China's economic problems are just getting started...
When chip-maker Nvidia briefly hit the $2trn valuation it kindly seemed to bring the rest of the world with it. The S&P500 and Dow hit new highs; records were set and broken on Japan’s Nikkei and the Stoxx in poor beleaguered Europe. Chinese stocks even got a lift from the rising tide that benefited the rest of the financial universe. It won’t be enough to rekindle the fire in the economic dragon… it’s more of a tired wheeze.
Since its peak in 2021, Chinese stocks have shed some $7trn – around 35% of their value. For context, over the same period, US stocks have gained some 14%. And India – well I digress. In January alone, Chinese markets dropped $1.5trn. By February the country’s securities regulator had been canned and the government was stepping in to stabilize prices. That sort of intervention would be a red flag for any capitalist with enough money to matter, but in the Middle Kingdom Big Panda’s paw on the tiller of the people’s finances is a comfort. Or at least it was when people thought Big Panda knew what the hell it was doing.
And why not? In 2008, when property values in the capitalist world were crashing and taking hunks of the financial system with it, China endured a single downward blip in real estate prices. So naturally, everyone from the Communist party chiefs on down assumed it was due to the superiority of what they were calling at the time “Capitalism with Chinese Characteristics.” With a better grasp of English they might have used the term “fascist.” Either way, the smart money is that simple isolation saved China’s bacon rather than anything we’d call economic management. Here’s why:
In Beijing’s defense, it is hard to draw a conclusion from reality when it is incompatible with a deeply held ideology. In 1970’s, President Deng Xiaopeng veered away from Maoism as hard any sensible person would and the country lurched from a poverty-stricken backwater to the world’s second largest economy by 2011. It’s hard to recall, but at the time, most of the hated gweilos – a Cantonese slang meaning “White Goblin” or “Foreign Devil” or something equally charming – were falling over themselves to welcome China’s ascent to the World Trade Organization in 2001. Sort of like offering a rich kid a Sigma Nu bid hoping he’ll be less weird once he joins. And for a while, it seemed to have worked. Xi Jinping took power in 2013, a year later foreign investors were given greater access to Chinese stocks via Hong Kong. All seemed swell and financial journalists started scrambling for Crouching Tiger Hidden Dragon metaphors.
Sometime into his second term, in 2018, likely noticing just under $30bn was flowing out of the country and into the US real estate market, Xi decided to exert some control and steer the whole thing back into a big Maoist hug. In 2019, the crack down on Hong Kong got started. In 202O came the covid lockdowns which would trickle on, in one awful form or another, for three years. That was also the year of the crack-down on Big Tech that rolled into a heavier crack-down on Hong Kong that has done its best to kill the city as a financial hub.
While baffling to a capitalist, the method behind Xi’s thought process was that baseline Marxist assumption that all of history points to the ultimate triumph of communism. That a sympathetic consolidation of historic forces is moving in China’s favor and against the West. A couple of uppity tech billionaires are not going to stand in the way of the Revolution. The Soviets had the same theory and – given the ideology’s circular logic – the USSR’s collapse only proves Xi’s point: Moscow lost faith, and the system fell apart.
Practically speaking, a solid belief in the grand forces of history over simple cause and effect makes for skittish and arbitrary policy. Yet nowhere in Xi’s personal history is there really anything to suggest that the man is mercurial. All reliable sources paint a picture of a man so stable that you’d never notice him until it was too late – let’s call it “stealth boredom.”
Even if few in China really know how he wound up at the center of a cult of personality, it doesn’t change the fact that there he is. And any man who would publish a book called Xi Jinping Thought and make it a mandatory school course every year is not likely the sort of man to sit still for a lecture in basic finance. The end result being that Xi simply doesn’t understand the global free market in which he finds himself a major player. He seems to know that there is a problem – but his training and devotion in an impractical economic theory creates a disconnect that can only be maintained by the true believer.
Down in the trenches, where people actually have to earn a living, they are a little more practical. And dubious. Forces of history rarely move fast enough to do your retirement account any favors. Chinese investors and entrepreneurs are losing confidence in the system. Analysts reckon that the country’s capital outflows are in the neighborhood of $500bn, although Beijing’s balance of payments data are hazy. Last year some $13.6 went in to the US property market – and that was after both countries passed laws restricting investment.
