China

[hillfronter83]

Just came back from my two-week trip to China. It's the first time seeing my family and friends in more than four years. Stayed in a small city near Shanghai and travel around in the region. Here are some observations:

 

• Overall economy is very challenging, although some high end restaurants seem to be doing fine.
• real estate will be doomed for years to come according to a real estate company executive friend. Even rural areas have a lot of high rise apartments (around 30 stories). I suspect these will be very costly to maintain and most Chinese are known for their frugalness. Don't feel good about the value of these building in 20 years. and most people i know already have multiple apartments.
• world class infrastructure everywhere, ie high speed rail, subway, etc. some of those projects were built to increase land value. While they look great, I'm not sure about the economic soundness. They are also very costly to maintain.
• e-commerce is very active, many people do grocery online nowadays.
• It's hard to increase consumption. most wealth is concentrated in people born in 60s, 70s. They grew up frugal and most people don't feel the desire to consume. The biggest spending is on food, but you can only eat 3 meals a day. secondly, the income decease is very real. a few years ago, local government employees were making over RMB300k, now it's about half, sometime lower.
• most people are stressed except the retirees. rich people (some centimillionaires) are worried about their shrinking net worth. and poor people are working 10-hour days to make their mortgage payment.
• although national birth rate are low. people i know are still having kids. but it could be they are local in a small city that is more affordable.
• most of the wealthy people's kids are living/studying in US or Europe.
• some of my friends, who used to drive BMW, Audi, are now driving Chinese made EVs. 

 

[Joseywales]

2 hours ago, hillfronter83 said:

Just came back from my two-week trip to China. It's the first time seeing my family and friends in more than four years. Stayed in a small city near Shanghai and travel around in the region. Here are some observations:

 

• Overall economy is very challenging, although some high end restaurants seem to be doing fine.
• real estate will be doomed for years to come according to a real estate company executive friend. Even rural areas have a lot of high rise apartments (around 30 stories). I suspect these will be very costly to maintain and most Chinese are known for their frugalness. Don't feel good about the value of these building in 20 years. and most people i know already have multiple apartments.
• world class infrastructure everywhere, ie high speed rail, subway, etc. some of those projects were built to increase land value. While they look great, I'm not sure about the economic soundness. They are also very costly to maintain.
• e-commerce is very active, many people do grocery online nowadays.
• It's hard to increase consumption. most wealth is concentrated in people born in 60s, 70s. They grew up frugal and most people don't feel the desire to consume. The biggest spending is on food, but you can only eat 3 meals a day. secondly, the income decease is very real. a few years ago, local government employees were making over RMB300k, now it's about half, sometime lower.
• most people are stressed except the retirees. rich people (some centimillionaires) are worried about their shrinking net worth. and poor people are working 10-hour days to make their mortgage payment.
• although national birth rate are low. people i know are still having kids. but it could be they are local in a small city that is more affordable.
• most of the wealthy people's kids are living/studying in US or Europe.
• some of my friends, who used to drive BMW, Audi, are now driving Chinese made EVs. 

 

Thank you for your insight! Much appreciated  

[james22]

4 hours ago, hillfronter83 said:

 

although national birth rate are low. people i know are still having kids. but it could be they are local in a small city that is more affordable.

 

According to official figures released on Wednesday, Chinese women had fewer than half the births in 2023 than they did in 2016 — the year Beijing finally repealed that slow-rolling disaster known as the One-Child Policy.

 

https://pjmedia.com/vodkapundit/2024/01/17/chinese-women-are-voting-against-communism-with-their-uteri-n4925570

[Ulti]

2 hours ago, Joseywales said:

most people are stressed

Thank you for your personal insight..

I am curious; you did not touch base on local feeling on politics social media heavy handed government officials in the people’s business,etc…. What’s contributing to the stress besides the economy…And I’m curious as to how they feel about the west and US in particular….( regular folks are great gov and gov officials suck.. haha)

[Thrifty3000]

Regarding the China real estate crisis I’ve recently read/heard fun facts along the lines of:

 

- China has approximately 80 million vacant homes, which is MASSIVE relative to the country’s 450 million households.

- building 80 million excess homes is by far the biggest overallocation of resources in modern history.
- Over 90% of the Chinese population already owns one or more homes.

- Only 7% of the population has investments in securities/financial assets.

- 30% of China’s economy has been tied to real estate.

- The vast majority of household wealth is tied up in real estate.

- Due to fear of the consequences of housing price declines, the CCP has instituted price controls on vacant houses.

