China

[Parsad]

5 hours ago, Hektor said:

The situation sounds to me more like the Fannie/Freddie saga in the US.

 

Yes, exactly...very similar.  Cheers!

[Parsad]

2 hours ago, blakehampton said:

I want to start by saying that I'm not an advocate for investment in China. I followed Munger into BABA and then proceeded to slowly bleed to death until I decided that China was a no-go, especially when I thought about the structure of ADRs.

 

However, I don't see anything wrong with this particular situation, I believe bondholders should be punished. They are essentially financing a company that built property developments on down payments without ever finishing them. The bottom line is the customers who were sold a false promise are higher up on the claim ladder than some foreign bond owners.

 

Sure.  Bond holders would naturally take a cut after stock holders are wiped out and there isn't enough in assets.  But in this case, there is and bond holders who naturally would be the owners of the remaining assets are also being wiped out.  That's not right.  That wouldn't happen in virtually every other Western economy or for that matter most developed economies.  Cheers!

[crs223]

4 minutes ago, Parsad said:

But in this case, there is and bond holders who naturally would be the owners of the remaining assets are also being wiped out

 

How “remaining assets” were there?  Who received them instead?

[Parsad]

6 minutes ago, crs223 said:

 

How “remaining assets” were there?  Who received them instead?

 

There were $260B in assets on the books...are you suggesting the real estate portfolio was completely wiped out?  That $260B in real estate holdings in China are completely worthless?

 

If so, they've got far bigger problems than I even imagined!  Cheers!

[crs223]

14 hours ago, formthirteen said:

I will definitely assume 99% of profits from BABA will not reach foreign investors

 

According to yahoo finance, BABA is paying out 18% of earnings as a dividend (1/5.44)

[crs223]

27 minutes ago, Parsad said:

 

There were $260B in assets on the books...are you suggesting the real estate portfolio was completely wiped out?  That $260B in real estate holdings in China are completely worthless?

 

Someone on this thread said that leftover assets (after liquidation) is not zero and is/will be stolen from bond holders. I would like to educate myself so i can make the same claim.  Can someone explain (or link to) the theft?

[ICUMD]

Perhaps a good part of that $260 B in real estate is in unfinished homes. Seems like Evergrande faced a liquidity crisis. Not sure the partially finished homes in ghost towns have any residual value.

 

These ghost towns have likely been deteriorating over years, likely becoming negative equity (liabilities) so to speak.

 

I don't think money was intentionally stolen from bond holders and risk getting black listed on the bond market permanently.

[schin]

Is this the "Big Short 2.0"? China edition?

 

Goldman Sachs will somehow make money on this... LOL.

[Luca]

 

https://www.cnbc.com/video/2024/02/06/msci-china-is-priced-like-an-entire-soe-goldman-sachs.html

MSCI China is priced like ‘an entire state-owned enterprise’: Goldman Sachs

 

https://www.cnbc.com/2024/01/14/goldman-sachs-picks-china-stocks-even-if-japans-lost-decades-repeat.html

Goldman Sachs says these China stocks can win even if there’s a repeat of Japan’s lost decades

Edited February 10 by Luca

[Luca]

https://www.scmp.com/news/china/diplomacy/article/3251590/eus-plans-tougher-china-stance-risk-coming-rails-splits-emerge-multiple-issues?module=top_story&pgtype=homepage

[juno323]

The challenge is that there’s no real way of pricing the political implications especially if things so south.

 

There’s a range of possible outcomes for investors, and using history as a guide, the downside scenarios are pretty dire.

 

The allure of “cheap valuations” is what attracts many investors to Asia.. but as someone whose lived here and seen the same story play out again and again, I would be more cautious.

