Category Archives: China

Chinese Communist Government Economic Strategies Baffle Economists

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In the capital city of Beijing, the Chinese Communist authoritarian regime is grappling with the harsh reality of self-inflicted economic struggles.

The ongoing real estate crisis in China presents a significant challenge to the Communist Party, with industry giants like Evergrande and Country Garden facing liquidation orders. Chinese citizens heavily were invested in real estate, with approximately 70 percent of their investments allocated to this sector, twice the amount seen in the United States.

The long-term real estate fundamentals have changed — China’s population has likely peaked, urbanization is slowing and home ownership is already very high.

Moreover, official economic figures released by the People’s Republic are often met with skepticism from experts, who believe gross domestic product (GDP) numbers are fantasy. For example, Foreign Policy reported that China’s economic growth in 2023 may have been significantly lower than the stated 5.2 percent, possibly around 1.5 percent.

China’s overall debt-to-GDP ratio is about 300% and rising, which is the highest among emerging markets and higher than most advanced economies. While China’s central government debt is relatively small at just above 20% of GDP, debt at the local government level is estimated to be more than 70% of GDP.

A debt crisis is typically a liquidity crisis  

Additionally, China’s government has substantial assets that can help pay debt. More importantly, a debt crisis is typically a liquidity crisis, and in the case of China, high domestic saving kept by capital controls at domestic banks means that more than 95% of China’s debt is domestic debt, financed by relatively stable domestic deposits and not subject to sentiment change of international investors.

Despite the Chinese Communist regime’s message of China being “open for business” to the global business community and financial elites, the reality paints a different picture. Beijing’s autocratic government enacted a draconian law that requires domestic and international companies operating in China to share business secrets and intellectual property with the Communist Party. This policy has raised concerns about the country’s investment and business environment. While the intention behind such measures may be national security and autocratic control related, it also poses challenges for companies operating in China.

Bottomline, the Chinese economy is plagued by a litany of challenges.

Local governments are struggling with financial difficulties after three years of pandemic spending and declining land sales. Some cities in China can’t repay their debts and have hadto cut basic services or reduce medical benefits for seniors.

The real estate crisis has deepened. Plunging home sales have pushed developers like Country Garden to the brink of collapse. The crisis has spilled over to the massive shadow banking sector, causing defaults and sparking protests across the country.

Youth unemployment has become so bad that the government stopped publishing the data.

Foreign companies have grown wary of Beijing’s rising scrutiny and are pulling out of the country. In the third quarter, a measure of foreign direct investment (FDI) into China turned negative for the first time since 1998.

Foreign investors beware when investing capital in an communist and autocratic country.

References:

  1. https://www.msn.com/en-us/news/world/xi-s-economic-strategies-baffle-even-chinese-economists/ar-BB1jpZa9
  2. https://www.npr.org/2023/08/16/1193711035/china-economy-tao-wang-interview
  3. https://www.cnn.com/2023/12/27/economy/china-economy-challenges-2024-intl-hnk/index.html

China’s Troubled Economy

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The Chinese economy has stalled to the point where it’s being called a “drag” on world economic output by the International Monetary Fund (IMF); and the Chinese economy has many problems — a property crisis, weak domestic spending and high youth unemployment. Most economists think the world’s second largest economy may be staring at decades of stagnation. ~ CNN Business

China is in trouble economically, socially, and demographically. In contrast, the U.S. economy is thriving

  • China’s population has declined, falling to 1.411 billion, as people flee autocratic rule and birth rates fall, marking its first decrease since 1961.
  • China’s real estate market and financial market are a house of cards and on the verge of collapse. Evergrande real estate developer has default on their loans and will threaten the global economy.
  • Lost of Chinese citizen wealth due to collapsing real estate market has depressed consumer spending within the country. 
  • USA 735 vs. China 495 number of billionaires. 
  • In China, the Communist Party elite love power, money, and wealth, it’s the people who suffer. Youth unemployment is rising and Western capital is leaving the country. 
  • China’s economy and middle class are continuing to grow. But, the rate of economic growth is slowing. 
  • Geopolitical concerns and relationship with the USA and the the West continue to increase.
  • Ghost cities, developed cities built but remain empty, are rampant throughout mainland China. 
  • Mexico eclipsed China as the U.S. largest trading partner.

