necessarily slow sharply

These are the same five paths, by the way, faced by every other country that has followed the high savings, high investment model. Each of these paths creates its own systemic difficulties and each, except for the first, implies substantial changes in economic institutions that, inevitably, must be associated with substantial changes in political institutions. This may be why in the end every previous country followed the last of the five paths.

 

https://carnegieendowment.org/chinafinancialmarkets/87007

 

This is a long piece from Dr. Pettis from last year but super insightful....Only paths 2 and 3 are tenable long term...they will still do path 1 but less and less so over time to ensure they hit their GDP targets and to keep the economy on an even keel whilst they transition to path 2 and 3.

 

The issue is that even at 3-4% overall GDP growth long term...there will be companies in AI/Cloud/EV/Green Tech space  that will growh exponentially as this is all new area....the risk being power structures and Xi.

 

 

 

 

Edited August 22, 2023 by tnp20

[UK]

7 hours ago, Luca said:

 Xi is not an idiot that doesnt understand markets and capitalism and basically wants to clone Mao now.

 

https://www.wsj.com/articles/xi-jinping-putin-china-russia-relations-11671030896

 

“I have a similar personality to yours,” Mr. Xi told Mr. Putin during his visit to Moscow.

 

https://www.nytimes.com/2023/08/15/opinion/china-russia-dictators-xi-putin.html

 

Aging dictators have less time to reshape the world — and more memories of being obeyed at home and dissed abroad for their conduct. They become increasingly repressive and aggressive as power goes to their heads. Surrounded by sycophants, they make disastrous decisions again and again. They start pondering their legacies and wondering why they haven’t received the global respect they think they deserve or achieved the glory that would etch their names among history’s greats. They may decide that they don’t want to go down as a merely transitional figure. It’s a combustible combination: an autocrat who is overconfident and aggrieved and in a hurry.

[Ulti]

"China’s total trade with Russia in the first seven months of this year jumped 36% from the same period a year earlier, to $134 billion, putting Moscow just behind Australia and Taiwan on the list of China’s biggest trading partners, according to trade data released last week"

 

https://www.wsj.com/world/china/booming-china-russia-trade-sends-trench-digging-machines-to-ukraines-front-lines-85f5b5ff

[Luca]

 

[hillfronter83]

53 minutes ago, Luca said:

 

As long as those slogans are still on such landmark in Beijing, nothing fundamentally changed for CCP.

[Luca]

50 minutes ago, hillfronter83 said:

As long as those slogans are still on such landmark in Beijing, nothing fundamentally changed for CCP.

What do you mean with "nothing changed"?

[james22]

For decades, China powered its economy by investing in factories, skyscrapers and roads. The model sparked an extraordinary period of growth that lifted China out of poverty and turned it into a global giant whose export prowess washed across the globe.

 

Now the model is broken.

 

What worked when China was playing catch-up makes less sense now that the country is drowning in debt and running out of things to build. . . .

 

The most obvious solution, economists say, would be for China to shift toward promoting consumer spending and service industries, which would help create a more balanced economy that more resembles those of the U.S. and Western Europe. . . .

 

Instead, guided by a desire to strengthen political control, Xi’s leadership has doubled down on state intervention to make China an even bigger industrial power, strong in government-favored industries such as semiconductors, EVs and AI.

 

https://archive.ph/HES9y#selection-639.0-653.36

 

With the old model reaching its end, it would make sense for China to pursue another phase of liberalization, evolving toward a freer economy with a focus on consumer spending and service industries. But that clashes with President Xi Jinping's vision. Instead, the government is scaling up another round of industrial policy focused on semiconductors, artificial intelligence, and direct government spending on cultural items such as sporting events.

 

"The leadership also worries that empowering individuals to make more decisions over how they spend their money could undermine state authority, without generating the kind of growth Beijing desires," the Journal reports.

 

That line does a pretty great job of summing up what's at stake in China. There's no doubt that governmental stimulus spending can drive economic growth higher over the short term, but the bill eventually comes due in the form of higher debt and wasted resources. Sustainable, long-term economic growth doesn't come from officials issuing edicts. It comes from the individuals' power to pursue their own needs and desires in the marketplace—even if some of those desires aren't aligned with what the government wants.

 

https://reason.com/2023/08/21/chinas-industrial-policy-is-failing-will-american-politicians-take-notice/

 

 

[Luca]

7 minutes ago, james22 said:

For decades, China powered its economy by investing in factories, skyscrapers and roads. The model sparked an extraordinary period of growth that lifted China out of poverty and turned it into a global giant whose export prowess washed across the globe.

 

Now the model is broken.

 

What worked when China was playing catch-up makes less sense now that the country is drowning in debt and running out of things to build. . . .

 

The most obvious solution, economists say, would be for China to shift toward promoting consumer spending and service industries, which would help create a more balanced economy that more resembles those of the U.S. and Western Europe. . . .

 

Instead, guided by a desire to strengthen political control, Xi’s leadership has doubled down on state intervention to make China an even bigger industrial power, strong in government-favored industries such as semiconductors, EVs and AI.

