China

[tnp20]

4 hours ago, Spekulatius said:

Anything else out there that is smaller and under the radar , pays massive dividends and is cheap and underfollowed? Those would be more interesting for me.

 

There are lots of these ....but I believe this is the wrong strategy...why opt for the Graham appraoch versus the Munger approach. Remember WB started with Ben Graham approach, met Charlie Munger and adopted the CHarlie Munger approach as that was superior. Monopolies with big moats and long runways. Visa and Mastercard of China and the likes.

 

My view is if you go for China, go for the best positioned companies with reasonable valuation. What if China geopolitics settles down, worse fears of CCP does not pass and China is able to escape the midddle income trap and become a wealthy country by 2035. (Many commentators have said the demographics issues can be countered  for many decades to come).

 

If it all goes wrong - may be a more global issues including USA based companies with heavy China exposure and at minimum global growth would take a big hit.

 

More likely scenario is muddling through with 3-4% slow growth. Its only slow in comparisson to their past but not slow relative to many western countries and by picking fast growing sectors - should be ok.

 

Edited August 25, 2023 by tnp20

[Spekulatius]

the world economy is not a zero sum game and i don't think the G7's are afraid of the BRICS.

4 hours ago, Luca said:

Yes, I started research into Lufax (a thread exists) and Ping An Insurance, the first is more interesting. I'll open a starter into Lufax when HK stock market opens in around 12 hours. And i fully agree with your statement, Big Tech is cheap but there are even better bargains. 

I am leery of financials, especially in the top down economy like China. The large Chinese banks are all state controlled for example. I believe the place to look is at stuff like industrials and perhaps service cos that operate in sectors that are under the radar of both the Chinese regulators as well as Western governments. Stuff like car dealers, industrials, service business and similar business.

 

I was looking at consumer good companies by they seem very expensive in most cases, but there are probably bargains to be found as well.

 

perhaps something that benefits from a secular shift from a capital investment to a consumer oriented economy would be great.

[tnp20]

https://archive.ph/7u13B

 

China’s Consumer Sentiment Starts to Improve, Surveys Show

 

This is with sniper shots. They are st

[sleepydragon]

2 hours ago, tnp20 said:

 

There are lots of these ....but I believe this is the wrong strategy...why opt for the Graham appraoch versus the Munger approach. Remember WB started with Ben Graham approach, met Charlie Munger and adopted the CHarlie Munger approach as that was superior. Monopolies with big moats and long runways. Visa and Mastercard of China and the likes.

 

My view is if you go for China, go for the best positioned companies with reasonable valuation. What if China geopolitics settles down, worse fears of CCP does not pass and China is able to escape the midddle income trap and become a wealthy country by 2035. (Many commentators have said the demographics issues can be countered  for many decades to come).

 

If it all goes wrong - may be a more global issues including USA based companies with heavy China exposure and at minimum global growth would take a big hit.

 

More likely scenario is muddling through with 3-4% slow growth. Its only slow in comparisson to their past but not slow relative to many western countries and by picking fast growing sectors - should be ok.

 

yeah, better go with the bigger company, which you know the cash they generate is real. There was an article about a number of Chinese firms bought billions of Nvidia ‘s chips fearing the sanctions. Those imo are the firms to invest in because they got the money and are investing.

 

[Viking]

7 hours ago, tnp20 said:

 

This is a brilliant comment indeed. Many long time China commentators such as Michael Pettis, Eswar Prasad, George Magnus, Stephen Roach are saying the same thing...China has some really tough decisions on the economy and these are political decisions. They have already started back tracking on a lot of Xi nonsense....but it remains to be seen if they can go the whole hog. XI above all craves stability and control so they can not afford sustained poor economy as that would lead to delegitimizing CCP and riots in the streets.

 

Examples of back tracking...

 

(i) Houses are for living versus now loosening policy to stabilize housing

(ii) Punishing Private business/Entreprenuers that drive most of the innovation and jobs growth and favouring SOE versus now saying Private enterprises are equal to SOE and are vital to China's future.

(iii) Common prosperity crap versus now saying getting rich by being entrepreneur is to be encouraged as that drives growth and employment which benefits society.