- Because prices aren’t allowed to decline, retirees and others are unable to sell the properties to fund their retirements, etc.

- When the prices eventually adjust, homes in key areas of China could be worth 70% less. (By comparison the GFC was a nothing burger). 

- Also, because prices are artificially high, hundreds of millions of people don't know how much life savings they have left.

- And, the major state-run banks are loaded up with real estate loans.
- Because of price controls and an imploding economy, a large and growing percentage of the population is increasingly disgruntled.

 

So, that sucks.

 

Edited January 18 by Thrifty3000

[brobro777]

Nikkei makes decades new highs while Hang Seng makes decades new lows

 

I never imagined this but here we are

[james22]

 

[Parsad]

https://finance.yahoo.com/news/china-stock-selloff-worsens-hong-050429499.html

 

Cheers!

[Luca]

[Parsad]

12 minutes ago, Luca said:

 

Opportunity or deflationary/stagnant market?!  Cheers!

 

[Luca]

19 minutes ago, Parsad said:

 

Opportunity or deflationary/stagnant market?!  Cheers!

 

 

Do you need growth for below 10x earnings? 

[forest81]

Thinking of buying a china basket. What do you think??

 

 

Baidu x 9 pe

Baba x 7

JD.Com x 7

Tencent x 15

PDD x 26

 

 

There are some seriously good companies there. Thinking of holding for 10+ years. Only danger for me is political risk/ war risk. 

 

 

[Luca]

56 minutes ago, forest81 said:

Thinking of buying a china basket. What do you think??

 

 

Baidu x 9 pe

Baba x 7

JD.Com x 7

Tencent x 15

PDD x 26

 

 

There are some seriously good companies there. Thinking of holding for 10+ years. Only danger for me is political risk/ war risk. 

 

 

 

I bought at higher prices and still think these companies are very very cheap. BUT uncertainty is as high as it gets with China/West relations, sanctions, possible war, crazy government/shady leadership etc. 

 

IF China makes the recovery and government stays solid+relations with west dont go worst case, these stocks should do super well from here IMO.

Edited January 22 by Luca

[Joseywales]

3 hours ago, forest81 said:

Thinking of buying a china basket. What do you think??

 

 

Baidu x 9 pe

Baba x 7

JD.Com x 7

Tencent x 15

PDD x 26

 

 

There are some seriously good companies there. Thinking of holding for 10+ years. Only danger for me is political risk/ war risk. 

 

 

I think position sizing is key. There is a very real chance it could blow up or stagnate 10+years and you have to remember opportunity cost. I'm choosing to keep my Chinese equities 3%-5% of my total portfolio. 

[Luca]

2 minutes ago, Joseywales said:

I think position sizing is key. There is a very real chance it could blow up or stagnate 10+years and you have to remember opportunity cost. I'm choosing to keep my Chinese equities 3%-5% of my total portfolio. 

Stagnate meaning they blow the 10% of their marketcap in earnings that are coming in every year away with 0 return or let the cash accumulate on the balance sheet and the market starts discounting the cash while they do 0 buybacks or dividends? Wdym with stagnate? 

 

 

Edited January 22 by Luca

[Luca]

Tencent as an example earns 25b every year, in 10 years they will have 350b+ in cash on the balance sheet without doing anything but getting some interest. Current marketcap is 330bish. Historically they earn some 30% CAGR a year on investment cash and 60%+ on cash invested into the core business. EVEN if they can not find ANYTHING, they will do buybacks+dividends as they are doing right now. 

 

The cash they earn every year compared to the marketcap is way more than what nvidia or any other big tech will ever earn over the next 10 years. 

 

Now will they find opportunities for the cash? Will the US block every tech investment globally? Will nobody want to do anything with china and the investment power of the second largest economy? Honestly i don't care if they invest in hippie dippie europe/us or with the saudis and africa as long as these businesses grow. 

 

There is very very very low risk except some imaginary boom world war case that for the sake of humanity hopefully wont happen.

 

Everybody takes their odds but fundamentals have to matter at some point and the market can only stay as delusional as when these high quality business chugg along and the classical conditioning subsides ;D

[Joseywales]

10 minutes ago, Luca said:

Stagnate meaning they blow the 10% of their marketcap in earnings that are coming in every year away with 0 return or let the cash accumulate on the balance sheet and the market starts discounting the cash while they do 0 buybacks or dividends? Wdym with stagnate? 