Source:  https://www.cnn.com/2023/12/27/economy/china-economy-challenges-2024-intl-hnk/index.html

U.S. Investors Avoid Investing in China

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China’s economy is in trouble.

China’s President Xi, speaking with forked tongue to the gullible, attempts to both revive an economy struggling to arrest a slide in the property sector by wooing Western capital, while also attempting to strengthen national security as military and trade tensions rise with the US. Even Chinese leader Xi Jinping has acknowledged the many challenges the country’s economy faced in calendar year 2023.

Western ompanies and investors have been caught in the middle, with executives hearing warm words from top Chinese officials only to then see authorities crackdown on consultancy firms, expand a vague anti-spy law and restrict access to data.

The Chinese economy has experienced higher unemployment, a downturn in manufacturing, reduce domestic GDP growth, political unrest, and a crashing real estate market, stated Gary Locke, former U.S. Ambassador to China. There exist lack of investor confidence and uncertainty in Chinese economy.

The country’s shift toward “a more totalitarian environment” has resulted in growing anxiety about being in China among foreign investors, according to Zak Dychtwald, founder of Shanghai-based trend research company Young China Group.

Western business people contemplating trips to China mist be crconcerned and exercise caution about the risks of unwarranted detention and becoming a political hostage similar to what has happened to U.S. citizens traveling to Russia, Venezuela, Iran and North Korea.

Reference:

  1. https://www.msn.com/en-us/money/other/xi-s-mixed-messages-leave-whiplashed-investors-wary-of-china/ar-AA1moQjP

China’s Financial System a House of Cards

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“China simply does not conform to the conventional wisdom about the factors necessary for sustained high growth: a well-developed financial system, the rule of law, democracy.” ~ PBS

China’s growth model has certainly created enormous risks.

Over the past decade and a half, growth has been driven in large part by massive and inefficient investment and an associated buildup of debt, most noticeably in real estate development, as China’s many uninhabited apartment buildings attest.

A financial system is supposed to allocate a nation’s wealth to its most productive opportunities. But even the most generous interpretation of China’s growth success has to acknowledge the inefficiencies and costs associated with a model that has delivered spectacularly in terms of official GDP, but has led to environmental degradation and a massive waste of resources.

The Chinese economy faces several daunting risks.

The first is a surge of capital flowing out of China — basically, people taking their money out of the country — which could destabilize the financial system as well as the overall economy.

The second is a set of concerns about China’s financial system, including the potential instability of the banking system (too many bad loans), wild swings in the stock market and the size of the shadow banking system (informal banking institutions that are not well regulated).

The third set of risks is related to more fundamental aspects of the Communist Chinese economy, political structure and policymaking. These include the possibility of a dramatic GDP growth slowdown, political instability fed by the government’s desire to further tighten its control domestically, and domestic and foreign policy missteps, specifically related to Taiwan.

References:

  1. https://www.pbs.org/newshour/economy/column-chinas-economy-house-cards

Chinese Economy Circling the Drain

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“What I’m trying to remind everyone is you don’t make anything investing in a totalitarian [Communist Chinese] government over a long period of time. ~ Kyle Bass, founder and chief investment officer of Hayman Capital Management

In recent months, a plethora of downbeat economic data and news have come out of Communist China.

Trouble is growing particularly in China’s real estate sector and financial markets. Massive property developers like Evergrande and Country Garden Holdings have teetered on the brink of default. Beijing has in recent months tried to stabilize the property and banking sectors and shore up support for the country’s stock market and renminbi.

Amid the constant flow of negative economic data emanating from China, government officials announced this summer that they would no longer publish certain economic statistic, such as youth employment, which is has soared in recent years.

“In the long run, you’ve got the Chinese economy circling the drain and you have the real estate market falling apart,” said Kyle Bass, founder and chief investment officer of Hayman Capital Management. “Every single private developer is in some stage of bankruptcy today. And you’ve got about $190 billion worth of offshore bonds, dollar bonds, in some sense of default.”

Further, “I just think you don’t want to invest,” he said. “I think you want to invest in markets where there’s a rule of law, and where you have real leadership, and you actually have ways to earn returns that are positive for your portfolio.”

