Xi’s Common Prosperity Will Cost Investors
A battle of investment titans has broken out between George Soros, BlackRock’s Larry Fink and Blackstone’s Steven Schwarzman. Soros stated that investments in China were not only going to be a money-losing proposition but were a “threat to U.S. national security.” The Financial Times on September 12 had the headline, “Fears over no rule of law as investors clash on outlook for China trading.” Meanwhile, the credit world is holding its collective breath as China’s largest property developer, Evergrande, inches closer to default on its $89 billion debt…much of it in dollar-dominated bonds. Some analysts think the repercussions could be global.
The motivating force behind all this drama is China’s strongman Xi Jinping and where he is taking the economy and his nation.
An excellent deep read on this is the recently published The World Turned Upside Down by Clyde Prestowitz. Not only do you get a first-class lesson in Chinese history, but also the best real-time understanding of U.S. policy and its failure to understand Chinese intentions.
Xi has consolidated all power in himself for life. There is now, for the very first time since Mao’s death, no second or third if he becomes incapacitated. There is no politburo advisory board with any authority, no press criticism or dissent on social media. Policy is a closed loop. Everyone is under surveillance by cameras linked to artificial intelligence facial recognition. Some 300 key party members show up at plenary sessions and unanimously vote yes on what Xi tells them to. He is a modern emperor incarnate…Hong Kong has been crushed and the influential free-thinking newspaper shut down, its journalists imprisoned.
Soros’s observations are accurate. He sees China building a muscular military, including massive new nuclear capacity, to challenge everyone in the South China Sea and beyond. Soros’s concern over Xi’s policy regarding Taiwan can best be summed up by Xi’s own 2019 remarks that the attempt to separate the island from the mainland would result in “bodies smashed and bones ground to powder.” Comments not exactly welcomed by those seeking dialogue and the lessening of conflict over this semi-conductor rich country.
Investors, who have already lost half of their money in the Goldman Sachs basket of U.S.-China stocks from their early 2021 peak, can at least take some solace that they are not the only ones on the losing end of Xi’s wrath. Korean K-pop boy bands like BTS are in trouble too. But so are luxury handbag makers, bling suppliers, Aston Martin and other luxury carmakers. It’s hard to achieve Xi’s new goal of “common prosperity” if you’re driving a vehicle worth more than an entire rural village. Princeling tech billionaires like Jack Ma have been cut down to size and his Ant Group financial IPO hopes were dashed on orders from Xi.
Why all the talk of “common prosperity?” Probably because over 300 million Chinese live on less than $5 a day. The urban poor who earn more suffer too because of high housing, education and medical costs. Approximately 60 percent of Chinese wealth is in the hands of the one percenters. This is a Latin American-style inequality hard to comprehend in a “socialist” society with or without “Chinese characteristics.”
For investors, the absurdly opaque nature of all foreign stakes in Chinese companies creates insecurity. These so-called “variable interest entities” put a layer of self-serving fictitious distance between owners and their equity. In America, if a Chinese citizen wants to purchase a share of Apple, he is free to do so. His rights are the same as every other shareholder. Want to invest in Alibaba or Tencent? You need to do that via a shell company listed in the Cayman Islands. You have no rights because your shares are not really registered. To add insult to injury, China’s regulators have threatened to investigate these deals.
How this uncertainty will be resolved is anyone’s guess. Some like Ark investor Cathie Wood and trillion-dollar firm Invesco think they can divine what Xi is thinking and so buy into companies he might favor…like surveillance gear or technology used for AI facial recognition. Others are just going to rely on “insider” information that will be peddled by those close to, or claiming to be close to, Xi. In the past, forecasting what was on the emperor’s mind was reserved for mystics, not equity analysts.
Any way you look at it, the investment climate in China is going through a seismic shift. The derring-do days of technology advances (Huawei), or online lending platforms (PPDAI group), or even delivery apps (Ele.me) are surely numbered. Each company of size is now required to have a Communist Party member (CCP) either on its board or on the workshop floor, not to represent the interests of the actual workers, but the party itself. How this differs from carting and sanitation companies of old with the mafia as silent partners is beyond me.
Bottom line—with mountains of governmental internal debt, an expansionist foreign policy built on even more debt (the Belt and Road Initiative), formally private companies awash in debt and now a strongman worried about the amount of makeup and eyeliner on pop idols, the investment landscape seems mired in haze.
On this one, I am long Soros and short BlackRock and every other institution that would put funds into China. Looking at the 5,000-year history of China (of which the CCP is a small blip), one-man rule has never ended well.