China just concluded its important once-every-five-year Congress where the President review the past achievements as well as charting the path for the next few years.
Investors who are watching the Chinese markets are parsing through Xi’s speech to glean some clues if he would loosen up the grip on the economy and the financial markets.
But Chinese language is high-context – the Chinese are not the most direct in saying what they really mean. Moreover this is an official speech which means it will lack details as it would have been highly ‘sanitized’.
Regardless, we believe it is time to give another perspective about China that is not merely a regurgitation of what the western media has said.
First, it is clear that Xi will continue his unprecedented third term since Mao. Chinese politics is not for the faint hearted. Xi has been ruthless in purging his political enemies and have since consolidated enough clout to stay in power.
This means he will continue to have a big say on how China would act for another 5 years. We are not here to judge whether the political system is right or not, but how it concerns an investor.
Our observation is that foreign investors’ confidence in Xi has worn out – they are increasingly blaming Xi for his draconian zero-Covid policy which slowed the economy and the strong-armed regulations on tech that tanked their share prices.
Investors have little hope for change as Xi has been consistent in his latest speech.
Basically zero-Covid policy will continue. We believe it is the lesser of the two evils. Not from a Socialist standpoint of saving the masses, but due to the inability of the healthcare system to handle any major outbreak.
The healthcare system will take many years to catch up and meanwhile many will die if an outbreak occurs. It will be a worse PR case than lockdowns.
China is aiming for four doses of vaccination and majority are in their third dose only. They have 1.4 billion people and over 270 million are elderlies who would experience higher death rates among Covid patients. Hence, Covid Zero will continue.
China’s economy has slowed and is estimated to grow at 3.3% this year, the second weakest growth in four decades.
The second concern is with the ‘common prosperity’ drive which seems to be in conflict with pursuit of economic growth.
Is this the end of the dazzling China growth story?
The good news is that Xi has emphasized that economic development remains a top priority. But specifically, China aims to raise the GDP per capita to a medium-developed country.
The storyline is consistent. China has a large rich-poor gap as a group of Chinese has been enriched by the boom. Although the richest Chinese are among the richest in the world, China’s GDP per capita rank is closer to countries like Iraq and Maldives.
This is where the common prosperity comes into play. While most investors fear that it is a return to Mao’s wealth redistribution route, we don’t think that is the case.
China wants people to get rich but not to get rich solely via capital. The Chinese ought to have meaningful contribution to the economy via productivity gains or simply through work.
This applies to the housing market where many got rich because of those who had capital benefitted more. China doesn’t see such activities as making China a strong country. Hence, the anti-property speculative measures were implemented.
China wants to be technologically advanced and be less dependent on the West. All these development requires human ingenuity and people putting in effort to work, not merely sitting around to deploy capital. That means income or wealth must reward such activities.
How are they going to do that we are not sure but China is taking bold reforms and pain is part of the process.
Hopefully these points help you see China from its perspective. Of course all these reforms may not succeed but not pursuing them might worsen rich-poor gap and irreconcilable political upheaval eventually.
Investors who believe in the future of China would have to wait longer. The results aren’t going to show soon.
If you cannot wait for at least 5 years, or if you believe the pain and risks aren’t worthwhile, it is better to take your investments elsewhere.
But remember other investments will give you pain and risks too, just which ones are you willing to suffer for.