References:

  1. https://markets.businessinsider.com/news/stocks/china-economy-investors-markets-capital-bass-workers-real-estae-property-2023-9

President Xi Jinping’s “Great Struggle”

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“Institutional U.S. investors in China better be paying attention to Xi’s speech with regard to ‘Common Prosperity’.” Kyle Bass

69-year-old Xi-Jinping was appointed to a precedent-defying third term as Chinese Communist Party (CCP) leader, but his third term is unlikely to be a charm, states Dr. Richard Haass, President of the Council on Foreign Relation. Xi has arguably inherited, largely of his own making, one of the most difficult economic, health, environmental, and national security challenges.

Attracting capital seen less important than Xi’s ideology.

Xi’s growing dominance has increased concern among global investors that Beijing has abandoned pragmatism for ideology, as the party shifts its focus from economic development toward security. Effectively, President Xi Jinping has put in place a wartime cabinet, warns Kyle Bass, Founder and Chief Investment Officer of Hayman Capital Management, and an ardent critic of China, in a Twitter post.

Bass commented that China’s 20th Party Congress purge not only installed Xi loyalists, but also installed two spy chiefs, and military leaders responsible for China’s ‘reunification’ strategy for Taiwan.

Moreover, President Xi Jinping sacked the only three men with markets experience (the heads of the PBOC, the CSRC, and finance minister). Xi also added the Ministry of State Security head to the Politburo and the Central Committee (Chen Wenqing).

“Chinese Communist Party (CCP) and its state champions have been using US capital markets to fund the development of China’s armed forces.” ~ Kyle Bass

These moves send a clear message to the world that conflict and ‘Great Struggle’ are coming soon, warns Bass. Not since Mao has a Chinese leader stacked his cabinet with hardliners with aerospace, weapons, surveillance, and military expertise. These moves by Xi signal that conflict with Taiwan is now around the corner.

Additionally, the Great Chinese Liquidation of public and private equity is in full swing, according to Bass. Today’s 10-20% crash in Chinese shares is just the beginning of the destruction of western capital invested in Chinese companies.

It appears that Xi’s ‘Great Struggle’ is also meant to inflict maximum pain to those who believed ‘reform and opening’.

Just think about what Henry Fernández (MSCI), Larry Fink (Blackrock), and Steve Schwarzman (Blackstone) have done to retirees with their pushing Chinese investments into everyone’s portfolios, states Bass.

Beijing’s sweeping regulatory crackdown on technology, education, food delivery and property sectors has sent shockwaves across global markets, driving Chinese markets down, Bass says. “It’s ‘unconscionable’ for global fund managers to invest in China.”

The writing was always on the Great Wall, opines Kyle Bass. Here comes the ‘Great Struggle’.

References:

  1. https://www.cfr.org/expert/richard-haass
  2. https://hiddenforces.io/podcasts/kyle-bass-china-hong-kong/
  3. https://www.realvision.com/shows/the-kyle-bass-interviews
  4. https://thesoundingline.com/kyle-bass-predicts-chinese-invasion-of-taiwan-in-next-24-months/

China’s Challenges According to Jamie Dimon

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China’s Communist Party leaders believe that America is in decline. They believe this not only because their country’s sheer size will make them the largest economy on the planet by 2030 but also because they believe their long-term thinking and competent, consistent leadership have outshone America’s in so many ways, writes Jamie Dimon, CEO, JP Morgan in his 2020 annual letter to shareholders.

The Chinese see an America that is losing ground in technology, infrastructure and education – a nation torn and crippled by politics, as well as racial and income inequality – and a country unable to coordinate government policies (fiscal, monetary, industrial, regulatory) in any coherent way to accomplish national goals. Unfortunately, recently, there is a lot of truth to this, in the next 40 years, according to Dimon.

In recent years, China has been dealing with many challenges to its economic expansion, including pandemic-related curbs, an energy crunch, and an unprecedented crackdown on private enterprises. These challenges and the Communist government’s reaction led to 4% growth in China for the fourth quarter, according to JP Morgan.

Additionally, the government actions against COVID-19 have also kept domestic demand for goods and services suppressed, putting a lid on imports.