 

https://archive.ph/HES9y#selection-639.0-653.36

 

With the old model reaching its end, it would make sense for China to pursue another phase of liberalization, evolving toward a freer economy with a focus on consumer spending and service industries. But that clashes with President Xi Jinping's vision. Instead, the government is scaling up another round of industrial policy focused on semiconductors, artificial intelligence, and direct government spending on cultural items such as sporting events.

 

"The leadership also worries that empowering individuals to make more decisions over how they spend their money could undermine state authority, without generating the kind of growth Beijing desires," the Journal reports.

 

That line does a pretty great job of summing up what's at stake in China. There's no doubt that governmental stimulus spending can drive economic growth higher over the short term, but the bill eventually comes due in the form of higher debt and wasted resources. Sustainable, long-term economic growth doesn't come from officials issuing edicts. It comes from the individuals' power to pursue their own needs and desires in the marketplace—even if some of those desires aren't aligned with what the government wants.

 

https://reason.com/2023/08/21/chinas-industrial-policy-is-failing-will-american-politicians-take-notice/

 

 

@james22  Do you own or have you owned any shares in chinese companies or companies with significant stakes in china?

Edited August 22, 2023 by Luca

[james22]

14 minutes ago, Luca said:

@james22  Do you own or have you owned any shares in chinese companies or companies with significant stakes in china?

 

Only Apple exposure via BRK and VITAX. Not significant enough to hurt.

[hillfronter83]

16 hours ago, Luca said:

What do you mean with "nothing changed"?

In the picture is the entrance to the Zhongnanhai, where high Chinese officials live and work. It's not an accident that the slogans on the wall are from culture revolution era (Long live CCP! Chairman Mao's thoughts are invincible!). CCP is the same party as decades ago. The main goal is and always will be to stay in power. So the "reform" and "regulations" are all means for achieving such goal.

[Luca]

2 hours ago, hillfronter83 said:

 CCP is the same party as decades ago. The main goal is and always will be to stay in power. So the "reform" and "regulations" are all means for achieving such goal.

Literally true for western politicians too

[Spekulatius]

1 hour ago, Luca said:

20 hours ago, Luca said:

@james22  Do you own or have you owned any shares in chinese companies or companies with significant stakes in china?

Literally true for western politicians too

@Luca what is your exposure to Chinese stocks? Also how do you risk manage it - or in other words what would you change your mind and made you sell?

[hillfronter83]

1 hour ago, Luca said:

Literally true for western politicians too

Name me a western political party that has similar influence on AMZN as CCP on BABA.

[james22]

6 minutes ago, hillfronter83 said:

Name me a western political party that has similar influence on AMZN as CCP on BABA.

 

You don't remember when Bezos was disappeared?

[Luca]

59 minutes ago, hillfronter83 said:

Name me a western political party that has similar influence on AMZN as CCP on BABA.

Because the US has a sleepy government that just doesnt really care and can be easily bought!

[Luca]

1 hour ago, Spekulatius said:

@Luca what is your exposure to Chinese stocks? Also how do you risk manage it - or in other words what would you change your mind and made you sell?

Around 15-20% is in China now and regarding risk, i think its way overblown and i am willing to bet a part of the PF. 

 

So far i have not seen any fundamental problems with chinas trajectory besides perhaps the slowing birthrate that is my most significant worry. I would change my mind if they actually privatize many big companies with no regard for shareholders just for the sake of privatization, a real shift away from privately owned enterprises. The tutoring companies interefered with education etc so i have an understanding for that move. But everything i hear from china i think is temporary and the long term outlook remains with growth and innovation.

[Luca]

My base case is that economic problems will sort themselves over time (3-5 years), GDP growth accelerates as well by then, the US and West realizes that they cant deal without china in economic questions, get anything done regarding the climate crisis without them etc, need their markets and personell, factories etc. 

 

China will continue growing their country, todays completely disregarded valuations will get back to pre october 2022, the good strong businesses will continue to flourish and we will outperform the market by miles due to multiple expansion+ faster growing economy.

 

I also think birth rates will reaccelerate, maybe not above 2.1 but comparable to western standards. 

Edited August 23, 2023 by Luca

[Spekulatius]

32 minutes ago, Luca said:

My base case is that economic problems will sort themselves over time (3-5 years), GDP growth accelerates as well by then, the US and West realizes that they cant deal without china in economic questions, get anything done regarding the climate crisis without them etc, need their markets and personell, factories etc. 

 

China will continue growing their country, todays completely disregarded valuations will get back to pre october 2022, the good strong businesses will continue to flourish and we will outperform the market by miles due to multiple expansion+ faster growing economy.

 

I also think birth rates will reaccelerate, maybe not above 2.1 but comparable to western standards. 

Why do think birth rates will accelerate? Making this happen is not small feat and the youth unemployment suggests it will get worse near term.