(iv) Punishing capital markets versus now encouraging capital markets

 

SO far they are holding firm on major fiscal boost to kick start the consumption part of the economy but that may be coming and they may even mix old unproductive infrastructure spend just to meet the GDP target and a restless population.

 

To me questions and answers are obvious:-

 

(i) What do they need to do and why ?   Avoid instability via economic crisis and malaise (unemployment) to keep CCP in power.

 

(ii) How can they do it ? Various new methods (new tech innovation & Consumption), new methods may take time and be slow but old methods (infrastrcuture ) are effective at boosting GDP and are fast acting but extremely wasteful  - who cares about debt at this point, there is sufficient fiscal space for them to take on more debt (according to all the China followers )- forget local government debt, LGFV debt - central government has space - so just a left pocket, right pocket  thing)

 

(iii) What if economy goes off rails ? Debt is not a problem - its all internal - they can keep pumping money in different areas until it turns ...

 

(iv) What is the right way to do it ?  slow growth, transition, coordination, flexibility and vision

 

(v) What is the best way to play slow growth ?  Be in fast growing sectors within the slow growth economy

 

(vi) Why invest in China at all when you can grow in fast growing sectors in US/West ? Yes by all means its not an either or, its an "and" story....China fast growers are at incredible valuation if you can get past geopolitics.

 

(v) What do I expect out of this ? At a minimum sugar high in about 12-24 months....and may be some long term wins because they are in the right space at the right time....

@tnp20 I think the guest in the podcast nailed it: Xi has destroyed the confidence of foreign investors. He gave the world a glimpse into what the  CCP’s end game is (and it doesn’t include foreigners). He was too early. And now he has lost the ability to take advantage of stupid foreigners (well some of them anyways - Macron still seems keen).

Edited August 26, 2023 by Viking

[Spekulatius]

WSJ article of a pretty comprehensive overview or the economic situation in China:

 

https://www.wsj.com/world/china/china-economy-debt-slowdown-recession-622a3be4?page=1

 

 

 

Another small nail in the coffin - the company I work for has announced this week that a manufacturing site in China is going to be shuttered and the operations are moved to other SE Asian country sites. One more site left to go…

 

Peak China:

Edited August 26, 2023 by Spekulatius

[UK]

https://www.economist.com/leaders/2023/08/24/why-chinas-economy-wont-be-fixed

 

Why does the government keep making mistakes? One reason is that short-term growth is no longer the priority of the Chinese Communist Party (ccp). The signs are that Mr Xi believes China must prepare for sustained economic and, potentially, military conflict with America. Today, therefore, he emphasises China’s pursuit of national greatness, security and resilience. He is willing to make material sacrifices to achieve those goals, and to the extent he wants growth, it must be “high quality”.

[UK]

https://www.reuters.com/technology/china-online-platforms-scrap-lucky-draw-features-amid-gambling-crackdown-2023-08-25/#:~:text=Analysts say online content platforms,wider clampdown on online gambling.

 

"We expect the anti-gambling crackdown... to eliminate 20% to 70% of live streaming revenue, depending on each platform's exposure," Charlie Chai, an analyst at 86Research, said. "It should take two quarters for the impact to be fully absorbed a third in Q2, and the remaining two-thirds in Q3." In their earnings report, Tencent said it was adjusting its live streaming business to become more "music-centric" while Huya said it was working to make the platform atmosphere "healthier". Cloud Music said it was reinforcing its "internal controls mechanism... and adopting stricter monitoring over irregular user activities".

While Chinese authorities say they have ended a years-long, wide-ranging regulatory crackdown on its technology sector, scrutiny has continued as Beijing looks to rectify social and business activities in line with socialist norms.

[UK]

https://www.economist.com/finance-and-economics/2023/08/24/chinas-economy-is-in-desperate-need-of-rescue

 

If Mr Posen is right, China is stuck. If spending is weak because households and entrepreneurs fear the party’s intrusive policymaking, their spirits will not revive until Mr Xi commits to self-restraint—a commitment that he cannot credibly make. Even if the setbacks of the past two years have chastened him, he cannot prove he will not change his mind again. The party lacks the power to limit its own power.