 

 

I was leaning towards the return on your investment. It's very clear the message set by the CCP and these powerhouse Chinese companies that they do not care about their international shareholders. While I do think that Tencent's management is a step above the rest and these companies will weather the upcoming storm of headwinds it's very much apparent that institutional investors do not want to touch Chinese equities with a 10 foot pole and there's a chance these equities can stay very cheap and undervalued for a very long time. FYI - I own a decent amount of Baba and JD and a few microcaps as far as Chinese equities. 

[Luca]

I would continuing loading the boat here, Xi is not anti investment and anti money, he doesn't like to see low quality real estate speculators that fill their pockets while common man and society suffers. The health of the society and flourishing matters more than IRR of private equity, doesnt mean they will stop developing and going back to an agrarian society. Chose your fighter! 

[Luca]

Frankly my china exposure is high already (25%+) so i might only add again if it gets ridiculous (5x earnings)

[Luca]

3 minutes ago, Joseywales said:

I was leaning towards the return on your investment. It's very clear the message set by the CCP and these powerhouse Chinese companies that they do not care about their international shareholders. While I do think that Tencent's management is a step above the rest and these companies will weather the upcoming storm of headwinds it's very much apparent that institutional investors do not want to touch Chinese equities with a 10 foot pole and there's a chance these equities can stay very cheap and undervalued for a very long time. FYI - I own a decent amount of Baba and JD and a few microcaps as far as Chinese equities. 

I dont even think they "dont care". Regulators just did their job and there are many understandable things happening. But obviously businesses come after the common prosperity so we have to deal with that in asia. 

[ICUMD]

Ultimately, capitalism is the only model that works to bring prosperity. India has now realized it.  China will need to get back to it if they want to resurrect their economy.  Outside this model, there is only 'uncommon prosperity'.

 

China will need to resort to stimulus and open their markets if they want any hope of making economic progress.  Maybe they will take another year or two, but I don't see any way out.  

 

Also, they will need to be more open and friendly to FDI.

 

I doubt they will want to be left behind as it's neighbors rise economically around them.

[Castanza]

44 minutes ago, ICUMD said:

Ultimately, capitalism is the only model that works to bring prosperity. India has now realized it.  China will need to get back to it if they want to resurrect their economy.  Outside this model, there is only 'uncommon prosperity'.

 

China will need to resort to stimulus and open their markets if they want any hope of making economic progress.  Maybe they will take another year or two, but I don't see any way out.  

 

Also, they will need to be more open and friendly to FDI.

 

I doubt they will want to be left behind as it's neighbors rise economically around them.

Although I agree that Capitalism is the way I think you’re a bit short sighted to think China is just going to disappear. China has been around for 3500+ years. The US and other capitalist nations have barely been around for 200 years. The jury is out on how this goes long term for capitalism. I’m seeing a few cracks in the US and to me they seem to be a result of capitalism and growth/success culture at all costs. Short term, so far it does wonders. But if survivability and endurance is your game, there are other models out there that have clearly worked for a long time. I think over the next 100-200 years it will become apparent whether unfettered individual growth/success is a recipe for the long term survival l of a nation. 

[Spekulatius]

7 hours ago, Luca said:

I would continuing loading the boat here, Xi is not anti investment and anti money, he doesn't like to see low quality real estate speculators that fill their pockets while common man and society suffers. The health of the society and flourishing matters more than IRR of private equity, doesnt mean they will stop developing and going back to an agrarian society. Chose your fighter! 

A good part of the real estate boom occurred under his watch.  He has been in power since 2013 after all.

 

RE was a way for the CCP to make their GDP growth numbers and that’s why they kept encouraging RE and now it’s way too big and those investors in RE are likely screwed. Xi now wants to deflate RE slowly as to not implode the economy.

I think Xi is the worst leader  China had since Mao. Anyways, I think the big companies  like Alibaba, Tencent etc can do well despite all this, provided they are going to be left alone by the CCP, but that does not seem quite likely either.

[Gamecock-YT]

these snowball derivatives kind of sound a bit like portfolio insurance from the 80s.

[Thrifty3000]

9 hours ago, Luca said:

Stagnate meaning they blow the 10% of their marketcap in earnings that are coming in every year away with 0 return or let the cash accumulate on the balance sheet and the market starts discounting the cash while they do 0 buybacks or dividends? Wdym with stagnate? 

 

 

 

Don't forget about the big risks of doing business with strapped-for-cash commies:

 

1) Big bro takes the free cash from the company for the good of the many.

2) When there's no free cash left big bro takes control of the company and appoints his buddies to all the paying jobs.

 

Eventually Atlas Shrugs and the capital either fights or flees.