Great article. I wonder why you do not seem to be worried about the costs of unwinding the real estate bubble? It seems to me that given its incredible scale (plausible estimates range from 1x-3.5x GDP of 'wealth' that will evaporate, and the housing industry represents ~29% of GDP), the real estate bubble deflating is going to be at least a drag on the economy, and at worst, a disaster. It makes me nervous holding the equities of shipping companies, and I'd be even more worried about being directly invested in China.
As usual Alf, very interesting and informative post. While you alluded to China's concept of the rule of law (tort and criminal) is whatever the Chinese Communist Party decides it is, I do think you missed mentioning one other very very big risk with investing in China - Geopolitics.
China is a close ally of Russia. If Russia's war with Ukraine ends tomorrow, as long as Putin is leader, Russia will still face stiff sanctions for years/decades to come. If China is found to be supporting Russia, it too could easily be the subject of sanctions.
That aside, the biggest marco factor I think long term is Russia (and to a lesser extent COVID) has reminded Western democracies of the importance of national security and ensuring we have secure and reliable energy and supply chains.
This trend was already in motion, but look for it to speed up and it will lead to more onshoring, more trade deals with allies, and fewer trade deals with adversaries/authoritarian states like Russia and China. Especially, in light of China continuing to grow its military and nuclear arsenal.
Trump put in place tariffs on China and Biden hasn't removed them. There are few things that such diametrically opposed politicians could agree on, but this is one. This makes clear to me the future is less trade and less investment with China. And while some will say Western democracies are a small portion of the countries in the world, which is of course true. It is equally true that collectively we are the richest nations in the world and as Russia has quickly found out, we control the global economy.
I usually agree with your analysis. I agree that China has the capacity to escape rampant mal-investment and excessive debt, which could lead to a 1990's Japan. But do they have the willingness to redistribute income from the state and SOE's to households? I see nothing but rhetoric from Xi, and even the phrase "common prosperity" has waned in CCP language. At every point Xi has chosen to consolidate personal and state power, and command over market decisions. He is effectively destroying Hong Kong. He has picked a fight with every ethnic minority and neighbor (except Russia). If China finds a way to no longer need food and fuel imports, I expect Xi would retreat to an hermit kingdom, which would secure his personal power.
If one allocates a small percentage to China, may I suggest hedging with investments in surrounding EM's which may prosper if China does stumble.
Thanks Alf, great article. An economy usually develops in three stages - manufacture, real estate and financial market. China has followed Western countries and also Japan over the last 20 years through the first two stages and now entering the third stage. As a Chinese, I believe China is trying to open it's financial market, although it might take a long time. As the second largest economy, it has complete industrial chain, a lot of good companies (EVs, AI), although issues like lack of transparency and low distribution of earnings and political uncertainty will keep many institutional investors away, as a personal investor, I do believe it worth to have some allocation. Government is adjusting the structural of the industries and support the development of more value-add industries as well as industrial automation will alleviate issues like increasing labour cost. Many Western medias claim Xi has destroyed HK, but ignored China's entering WTO has weakened HK's long term advantage as an international trade hub.
China is fascinating and scary to say the least! I highly recommend taking the time to go thru professor Michael Pettis's latest book on China (Trade Wars are Class Wars). Pettis and his co-author Michael Klein go into great detail on "common prosperity" and "dual circulation". Pettis has a great perspective given that he has been living in Beijing and teaching at the university there for over 20 years so he has boots on the ground. Thanks Alf!
I hope to read a similarly well-written one on India someday. It's still well behind China in terms of catching up to the US, so you don't have to hurry too much 🙂
From an economic stance I agree with you. However, US is targeting China and we will most likely ban the ownership of Chinese equities along Russian lines.
Thanks for the article. Your question on “How would you feel about arguing against a Chinese company in a Chinese court of law?” is one where every western investors asked and every western bias media focused on over the past 12 months. It’s a fair question. But I would like to ask you a similar question… “How would you feel about arguing against an India company in an India court of law?” (Watch Bad Boy Billionaires in Netflix?) Or “ How would you feel about arguing against an Indonesian company in an Indonesian court of law?” (Want to ask Nathaniel Rothschild on his coal investment there?). Do you see a valuation discount on Indonesia or India stocks? No, they are as expensive as the US equity market. Why?
In the 1970s and 1980s we used to use relative Mkt Cap to GDP and relative foreign ownership as guides to structural weighting of emerging markets. On this basis, if we believed the growth rates, we would now have an allocation to PRC.
great article alf- I would add the big risk of the US delisting chinese companies from US exchanges as well (maybe this is obvious to all but still important)
A very good article as always Alf :) I am from China Mainland, and there is a update —— since the two sessions in March, there is now much less coverage of common prosperity; Some people believe this could mean that Xi's policy is being questioned.
Excellent piece. Thank you very much for writing it. I have just two questions:
1 - When you mention structural drivers of growth, you just refer to growth in the labor force and total factor productivity trends. Does growth capital accumulation not play out in this framework?
2 - Why the transition to a more domestic-demand centered economy would bring de-leveraging episodes? I would expect this to work the other way around: government transfering money to households to increase their consumption power and/or consumer finance banks writing more loans.