...

If China’s government acts with urgency, it has the tools it requires in order to engineer a recovery in the latter part of this year. But will it use them? Mr Xi lacks the credibility or focus of previous leaders. He now prizes greatness over growth, security over efficiency and resilience over comfort. He wants to fortify the economy, not gratify consumers. These competing priorities may prevent China’s rulers from doing whatever it takes to revive demand. Mr Xi no longer wants growth at all costs. And so the country has not had it. At growing cost. 

[UK]

https://www.economist.com/finance-and-economics/2023/08/22/what-chinas-economic-troubles-mean-for-the-world

 

Commodity exporters are especially exposed to China’s slowdown. The country guzzles almost a fifth of the world’s oil, half of its refined copper, nickel and zinc, and more than three-fifths of its iron ore. China’s property woes will mean that it requires less of such supplies. That will be a knock for countries such as Zambia, where exports of copper and other metals to China amount to 20% of gdp, and Australia, a big supplier of coal and iron (see chart 1). On August 22nd bhp, an Australian firm and the world’s biggest miner, reported its lowest annual profit in three years, and warned that China’s stimulus efforts were not producing changes on the ground.

...

Weak spots in the West include Germany (see chart 2). Faltering demand from China is one reason why the country’s economy has stagnated of late. And some Western firms are exposed through their reliance on the country for revenues. In 2021 the 200 biggest multinationals in America, Europe and Japan made 13% of their sales in China, earning $700bn. Tesla is more exposed still, making around a fifth of its sales in China; Qualcomm, a chipmaker, makes a staggering two-thirds.

...

Provided the slowdown does not escalate into full-blown crisis, the pain will remain concentrated. Sales to China account for only 4-8% of business for all listed firms in America, Europe and Japan. Exports from America, Britain, France and Spain come to 1-2% of their respective outputs. Even in Germany, with an export share of 4%, it would take China collapsing to generate a sizeable hit to its economy.

...

But what if things go badly wrong in China? Under a worst-case scenario, a property meltdown could reverberate through the world’s financial markets. A study by the Bank of England in 2018 found that a “hard landing” in China, where economic growth fell from 7% to -1%, would cause global asset prices to fall and rich-world currencies to rise as investors rushed in the direction of safer assets. Overall, British gdp would drop by 1.2%. Although most Western financial institutions have relatively little exposure to China, there are exceptions, such as hsbc and Standard Chartered, two British banks.

[UK]

https://www.bloomberg.com/news/articles/2023-08-27/china-cuts-tax-on-stock-trading-to-boost-market-confidence?srnd=premium-europe

 

China lowered the stamp duty on stock trades for the first time since 2008, marking a major attempt to restore confidence in the world’s second-largest equity market.

...

The reduction has the potential to trigger a knee-jerk rally in China’s $9.6 trillion equity market, which is highly sensitive to policy shifts that impact market liquidity. The cut is a boon for Chinese brokerages as well as quantitative hedge funds that use rapid-fire trading strategies.

...

They have also guided mutual fund managers to step up purchases of their own equity funds, cut handling fees on stock transactions and encouraged companies to step up share buybacks. China adjusted the stamp duty on stock trading several times in the past. In May 2007, it raised the rate to 0.3% to cool a rally that was drawing more than 300,000 new investors a day. In April 2008, the government slashed the levy to 0.1% to support the market after a plunge, spurring a bull run the following year.

[tnp20]

12 hours ago, UK said:

If China’s government acts with urgency, it has the tools it requires in order to engineer a recovery in the latter part of this year. But will it use them? Mr Xi lacks the credibility or focus of previous leaders. He now prizes greatness over growth, security over efficiency and resilience over comfort. He wants to fortify the economy, not gratify consumers. These competing priorities may prevent China’s rulers from doing whatever it takes to revive demand. Mr Xi no longer wants growth at all costs. And so the country has not had it. At growing cost.

 

Good piece. Xi has scored too many "own goals". Without further economic prosperity CCP credibility and longevity is at stake. Xi is doing a lot of things that are threatening economic prosperity - some things can be easily reversed but other things are irrevocably damaged for long term.