However, Dimon opines that “China will have to confront some serious socioeconomic and geopolitical issues”:

  • The Chinese lack enough food, water and energy to support their population;
  • Pollution is rampant;
  • Corruption continues to be a problem;
  • State-owned enterprises are often inefficient;
  • Corporate and government debt levels are growing rapidly;
  • Financial markets lack depth, transparency and adequate rule of law;
  • Income inequality is higher than in the rest of the world; and
  • Their working age population has been declining since 2012.
  • Capital outflows has caused the regime to tighten capital controls.
  • Lower rates make Chinese financial markets less attractive to global and domestic capital.

Additionally, China will continue to face pressure from the United States and other Western governments over human rights abuses (especially against the Uyghur population), democracy and freedom in Hong Kong, and activity in the South China Sea and Taiwan. The Uyghurs are an ethnic Muslim minority in China that have allegedly endured forced labor and other human rights violations.

Autocratic and authoritative leadership works well when you can manage top down and you are starting from a very low base. China’s recent success definitely has its leadership feeling confident.

Regardless of Chinese Communist Party’s opinions regarding its inevitable economic rise, only 100 million people of its more than 1.4 billion population in China effectively participate in the nation’s one-party political system. No other developed nation has such low participation. Growing middle classes almost always demand political power, which helps explain why autocratic leadership almost always falters in a larger, more complex economy.

Under autocratic leadership, a major risk is the allocation of economic assets (capital and people), which are, over time, used to further political interests, leading to inefficient companies and markets, favoritism and corruption.

In addition, autocratic leadership diminishes the rule of law and transparency – damaging the ability to create a well-functioning financial system (this certainly restricts the internationalizing of the RMB).

Disruption of trade is another risk China faces. The United States’ trade issues with China are substantial and real. They include:

  • Theft or forced transfer of intellectual property;
  • Lack of bilateral investment rights, transfer of ownership or control of investments;
  • Onerous non-tariff barriers;
  • Unfair subsidies or benefits for state-owned enterprises; and
  • Lack of rapid enforcement of any disagreements.

China will only comply with international trade agreements and only do what is in its own self-interest. Near term, we should expect challenge and conflict to characterize the relationship between China and the West over a range of economic, human rights and strategic issues.

There may, however, be areas where we will simply never agree. As the two largest economies in the world, China and the United States should continue to have a long-term interest in collaborating where we can on critical global issues, including climate change, global health and stability on the Korean Peninsula.

China does not have a straight road to becoming the dominant economic power. To put this in perspective, America’s GDP per person in 2019 was $65,000 and China’s was $10,000. Even if we do a rather poor job at managing our economy (growing at 2%), our GDP per person in 20 years would be $85,000. And if the Chinese do a good job managing their economy, their GDP per person in 2040 would still be under $35,000. While China is well on its way to becoming a fully developed nation, it may face more uncertainty and moments of slower growth in the future (like the rest of us) than in the past.

For the near term, if China and the United States can maintain a healthy strategic and economic relationship, it could greatly benefit both countries – as well as the rest of the world.

Another factor is the Chinese currency, the renminbi (RMB). The renminbi cannot be freely moved around the world; it can leave China only in limited amounts and can be invested only as the Chinese see fit. Thus the renminbi is a long way from replacing the U.S. dollar as the world’s reserve currency.

The Chinese currency is subject to their internal politics, laws and regulations. While the Chinese have done a good job building their economy and are slowly moving toward a more transparent society and financial system, they are a long way from having a currency that is fully “convertible” like the U.S. dollar.

References:

  1. https://reports.jpmorganchase.com/investor-relations/2020/ar-ceo-letters.htm
  2. https://www.wsj.com/articles/slow-meltdown-of-china-economy-evergrande-property-market-collapse-downturn-xi-cewc-11640032283
  3. https://www.msn.com/en-us/money/markets/could-chinas-economy-collapse/ar-AAPypxS
  4. https://warontherocks.com/2021/12/could-chinas-massive-public-debt-torpedo-the-global-economy/

Commercial real estate bust.

While the U.S. economy is likely to grow 6% in 2021 and 4% in 2022, the highest rate in decades, analysts project.

China’s economy has been faltering despite it’s exceptionally strong trade surplus and it’s authoritarian government’s heavy hand on COVID-19.