Foreign investors have lost confidence as well. For better than a decade returns were fine, but they never really lived up to the hype – or for that matter, the official numbers. Last year China and Hong Kong stocks were the worst performers in the world. Something has misfired, but the Communist Party gets pretty touchy when foreigners have the bad form to notice it. So Beijing has classed most garden-variety Western due diligence as “espionage.”
That’s not going to help. Now that the exodus has started, it’s hard to see why investors would come back anytime soon. And China’s economy isn’t out of the woods yet. Still, there are places to go… Which brings us back to India – since 2021 they’re stock market is up by 35%.
Happy Diwali to you, too.
Part Two: Two Sessions
In college I wrote a paper arguing the reason why Russian communism collapsed and the Chinese version survived was essentially that the Beijing was smart enough not to believe its own bullshit. This no longer appears to be the case.
The Marxism that Beijing conveniently ignored for the last 30 years is back, requiring ideology to trump reality once more. It’s fine to have that sort of relationship with your dog, but less so in global markets filled with humans. One of the more cherished, and ignored, elements of communist ideology is the notion that everything belongs to “the people.” So every blue moon, the party is obliged to pretend that it knows the people are there.
Lord knows that America’s congress takes long vacations, but the big gathering of the People’s National Congress in Beijing only happens once a year. The gathering of the PNC is held in conjunction with its advisory committee, just to make sure that “the people” don’t get any funny ideas. They call this the “two sessions.” Only one of them matters. The PNC isn’t like America’s barking, obstructionist congress. It’s a rubber stamp affair more akin to the national conventions of US political parties: We already know the fix is in, but it is useful of see what the people in charge are thinking and how, precisely, they are likely to ruin your year.
There was the usual bell ringing, and China has had some notable successes: Last year it overtook Japan as the world’s largest automaker. This was largely due to the EV sector, where BYD over took Tesla as the largest EV maker. And riding that high, prime minister Li Quang announced the ambitious growth target of that China’s growth of 5%. That’s a tall order for a strategy of doubling down on an export-led economy in a global market that currently hates you.
Domestically, things are worse. Three thousand years of ham-handed central management has made the Chinese a fairly thrifty lot, and communism didn’t make them any flashier. Opening up the economy has – sort of. That single downward blip in property prices in 2008 enticed Chinese investors into the same trap as their American counterparts: That property prices would always go up. Now some 25% of Chinese savings are in the rapidly crumbling property sector. Beijing’s attempts to gently deflate property bubble has only hurt that section of the economy on which its growth depends: The people who thought that they were solidly middle class. Stocks make up a smaller chunk, but it’s lost $7trn in the last three years.
None of which is going to help domestic consumption, but the medium term problem is more social than economic. Anyone with hint of wealth in China is neuvo-riche; in my grandfather’s day the entire place was an economic misfire and anything that we’d call old money was eaten up by the people’s revolution. While its romantic (and very Marxist) to believe that revolution comes from the lower classes rising up against their greedy oppressors, in reality, that doesn’t happen very often. Revolutions almost exclusively come from what Eric Hoffer called the new poor: basically the staunchly middle class who have recently taken a humiliating slide down the socio-economic ladder. To wit: the French revolution, the rise of the Bolsheviks and the Nazi’s were all were fishing from the new poor for their powerbase. The Iranian Revolution succeeded only with the help the liberal middle class who thought they were establishing a democracy. The Arab Spring was a revolt of the college educated.
China’s revolution has long ossified into a bureaucratic elite. It is also sitting on a generation that managed to do well on of the system that opened up in the 1970’s, but it’s not nearly as equal as it claims. The Economist has a brilliant podcast about his rise called The Prince: it’s an apt description of a man who inherited great wealth without understanding its source. Like a lot of princelings, Xi is a cult-of-personality Maoist, educated to see capitalism as a threat to party control. If China is going to achieve the innovation and value-added economic goals it announced at the PNC, it needs an educated middle class.
To elevate Xi Jinping Thought above economic and geopolitical reality means pushing the neuvo-riche back into the masses. And they won’t go quietly.
Come back for Part Three