 

I have seen enough economic papers to say all options are on the table....

 

(i) Ideal growth story --> Innovative quality growth , but this will initially be very slow and comes in fits and starts , and for this they badly need confidence in the private sector which Xi has punished badly. It remains to be seen if confidence in the entrepreneur class and private sector comes back and if it comes back, it remains to be seen if they can innovate and produce quality growth. 

 

(ii) Rebalance story --> Their share of export versus domestic consumption is unbalanced. They want to kick start the consumption confidence and recovery but again past Xi policies have resulted in consumers opting for having a huge savings cushion against another one of Xi's stupid policies like zero covid. They dont want cash or consumption coupon handouts as Xi does not believe in welfare state. They would like to see more (i) Services  consumption which tends to employ a lot of people which would help address the unemployment problem and (ii) Spending on the new innovation story so it further drives innovation and quality growth - areas such as EVs, greentech, biotech, AI. They have been handing out lot of tax breaks for EV vehicles and greentech.

 

(iii) Panic Story ---> Growth really slows down and risk of recession/depression, they will ramp up unproductive infrastructure spend because it works and is fast acting but at risk of growing debt whilst producing unproductive assets. There is still some productive infrastructure they can build but is limited ...such as High speed rail lines across the country and urbanizing and developing tier 3 cities, but definitely less housing construction.

 

I firmly believe if Lee Kuan Yew was alive today, he would use "iron in the brain" metaphor today for Xi ..as that would trump "iron in the blood". The dude is dumb and dogmatic making for policy disaster. Ofcourse he is also responsible for the geopolitics mess that resulted in alientating neighbours and also alienating foreigners. If China wants to win at innovation, he needs the worlds best to come to China. This is never going to happen unless USA/West becomes toxic to live in.

 

China's economy will make progress despite Xi. Its stocks will do well despite Xi due to domestic investors (new play toy now housing is no more, and now retirement money is going into it) and CHina's VISA and Master card are a long play that will outlast Xi (who  has another 10 years). But as with all autocrats he may complelely ruin the party for everyone and this will hit global stocks and growth, not just China.

Edited August 27, 2023 by tnp20

[Parsad]

https://finance.yahoo.com/news/china-evergrande-shares-plunge-more-013647508.html

 

Cheers!

[UK]

https://www.investing.com/news/stock-market-news/analysischinese-investors-rush-to-offshore-funds-to-offset-domestic-risks-3163005

[Spekulatius]

Sort of interesting to what extend they are working social media:

https://www.wsj.com/tech/meta-uncovers-largest-ever-chinese-influence-network-4e20be8e?mod=tech_lead_pos1

[tnp20]

 

 

Its a min-panic...$500B infrastructure spend this year (likely somewhat wasteful)....but they need to hit their growth targets....this is a mini-stimulus...should at minimum result in sugar rush into next year....

[sleepydragon]

https://apple.news/A9Qvb8jWuQ9SUbT2VZby8RA

 

This story warmed my heart as a Chinese ADR bag holder, I mean investors

Regardless all the adversity threw at them, Chinese entrepreneur spirit is alive and they will not give up making money! Just look at this old guy Yumihong , the founder/CEO of New Oriental.

 

Edited August 30, 2023 by sleepydragon

[UK]

https://www.bloomberg.com/news/articles/2023-08-30/us-approves-first-arms-sale-for-taiwan-under-program-for-nations#xj4y7vzkg

 

The US for the first time approved the transfer of weapons to Taiwan under a program usually reserved for sovereign states, the State Department said Wednesday.

[Spekulatius]

CCP in charge of capital allocation:

https://www.scmp.com/economy/china-economy/article/3232720/chinas-record-annual-limit-infrastructure-boosting-bonds-be-spent-october

[james22]

When a nation is clearly planning for something, it is best to acknowledge it and make your own plans accordingly. . . .

 

"What I think is they're on their five year [plan], and if you go back three different budgets for them, or four years, over our 20 years in the desert, they focused very clearly on delivering a force capable to take on the United States.