Cathie Wood Dislikes Investing in Chinese Stocks

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“Pouring billions of dollars into China now is a tragic mistake.” George Soros

Cathie Wood, the CEO of Ark Invest, has slashed her company’s investment exposure to China in 2021. Her actions came as Beijing’ tightened its authoritarian grip on domestic businesses and the economy. These actions has rattled global investors, wiping trillion of dollars off the value of Chinese stocks and triggering fears about the future of innovation in China, especially with China experiencing serious economic slowdown and real estate turmoil.

See the source image

Wood revealed that her Ark Innovation ETF has significantly reduced its exposure to China. Sweeping regulatory changes have made the investment environment riskier in,China, according to a Financial Times report.  Additionally, the Chinese government has been accused by the U.S. and the international community of committing genocide specifically against the Muslim Uyghurs and other minorities which has resulted in several countries boycotting the 2022 Beijing Winter Olympics because of these allegations.

Almost every week late last year, China announced a regulatory crackdown aimed at reasserting its absolute control of its economy. The crackdowns included a banned on the ride-share company Didi from app stores a day after it listed on the New York Stock Exchange.

With Chinese authorities apparently focusing on social issues and social engineering at the expense of capital markets, Wood said, “We own very, very few stocks there [in China] because they’re unpredictable. They are grappling with what most governments are grappling with: the gap between rich and poor.”

Furthermore, Chinese authorities have been cracking down on cheap credit in an effort to cool the country’s real estate market that has been driven by speculation. These actions has caused China’s Evergrande Group, the world’s most indebted property developer, and other large property developers to default on bond payments. Wood is concerned that 75% of consumer savings in China is held in real estate, and real estate values have fallen in recent months. Her analysis: That the Chinese government is willing to risk the decline in real estate values and wipe out real estate investors in order to address the wealth gap.

Angel investor and entrepreneur Jason Calacanis commented: “I think the mad king is circling his wagons because he feels threatened. I’m talking about [Chinese President] Xi Jinping.”

President Xi Jinping’s has talked about “common prosperity” as a policy goal in China, and called on high-income Chinese enterprises to “return more [of their profits] to society”. These policies have been particularly focused on cracking down on the power of big private companies, such as e-commerce giant Alibaba and ride-hailing app Didi. Beijing’s policies have prompted investors to sell Chinese assets in 2021.

Moreover, Chinese companies in the technology, education and gaming sectors have faced an onslaught of draconian new rules relating to data privacy and workers’ rights in recent months. Chinese authorities have told the companies to “break from the solitary focus of pursuing profit or attracting players and fans.” Within the past several months, China barred online gamers under the age of 18 from playing on weekdays and limited their play to just three hours on weekends.

Cathie Wood is also circumspect about China’s demographics. China has been confronting the lowest fertility rates it has experienced in seven decades as well as a material gender imbalance. This is a growing concern to the Communist authoritarian government.

“I think President Xi is very unsettled that China’s three-child policy is not working. And that’s very forecastable,” Wood said.

Multinational U.S. companies have come under increased pressure both within China and internationally as they aim to comply with Xinjiang-related trade sanctions while simultaneously overlooking Chinese government’s crimes against humanity while continuing to operate in China. These companies issued marketing statements condemning the murder of George Floyd in the U.S. while turning a blind eye and remaining mute regarding genocide and mass murder in China.

Billionaire investor George Soros said BlackRock’s and other U.S. businesses who are investing billions of dollars into China now is a “mistake” and will likely lose money for the asset manager’s clients, according to an opinion piece in the Wall Street Journal.

“Pouring billions of dollars into China now is a tragic mistake,” Soros wrote in the op-ed. “It is likely to lose money for BlackRock’s clients and, more important, will damage the national security interests of the U.S. and other democracies.”

References:

  1. https://www.forbes.com/sites/kerryadolan/2021/12/03/investor-cathie-wood-on-bitcoin-why-she-sold-stocks-in-china-and-what-her-firm-is-buying-now
  2. https://www.cnn.com/2021/09/09/investing/cathie-wood-ark-china/index.html
  3. https://www.afr.com/markets/equity-markets/how-jack-ma-treatment-prompted-cathie-wood-to-quit-china-20211020-p591ia
  4. https://www.reuters.com/business/finance/soros-says-blackrocks-china-investments-likely-lose-money-wsj-2021-09-07/
  5. https://www.cnbc.com/2022/01/11/intel-deletes-reference-to-xinjiang-after-backlash-in-china.html

Chinese Stocks are Risky

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Recently Luckin Coffee (LK) issued a press release admitting that their chief operating officer had fabricated a significant amount of sales from the second quarter through the fourth quarter of 2019.  This caused Luckin Coffee share price to fall 82% in U.S. trading and leaving investor with little recourse.

