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Xi scares me. And I’m far from his grasp. I can’t imagine what it is like if you are close.
Under China’s Paramount Leader, the rare thing—start-ups that actually succeed—have been gutted, innocents arrested, Putin’s evisceration of Ukraine embraced and Covid policy has swung from locking people inside to letting them out with no coherent medical plan.
These decisions reflect a thinking pattern. Surging Covid deaths in the headlines are just the latest data point. Xi is either reckless or rigidly rooted in Soviet ideology or both. How can a person who assiduously climbed the Party’s slippery rungs and managed to change the constitution to allow him to serve for life be reckless? I don’t have a good answer except that the skills required to outwit rivals are sometimes negatively correlated to governing (think George W. Bush’s Iraq 2 invasion).
After Ukraine, it’s impossible to say with certainty Xi won’t invade Taiwan. The question for investors is if this risk is already, as they say, “priced in.” My answer is, “no.” The yield on the benchmark index of Chinese stocks today is 6%. The equivalent yield is 5% in the US. This means Chinese stocks are 20% cheaper than the US. To me, however, this pricing is way too low to justify biting. If Xi invades, the value of your assets may drop to zero, or close to it.
I suspect this is the reason Apple is relocating production facilities to Vietnam and Arizona. Imagine being inside the conversation between Tim Cook and Apple’s board. Fear contains dissent but it doesn’t attract capital.
China’s Context
For non-specialists, some China context is critical and I find missing in major news reports. A few key points.
China’s boom. For most of the 20th century, China was in chaos. Civil war. Famine. Bizarre psychological experiments. In the 1980s everything suddenly changed. One man, Deng, abandoned Mao’s policies. A slice of China, roughly the equivalent of Georgia to Alabama, sucked in labor from the interior and now assembles much of what the world consumes. Shenzhen and many other cities grew from the size of Burlington, VT to two New York cities in 30 years. Roughly 350 million people (more than the US population) ebbs and flows from factory to farm. While the boom brought both debt and environmental carnage it did lift millions and millions out of vicious poverty. Like the Soviet Union’s 1950 growth boom, however, this is unsustainable because you only need so many buildings and roads. China is at the “now what” stage.
China’s culture. As Gao Xiqing said on my podcast, China’s culture is ancient and evolves slowly. Gao is one of the most extraordinary people I have met and I encourage you to listen. About 100 years ago, China’s governance and family systems were more or less unchanged from 2,000 years earlier—emperors, gentry with concubines, peasants. Today, China’s culture is a quixotic mix of Confucian respect for authority, Sovietism, post-Cultural Revolution trauma, and income inequality. Judeo-Christian ethics are as distant to China as 道教 (Taoism) is to the West. About 5% of the country is college-educated and a tiny elite is incredibly erudite and worldly, some of them in positions of power. The ultra-modern is layered slapdash on the medieval. The photo below shows food rations by household. I took it in Western China.
China’s internal tension. Like most people, the Chinese value both wealth and tradition. This ancient conflict is particularly acute in China. Technology—railroads, electricity, combustion engines, computers—bring disruption and wealth. Culture creates order and stability. The more rigid the culture the more intense the tension.
Xi’s Fact Pattern
The above is the reality Xi faces. Difficult circumstances for any person. If China’s hardware is its culture, the software is Soviet and, within that context, the question is if you try to be more like Gorbachev and Deng or Stalin and Mao.
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