 

And the speed and acceleration that they have shown and they are delivering, right, when you talk about outputs, we all look at the Chinese to understand, truly, where they are, what they're doing.

 

The largest military buildup since World War Two, both in conventional forces and then strategic-nuclear. J-20s are in full-rate production, ships coming off their industrial baseline at numbers that only replicate what we did in the Lehman time and the 600 ship Navy kind of time frame. Again, nuclear build up... is the largest and continuous we've seen.

 

So those are the concerning pieces. And that's what we're walking into."

 

https://cdrsalamander.substack.com/p/the-prcs-buildup-is-not-a-jobs-program

[Luca]

20 minutes ago, james22 said:

When a nation is clearly planning for something, it is best to acknowledge it and make your own plans accordingly. . . .

 

"What I think is they're on their five year [plan], and if you go back three different budgets for them, or four years, over our 20 years in the desert, they focused very clearly on delivering a force capable to take on the United States.

 

And the speed and acceleration that they have shown and they are delivering, right, when you talk about outputs, we all look at the Chinese to understand, truly, where they are, what they're doing.

 

The largest military buildup since World War Two, both in conventional forces and then strategic-nuclear. J-20s are in full-rate production, ships coming off their industrial baseline at numbers that only replicate what we did in the Lehman time and the 600 ship Navy kind of time frame. Again, nuclear build up... is the largest and continuous we've seen.

 

So those are the concerning pieces. And that's what we're walking into."

 

https://cdrsalamander.substack.com/p/the-prcs-buildup-is-not-a-jobs-program

Why would it be a problem for China to build up their army and not for the US? 

Why does the US have the global single right to have all those bases and rockets stationed everywhere and other countries cant have it? 

[Spekulatius]

2 minutes ago, Luca said:

Why would it be a problem for China to build up their army and not for the US? 

Why does the US have the global single right to have all those bases and rockets stationed everywhere and other countries cant have it? 

Because China is aggressive and has virtually attacked all their neighbors post WW2.

 

Tibet 1946 (annexed)

Korea 1950

Taiwan straight 1955/1958

Myanmar 1960

India 1962 (and several times after that)

Russia 1969

Vietnam 1979

 

Most were under Mao but Vietnam 1979 was not. XJP is a neo Maoist, so if you are China's neighbor, you should be concerned. There is also currently a cold war with the Philippines going on, due to China planting concrete Island and then declaring the ocean around it theirs.

[UK]

28 minutes ago, Luca said:

Why would it be a problem for China to build up their army and not for the US? 

Why does the US have the global single right to have all those bases and rockets stationed everywhere and other countries cant have it? 

 

https://edition.cnn.com/2023/08/31/india/india-china-map-protest-intl-hnk/index.html

 

https://www.reuters.com/world/asia-pacific/china-says-countries-should-see-its-national-map-objective-way-2023-08-31/

 

[UK]

Btw re this BRICS alliance: https://www.bloomberg.com/news/articles/2023-08-31/india-china-tensions-threaten-to-leave-modi-empty-handed-at-g-20

[tnp20]

 

 

We are following the right strategy...arming Taiwan, building up alliances that face China that will increase the cost to China.  If you look at China's friends globally, these are mostly low quality (economic and technological) friends and so at best its ambitions will be limited to reginal power play.

 

In terms of regional military capability ---> US + Alliance(Japan, Indian, Korea, Pjilipines, Vietnam)  > China

 

It is true today and will remain so for decades to come. India is openly nuclear. Japan, Taiwan, Korean have both the technical capability to go nuclear and the raw materials (from extracted weapons grace Uranium from Nuclear power plants).

 

Anyway which you analyze this, you wonder why Xi is playing a poor Chess game even if he is thinking 50 years ahead. Long term success of China will depend on "High-tech" innovation ...and probably I should qualify that as "High-tech innvation in strategic areas that matter"  and undoubtedly they will make some progress...but it can not match and will never match the western led order and shared knowledge worker pool. No one wants to go live in China and set up high tech start up.

 

On a positive note....Just anecdotal evidence....I am seeing lots of usually negative media sources on China turn less negative or even outright positive with green shoots....

 

 

Edited August 31, 2023 by tnp20