Luckin, a rival of Starbucks in China, happen to be a fairly new public company that opened its initial public offering (IPO) in May 2019.  In the case of Luckin, investors needed to exercise caution when a company goes from zero to a $3 billion market capitalization valuation in less than two years.  Furthermore, it is important to understand that what occurred with Luckin Coffee can occur with other Chinese companies with stocks listed on U.S. equity market exchanges since they are not required to comply with Security and Exchange Commission’s (SEC) strict disclosure and transparency requirements.

Chinese stocks and emerging-markets stocks

China is the world’s second-largest economy and is still growing as an emerging market. Investing in young Chinese companies can be extremely risky.  Although the growth available in China is clearly appealing, there are a number of inherent risks for investors.  The risks include currency manipulation, ineffectual securities reporting standards, the draconian influence of China’s communist government, and the potential for financial fraud.

Recent economic and equity market history are rife with financial frauds and illegal activity related to Chinese companies listed on U.S. equity exchanges.  Many seasoned U.S. investors advise that Americans should avoid investing in Chinese stocks. They even recommend avoiding the few larger Chinese companies with established histories and strong management track records.

Delisting Chinese Stocks

To avoid future Luckin Coffee frauds perpetrated on unsuspecting American investors, “Chinese companies should be delisted from American exchanges if they don’t follow U.S. securities laws”, according to Senator Marco Rubio.  Senator Rubio believes that increase oversight is vitally required for Chinese and other foreign companies listed on American stock exchanges. In fact, he and colleagues have offered legislation that calls for delisting firms that are out of compliance with U.S. regulators for a period of three years.

Bottomline, it is difficult to trust the financial statements coming out of some high-flying companies based there. Fundamentals don’t matter if you can’t be sure the numbers are real and it is difficult to invest in Chinese companies that might be trying to deceive investors.

References:

  1. https://finance.yahoo.com/news/luckin-coffee-chairman-defaults-loan-152735017.html
  2. https://www.msn.com/en-us/finance/topstocks/investing-lessons-from-the-luckin-coffee-accounting-fraud-debacle/ar-BB12eas4
  3. https://www.cnbc.com/2019/10/08/marco-rubio-chinese-firms-should-be-delisted-in-us-if-they-dont-follow-laws.html

Schwab Sector Views: New Sector Ratings for the New Year | Charles Schwab

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By Schwab Center for Financial Research

Macro environment:  Rising stocks and Treasury yields, fading U.S. dollar

We [Charles Schwab] continue to see a gap between the health of the manufacturing sector and that of the services sector and consumers. Despite recent U.S.-China trade war de-escalation, manufacturing activity remains under strain from ongoing tariffs, new tariff threats and still-elevated trade policy uncertainty, combined with slow global growth. On the other hand, the services sector continues to thrive amid strong consumer confidence and consumption, in large part due to a strong job market. 

While economic momentum overall has slowed, we do see signs of stabilization in both the United States and abroad. Accommodative monetary (central bank) and fiscal (tax cuts and government spending) policies have provided a strong tailwind for the global economy.

The signing of a “phase-one” trade deal between the U.S. and China, combined with congressional passage of the new U.S.-Mexico-Canada (USMCA) trade pact, have eased some trade uncertainty. Amid this apparent global economic revitalization and shrinking trade risk, Treasury bond yields have risen, the value of U.S. dollar has declined and U.S. stocks have advanced to record highs.

However, geopolitical risks—while reduced somewhat—remain elevated, and equity valuations are high. Given this combination, we think bouts of increased volatility and more frequent pullbacks are possible. This doesn’t necessarily mean the rally won’t keep going—it’s likely the strong momentum in stocks may continue until there is a catalyst sufficient to deflate the current extremely bullish investor sentiment—but the risks need to be considered.

— Read on www.schwab.com/resource-center/insights/content/sector-views