Great article. I wonder why you do not seem to be worried about the costs of unwinding the real estate bubble? It seems to me that given its incredible scale (plausible estimates range from 1x-3.5x GDP of 'wealth' that will evaporate, and the housing industry represents ~29% of GDP), the real estate bubble deflating is going to be at least a drag on the economy, and at worst, a disaster. It makes me nervous holding the equities of shipping companies, and I'd be even more worried about being directly invested in China.
As usual Alf, very interesting and informative post. While you alluded to China's concept of the rule of law (tort and criminal) is whatever the Chinese Communist Party decides it is, I do think you missed mentioning one other very very big risk with investing in China - Geopolitics.
China is a close ally of Russia. If Russia's war with Ukraine ends tomorrow, as long as Putin is leader, Russia will still face stiff sanctions for years/decades to come. If China is found to be supporting Russia, it too could easily be the subject of sanctions.
That aside, the biggest marco factor I think long term is Russia (and to a lesser extent COVID) has reminded Western democracies of the importance of national security and ensuring we have secure and reliable energy and supply chains.
This trend was already in motion, but look for it to speed up and it will lead to more onshoring, more trade deals with allies, and fewer trade deals with adversaries/authoritarian states like Russia and China. Especially, in light of China continuing to grow its military and nuclear arsenal.
Trump put in place tariffs on China and Biden hasn't removed them. There are few things that such diametrically opposed politicians could agree on, but this is one. This makes clear to me the future is less trade and less investment with China. And while some will say Western democracies are a small portion of the countries in the world, which is of course true. It is equally true that collectively we are the richest nations in the world and as Russia has quickly found out, we control the global economy.
I usually agree with your analysis. I agree that China has the capacity to escape rampant mal-investment and excessive debt, which could lead to a 1990's Japan. But do they have the willingness to redistribute income from the state and SOE's to households? I see nothing but rhetoric from Xi, and even the phrase "common prosperity" has waned in CCP language. At every point Xi has chosen to consolidate personal and state power, and command over market decisions. He is effectively destroying Hong Kong. He has picked a fight with every ethnic minority and neighbor (except Russia). If China finds a way to no longer need food and fuel imports, I expect Xi would retreat to an hermit kingdom, which would secure his personal power.
If one allocates a small percentage to China, may I suggest hedging with investments in surrounding EM's which may prosper if China does stumble.
Thanks Alf, great article. An economy usually develops in three stages - manufacture, real estate and financial market. China has followed Western countries and also Japan over the last 20 years through the first two stages and now entering the third stage. As a Chinese, I believe China is trying to open it's financial market, although it might take a long time. As the second largest economy, it has complete industrial chain, a lot of good companies (EVs, AI), although issues like lack of transparency and low distribution of earnings and political uncertainty will keep many institutional investors away, as a personal investor, I do believe it worth to have some allocation. Government is adjusting the structural of the industries and support the development of more value-add industries as well as industrial automation will alleviate issues like increasing labour cost. Many Western medias claim Xi has destroyed HK, but ignored China's entering WTO has weakened HK's long term advantage as an international trade hub.
Thanks Alf...very helpful content....keep it comming.
Fantastic analysis Alf 🙏🏽
China is fascinating and scary to say the least! I highly recommend taking the time to go thru professor Michael Pettis's latest book on China (Trade Wars are Class Wars). Pettis and his co-author Michael Klein go into great detail on "common prosperity" and "dual circulation". Pettis has a great perspective given that he has been living in Beijing and teaching at the university there for over 20 years so he has boots on the ground. Thanks Alf!
Thanks for the article!
I hope to read a similarly well-written one on India someday. It's still well behind China in terms of catching up to the US, so you don't have to hurry too much 🙂
From an economic stance I agree with you. However, US is targeting China and we will most likely ban the ownership of Chinese equities along Russian lines.
Thanks for the article. Your question on “How would you feel about arguing against a Chinese company in a Chinese court of law?” is one where every western investors asked and every western bias media focused on over the past 12 months. It’s a fair question. But I would like to ask you a similar question… “How would you feel about arguing against an India company in an India court of law?” (Watch Bad Boy Billionaires in Netflix?) Or “ How would you feel about arguing against an Indonesian company in an Indonesian court of law?” (Want to ask Nathaniel Rothschild on his coal investment there?). Do you see a valuation discount on Indonesia or India stocks? No, they are as expensive as the US equity market. Why?
In the 1970s and 1980s we used to use relative Mkt Cap to GDP and relative foreign ownership as guides to structural weighting of emerging markets. On this basis, if we believed the growth rates, we would now have an allocation to PRC.
great article alf- I would add the big risk of the US delisting chinese companies from US exchanges as well (maybe this is obvious to all but still important)
A very good article as always Alf :) I am from China Mainland, and there is a update —— since the two sessions in March, there is now much less coverage of common prosperity; Some people believe this could mean that Xi's policy is being questioned.
Another great article! Personally, the VIE structure of Chinese listings puts me off investing in the region.
Hi Alf,
Excellent piece. Thank you very much for writing it. I have just two questions:
1 - When you mention structural drivers of growth, you just refer to growth in the labor force and total factor productivity trends. Does growth capital accumulation not play out in this framework?
2 - Why the transition to a more domestic-demand centered economy would bring de-leveraging episodes? I would expect this to work the other way around: government transfering money to households to increase their consumption power and/or consumer finance banks writing more loans.
Thank you very much
Best regards
Javier
Brilliant article. Very insightful and informative.