China Context
Narrowing the Equity Market
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For foreigners, particularly Americans, it’s hard to make sense of Chinese policy because the systems are so different. This is evident in the reaction to Chinese regulators’ decision to defenestrate private Chinese education companies. A representative sample from Bloomberg: “after a week of wild market swings and tense calls with clients, some investors have decided China just isn’t worth the trouble.” For the record, China’s stock market is up 27% since Jan. 1, 2020 and down 7% this year. With that in mind, some context.
1. While the US and Chinese administrative systems are very different, many problems they face are similar, like global warming, disruptive tech change, large gaps between rich and poor, an information revolution that changes both what information is created and how it is disseminated. Other issues, like demographics, are different.
2. China has a potentate, Confucian values, modern technology, Soviet political software and language. The US has separation of power, Judeo-Christian values, modern technology and Enlightenment (17th century) political software and language.
3. While many Americans and Europeans find the Chinese system bizarre, it is not likely to change any time soon. Parts of the system are thousands of years old, including the language, culture and notion of a supreme leader.
4. For perspective, many Chinese find parts of the US system bizarre. Why, they wonder, can mentally ill people obtain high powered rifles and shoot children? What about the power afforded to anti-vaxers? What kind of political system produces repeated economic crises (2000, 2008 and 2020) and Trump?
5. If you want to see the different systems in action you can now read Chinese newspapers and have them instantly translated. Friday, the People’s Daily asserted “under the strong leadership of the Party Central Committee with Comrade Xi Jinping at its core we have coordinated the overall situation at home and abroad…”. Message: everything is under control. On the same day, The New York Times said, “CDC Internal Report Calls Delta Variant as Contagious as Chickenpox.” Message: things are almost out of control.
6. Distinguish between the people and the government. There are Chinese people in Taiwan and Chinese people in mainland China and the systems of government are very different. The Chinese people I know are hard-working, thoughtful, honest, curious and loyal friends.
7. A potentate, like Xi, has a degree of power unimaginable in the US. If the supreme leader has good ideas, this can lead to very rapid improvement. If they have bad ideas, the opposite.
8. Until 1912, China had an emperor. While there were different dynasties, this system went back a long time. The first modern potentate was Mao. He unified China after decades of civil war and invasion, a huge accomplishment. He also enacted policies that led to mass starvation and a decade of chaos during the Cultural Revolution. (The picture accompanying this post is one I took in Western China detailing food rations).
9. The next modern supreme leader was Deng. Way ahead of the collapse of the Soviet Union, he introduced capitalism, while retaining authoritarian control, leading to the biggest economic boom ever, anywhere. Hundreds of millions of people were lifted out of poverty.
10. After Deng stepped down, a number of potentates followed. All, more or less, stuck with Deng’s policy.
11. Xi came to power in 2012. The essence of his rule is “going back” to, in his eyes, go forward. If the pendulum in China has swung from Mao (hard core communism) to Deng (authoritarian political control with hyper-competitive private sector capitalism), Xi is moving the pendulum back, more control, less free market.
12.In the US, the pendulum is also swinging back, thus the appointment of anti-trust academic Lina Kahn to run the Federal Trade Commission.
13. A pendulum swing doesn’t mean Capitalism is dead. The Chinese have studied the collapse of the Soviet Union in detail and know command economies don’t work. Economic theorists in China talk about finding a “third way,” something with features of capitalism and communism. However, a swing back does mean no term limits on the potentate, crushing Hong Kong and more overt threats to forcibly integrate Taiwan.
14. With that context, last week’s regulations make more sense because:
a. All households are exposed to shelter, education and medicine. In all countries trying to figure out how to allocate these resources equitably is tricky. Think about the US debates over affordable housing.
b. Chinese culture places a strong premium on education. Learning the 6 or 7 thousand characters required to graduate high school takes enormous work and more attention has recently been placed on developing the “whole child” as opposed to endless cram sessions.
c. Private education courses are expensive. The expense of raising a child is cited as a factor in China’s low birth rate, which China is now trying to shift.
That said, the suddenness of the policy shift, which essentially wiped out education companies overnight, speaks to either a more chaotic policy making environment or a swift shift of view by the supreme leader or maybe both.
I still find Chinese stocks attractive and hold some in my portfolio. They are cheaper than US stocks, represent some innovative companies and are diversifying to what I already own. However, I don’t hold the stock market index, the Chinese equivalent of the S&P 500. Chinese authorities may crack down on other stocks and US authorities may prohibit the purchase of stocks tied to the military or high-tech. I believe China’s stock market is a “stock pickers” market. I am not a stock picker so I’ve hired people to do this. THIS IS NOT INVESTMENT ADVICE, more ideas for discussion.
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Last week, I said I’d go on vacation. I now intend to do actually go on vacation and not write for a few weeks and look forward to sharing more thoughts later in August. Thank you for your interest and please share any feedback!