[Spekulatius]

Mobius starts to like China:

 

[Spekulatius]

lol:

 

[Hektor]

A Taylor Swift tour of China might spark its economy

 

https://www.bloomberg.com/news/articles/2024-02-10/taylor-swift-wows-chinese-women-tired-of-xi-s-conservative-era

 

Taylor Swift Wows Chinese Women Tired of Xi’s Conservative Era

[Hektor]

53 minutes ago, Spekulatius said:

lol:

 

Yeah, this will be interesting 

[Spekulatius]

10 minutes ago, Hektor said:

A Taylor Swift tour of China might spark its economy

 

https://www.bloomberg.com/news/articles/2024-02-10/taylor-swift-wows-chinese-women-tired-of-xi-s-conservative-era

 

Taylor Swift Wows Chinese Women Tired of Xi’s Conservative Era

The Chinese economy just need some stimulus - like strippers buying the empty homes on credit. This isn’t exactly a hard problem to solve.

[Hektor]

2 hours ago, Spekulatius said:

The Chinese economy just need some stimulus - like strippers buying the empty homes on credit. This isn’t exactly a hard problem to solve.

[Hektor]

Interesting article from Fortune. Seems like China will do well. Not so sure about non-Chinese companies or investors doing business in China.

 

https://fortune.com/2024/02/02/china-us-geopolitical-tensions-business-economic-rivalry-supply-chains/
 

A snippet from the article:

 

What is a U.S. company’s best strategy in today’s China? In the near term, the answer depends on its industry and its business relationships.

 

The future looks bright in industries that aren’t technologically sensitive. With China still welcoming many U.S. consumer goods and services, McDonald’s recently announced plans to add thousands more restaurants. “We’re incredibly bullish on the opportunity,” CEO Chris Kempczinski tells Fortune. “There’s no reason China couldn’t be our largest market.” Like other U.S. companies, McDonald’s set up its China operation as a freestanding entity that pays dividends to the parent; McDonald’s owns 48% and state-owned China International Trust Investment Corp. owns 52%. 

 

U.S. financial services companies have performed well in China because they achieve efficiencies by being global. Chinese finance companies, in contrast, have a poor record outside China; for example, few Westerners know of ICBC (Industrial and Commercial Bank of China) even though it’s the world’s largest bank by revenue. But last December the CCP published an article stating that the finance sector will be expected to follow Marxist principles. In practice, U.S. firms may now struggle to invest Chinese clients’ funds in U.S.-based assets.

 

Consulting firms face an even dicier future, as the Bain and Mintz raids underscore. Recent laws broadly regulating how companies can possess data or move it across borders are especially restrictive for consulting firms, since their business is gathering, analyzing, and communicating data.

 

Facing the toughest futures are companies making products that China wants to produce on its own. As an executive with decades of China experience notes, “If you are anywhere near a product that has been put under export controls by the U.S. government”—sectors include semiconductors, AI, robotics, biotech, and more—“you know the Chinese government is doing anything it can to support your Chinese replacement.” Other high-priority technologies for China include pharmaceuticals, aerospace, electronics, and renewable energy. Going against Chinese competitors in any of them will be a long, hard slog.

 

[formthirteen]

Here's an article I read yesterday by Peter Thiel from 2008:

The Optimistic Thought Experiment: In the long run, there are no good bets against globalization

https://www.hoover.org/research/optimistic-thought-experiment

 

He coherently rambles — on a much higher level than both Putin and certainly Paycom's CEO — about philosophy, history, and globalization. He was correct about China and still is IMO:

 

Quote

To the extent that China involves a leveraged play on globalization, should one therefore simply invest in the Chinese stock market? In our optimistic thought experiment, one might expect China to outperform the rest of the world in every good scenario.

 

If there is a catastrophic approximation embedded in this analysis, then it consists of the conflation between China as a real economy and “China” as a financial instrument. To say the least, there are many eerie parallels between the Chinese stock market of early 2007 and the Nasdaq of early 2000: an abstract story of long-term, exponential growth; rampant speculation; and unprofitable or overvalued companies.