 

Anyways, here is a good podcast on that matter:

https://www.bloomberg.com/news/articles/2023-08-21/the-deep-problems-underlying-china-s-economy?srnd=oddlots#xj4y7vzkg

 

The follow mentions 4 d's that impact the Chinese economy - demand, debt, demographics and decoupling.

Another interesting quote - The Chinese party thinks they are in charge of capital allocation for the Chinese economy.

 

So, no stimy checks, we build more infrastructure because they serve as monuments for the CCP as well.

 

Edited August 23, 2023 by Spekulatius

[Luca]

13 minutes ago, Spekulatius said:

Why do think birth rates will accelerate? Making this happen is not small feat and the youth unemployment suggests it will get worse near term.

Because they are in the midst of economic problems and changing tides, They were at 1.7 in 2016. I doubt it stays this static and we have not seen significant government incentives in that regard yet. 

13 minutes ago, Spekulatius said:

 

Anyways, here is a good podcast on that matter:

https://www.bloomberg.com/news/articles/2023-08-21/the-deep-problems-underlying-china-s-economy?srnd=oddlots#xj4y7vzkg

 

The follow mentions 4 d's that impact the Chinese economy - demand, debt, demographics and decoupling.

 

And they are already tackling many of these sectors, as we have seen with recent crackdowns. 

13 minutes ago, Spekulatius said:

 

 

Another interesting quote - The Chinese party thinks they are in charge of capital allocation for the Chinese economy.

As if some outside spectator can make such a statement! Absolutely not how reality looks like, and I doubt very much that the CCP thinks they solely are in charge of capital allocation. 

 

13 minutes ago, Spekulatius said:

So, no stimy checks, we build more infrastructure because they serve as monuments for the CCP as well.

We will see if that statement turns out to be true. 

[Luca]

And it can be seen by this thread how hated and disregarded china is. Its a stinking fish in the corner that everybody spits on. If id look somewhere for businesses to buy shares in id look in china! 

 

How much riskier is it to buy these 25x earnings+ flyers in the US that dont grow much compared to decently managed cheap bargains in china? Id very much prefer the latter. Stock based compensation considered alphabet trades at close to 40x earnings, 2.5% yield. 

 

Who buys this and expect meaningful performance over 5-10 years. The terminal value multiple has to be so high to get to some kind of market outperformance. And then what about the china risk? The taiwan risk? 

 

If you seriously think china will shake things up with their military, owning any larger US big market cap would be out of the picture too, the whole car supply chain, the growth in china priced in. 

 

It doesnt make any sense!

[Luca]

And for the Berkshire Shareholders too, 177b of value in the apple stake. More than a fifth of revenues coming from china, including taiwan even more. 1/3 of the growth coming from china in 2021 for apple revenue. China risk? 

 

What about paying 30x earnings for LVMH? If china risk is real id sell that too if i were honest with myself. the CCP already cracked down on some influencers that promote luxury status races.

 

The world is heavily connected, decoupling is not possible and makes some good headlines and click volume. 

[Luca]

From everything i read about china the last years, the hours over hours i consumed, its unthinkable to me that china will be russia 2.0 or that they will attack taiwan and ruin that beautiful island. I doubt anybody wants to destroy entire generations with another war BUT you never know and you certainly cant hedge with US largecaps! 

Edited August 23, 2023 by Luca

[cubsfan]

28 minutes ago, Luca said:

From everything i read about china the last years, the hours over hours i consumed, its unthinkable to me that china will be russia 2.0 or that they will attack taiwan and ruin that beautiful island. I doubt anybody wants to destroy entire generations with another war BUT you never know and you certainly cant hedge with US largecaps! 

You have your own opinion, and that’s ok.

 

To say it’s unthinkable that China will invade Taiwan is pretty darn extreme, because their actions over the last year or so could not make any clearer.

 

China is clearly not a good neighbor- and once Taiwan, then how is South Korea going to feel surrounded by China, N Korea and Russia??

 

There is huge political risk with Xi in charge and a extremely senile & weak US President that is completely compromised by China.

[Luca]

6 minutes ago, cubsfan said:

You have your own opinion, and that’s ok.

 

To say it’s unthinkable that China will invade Taiwan is pretty darn extreme, because their actions over the last year or so could not make any clearer.

 

China is clearly not a good neighbor- and once Taiwan, then how is South Korea going to feel surrounded by China, N Korea and Russia??

 

There is huge political risk with Xi in charge and a extremely senile & weak US President that is completely compromised by China.

These Tension with Taiwan have been here since the KMT dropped over to Taiwan so 70 years of this, previously also with some bombin. Munger said it himself, the Invasion is off the table for a long time. 

 

If you have a good stomach and can look forward over the next few years i think there is a lot of money to be made

Edited August 23, 2023 by Luca

[hillfronter83]

3 hours ago, Luca said:

From everything i read about china the last years, the hours over hours i consumed, its unthinkable to me that china will be russia 2.0 or that they will attack taiwan and ruin that beautiful island. I doubt anybody wants to destroy entire generations with another war BUT you never know and you certainly cant hedge with US largecaps! 

"Too young, too simple. Sometime naive!"