 

One intermediate possibility is that the China of 2014 will be like the internet of 2007 — much larger, but with winners very different from the ones that investors today expect. The largest New Economy business is Google, a company that scarcely registered in early 2000. Might it also turn out that the greatest Chinese companies of 2014 will be concerns that are private and tightly controlled businesses today, rather than the high-profile and money-losing companies that have been floated by the Chinese state?

 

At the very least, outsiders need to understand that China is controlled for the benefit of insiders. The insiders know when to sell, and so one would expect the businesses that have been made available to the outside world systematically to underperform those ventures still controlled by card-carrying members of the Chinese Communist Party. “China” will underperform China, and a “China” bubble exists to the extent that investors underestimate the degree of this underperformance.²⁸

 

This limitation also may be framed in terms of globalization. In important respects, “China” as a financial economy is sustained by the absence of globalization — in particular, by the enormous amounts of capital trapped within China’s borders that must either suffer slow death from inflation (now running higher than Chinese bank deposit rates) or brave the acute sense of vertigo of the elevated stock market. Because the free convertibility of the renminbi would dampen equity speculation, a long “China” position is not a forecast that financial globalization will succeed, but rather a bet that its internal contradictions will persist.

 

The starting valuation of ”China” was similar to the ”Magnificent 7”. There is no longer a bubble in China but ”the internal contradictions will persist” and the ventures are still ”controlled by card-carrying members of the CCP”:

 

Quote

no emerging market had ever reached a p/e of 62, as China’s Shanghai a Shares index did in 2007

 

Thiel also mentions Berkshire Hathaway and that Warren was long technology and globalization already in 2007 (but not China?):

 

Quote

The reverse version of this sort of investment would involve the writing of insurance and reinsurance policies for catastrophic global risk. In any world where investors survive, the issuers of these policies are likely to retain a significant portion of the premium — regardless of whether or not the risks were priced correctly ex ante. In this context, it is striking that Warren Buffett, often described as the greatest investor of all time, has shifted the Berkshire Hathaway portfolio from “value” investments (no internet, no growth, often just businesses with stable cash flows) to the global insurance and reinsurance industries (perhaps one of the purest bets on the optimistic thought experiment).²⁶

 

Quote

 

Despite all this, the world may yet resume the globalist path. The narrative of the past four centuries has not been one of continuous progress, but strewn beneath the stories of cupidity and strife there lies the story of the powerful impulse toward globalization and of the transformational effects of technology. In this context, a near-term backlash against globalization should not be confused with the end of the world, though a wholesale rollback could represent the ultimate catastrophe.

 

For the policymaker as for the investor, the challenge is to find a way between the Scylla of outdated wisdom and the Charybdis of nihilistic cleverness. The agon between globalization and its alternative will be close — at least in the sense that individual choices will prove to be of decisive significance. In this, we are opposed to the reigning faith in efficient markets.  Unlike the faith in efficient markets, however, ours is a faith that seemingly still cannot be named.

 

 

I guess I understand the history and forces behind globalization better after reading Peter Thiel's ramblings:

 

Quote

 

One can begin with the usual bromides and banalities. “Globalization” means a breaking down of barriers between nations; an increase in travel and knowledge about other countries; an increase of trade and competition among and between the peoples of the world, to the point where there is a more or less level playing field in the entire world; and the death of all cultures, in the sense of robust systems that exclude part of humanity. On the level of economics, it means a global marketplace; and on the level of politics, it means the ascension of transnational elites and organizations, at the expense of all localized countries and governments.

 

Even these preliminary observations remind one that globalization remains far from complete. Massive barriers to trade remain. The nation-state has not withered away. On the crudest of economic measures — say, the difference between the income of a car factory worker in Detroit and in Shenzhen — the gulf between the present and a truly global future remains vast. And on the level of the un, the wto, or Echelon, political unity remains more an aspiration than a reality.

 

 

 

Quote

 

The idea of globalization is not new. It is coeval with the modern West. Starting in the seventeenth century, the dawn of the modern era, the global state or market has become the sine qua non for this-worldly peace and security.

This already is implicit in the writings of Thomas Hobbes, the definitive political philosopher of modernity. For Hobbes, the natural state must be replaced by an artificial or virtual world over which humans have full mastery and control. The telos is replaced by the fear of the end, or the fear of death. ⁷ And so the classical virtues, such as courage, magnanimity, or wisdom, give way to peaceableness as the greatest good. In the state of nature, the war of all against all prevails; but under the artificial human world of the social contract, humans will become citizens by giving a monopoly on violence to the figure of Leviathan, a powerful monster that lives at sea. To make explicit what is implicit, Leviathan cannot be merely the master of a given nation or kingdom, since then the state of nature would still prevail amongst nations and kingdoms. For Hobbes ’ City of Man to be built, Leviathan must rule all nations and kingdoms and truly be the prince of this world. He is the “mortal god” created by the mind of man.

 

The ideas of Hobbes were elaborated and developed by John Locke, the philosopher of the American founding, and by Adam Smith, whose Wealth of Nations founded the modern science of economics. Locke and Smith sought to construct an ever greater Leviathan, in which systems of checks and balances in the sphere of politics, or global trade and commerce in the sphere of economics, would rule the world.

 

 

Quote

¹⁹ If one reduces “globalization” to the elimination of all barriers, then the most literal interpretation of “globalization” would entail the conquest of outer space. The boom of the1950s and 1960s centered on “the final frontier” and tapped into the imaginary worlds of science fiction. The space boom returned to earth in the 1970s, as disappointed investors and governments realized that almost nothing of value was to be found in the limitless void — or at least nothing within easy reach.

 

[formthirteen]

Long China vs long ”China”:

 

[formthirteen]

Things have changed since 2008: the Chinese stock market P/E is no longer over 62. Here's an interview with Peter Thiel from Nov, 2022:

https://www.hoover.org/research/peter-thiel-leader-rebel-alliance

 

Quote

 

Peter Robinson: Let me try two quotations on you here. The historian Stephen Kotkin, whom you know, when asked to name his main finding after a lifetime of studying in the Soviet archives, quote, "They were communists," close quote. President Xi Jinping of China, this is, he's speaking to the Central Committee in 2013. This is a speech the Chinese republished in 2019 and that, as far as I can tell from looking at the Internet, American analysts discovered in 2020. Xi Jinping in 2013 to the Central Committee: "There are people who believe "that communism is an unattainable hope, "but facts have repeatedly told us "that Marx and Engels' analysis is not outdated. "Capitalism is bound to die out," close quote, so in the conflict with China, to what extent are we facing just another great power struggle? But this was always the question with the Soviet Union, right? Well, it's just another great... No, it isn't. They're different because they're communists. Same question for China.

 

Peter Thiel: Yeah, I would agree with that that we need to take it more seriously, at face value, where they say they're communists; we should just take that-

 

Peter Robinson: Why argue with them?

 

Peter Thiel: We should we should take that at least at face value. There probably are a lot of subquestions one can ask, so maybe they're not strictly Marxist, but they are strictly Leninist, and so it is sort of this totalitarian one-party structure. Maybe there are elements of it that are also fascist where, you know, the Prague Spring was communism with a human face, and maybe China is fascism with a communist face or something like that, and then, of course, there are some some ways in which it's also different from fascism and communism in the early 20th century forms where both fascism and communism were fundamentally youth movements, and then, China is kind of a gerontocracy, and so it is a, it's sort of a-

 

Peter Robinson: It is distinctive. It is its own thing.

 

Peter Thiel: So it's a, I don't know, it's sort of a half fascist, half communist gerontocracy. It is, you know, it is strange. It's strangely much less idealistic or ideological, I think, than the Soviet Union. It strikes me that people probably don't really believe in any of these ideas. They have to sort of be forced down in a very strange way, so there's certainly a lot of things that are unique and different, but yet taking it as a communist country at face value, we could do much worse than that.

 

 

 

Quote

 

Peter Thiel: Well, if we say that tech is the oil of the 21st century, there is this strange juxtaposition where California has been, you know, it has these gusher-like companies that just generate, you know, enormous wealth, enormous profits, you know, a decent number of quite well-paying jobs, and then, they're combined with this, you know, rather bad form of social political governance where you'd never do anything like this, and it's that juxtaposition I was trying to make sense of. There's like a San Francisco version of it where it's, you know, on a per capita GDP it has to be one of the wealthiest cities in the world, and then, it's completely-

 

 

Quote

There's always a question how much of these things are personal or structural, so there's a personal version where you can say that there's something, you know, unusually crazy about Xi, that he's the second coming of Stalin or Genghis Khan or something like this, and then there's maybe, but maybe it's not personal to Xi. Maybe it's just structural that China could be moderately free, not completely totalitarian as long as the economy was growing 8% a year, and at the point when that slowed down and all exponential things eventually slow, you had to actually clamp down a lot more, that once China grows at 3 or 4% a year, and the growth is uneven, it's actually gonna become more authoritarian, more totalitarian, something like that.

 

Edited February 12 by formthirteen

[nwoodman]

Good article in the WSJ today on the One Child Policy.  

 

How China Miscalculated Its Way to a Baby Bust

 

"As the decades passed, a growing number of demographers and economists called out the policy as outdated and flawed. China’s fertility rate would have gone down on its own as life expectancies rose and economic conditions improved, they say. 

 

One factor missing from Song’s population math was human behavior. The government’s sometimes brutal enforcement, including forced abortions and sterilizations, as well as decadeslong propaganda about the benefits of having a small family, left a lasting one-child mindset. The modeling also failed to take into account the traditional preference for sons. If couples could only have one child, they would prefer to have a boy.

Young women are now at the core of China’s demographic dilemma. They are increasingly reluctant to have children—and there are fewer of them every year.  

 

Greenhalgh, the Harvard anthropologist, said that the women growing up under the one-child policy were raised in line with Beijing’s goals of a smaller but what it called “higher-quality” population: well-educated, savvy and independent. “These women are not going to accept going back to the family to be housewives,” she said. 

 

Apart from cultural and social changes, Song’s model hadn’t taken into account economic forces, such as the enormous migration flows to cities unleashed by Deng’s reforms, which played a bigger role than anyone had imagined in pushing down fertility rates, researchers have said."

 

“All of China’s population policies for decades have been based on erroneous projections,” Yi said. “China’s demographic crisis is beyond the imagination of Chinese officials and the international community.”

 

 

Edited February 13 by nwoodman

[vinod1]

China could very well say "Have 3 kids or you are not eligible for .... services/benefits". Sure it would be slow but in 20 years, they can make up for that shortfall. Have only one kid? Just one hour internet for you in a day.

[Hektor]

And deal with the unintended consequences of that decision!

[Hektor]

https://www.barrons.com/articles/chinas-property-crisis-is-causing-pain-for-many-318efe30

 

The property crisis saga continues. 

 

"The problems appear to be getting worse, and observers are wondering how much of the damage will hit the country’s economy. The property sector produces about a quarter of China’s annual economic growth, and it comprises roughly 70% of household wealth, as citizens have long thought of it as the safest place for their savings.

 

The problems are leading to losses for domestic and overseas investors, to a wave of layoffs from distressed firms. But one problem that’s harder to gauge is the degree of discontent wrought by apartments and houses left unfinished by indebted developers. Nomura analysts estimated that at the end of 2022, there were about 20 million such units.

 

Freedom House’s China Dissent Monitor project tallied 1,777 demonstrations linked to the property sector between June 2022 and October 2023, the majority of which were related to unfinished units."