a battle of investment titans has broken out between George Soros, BlackRock’s Larry Fink and Blackstone’s Steven Schwarzman. Soros stated that investing in China would not only be a loss-making proposition, but also a “threat to US national security.” The Financial times on September 12, the headline, “Fears above no rule of law if investors clash with prospects for trade in China.” Meanwhile, the credit world is holding its breath as China’s largest real estate developer, evergrande, inches closer to standard on its $89 billion debt…largely in dollar-dominated bonds. Some analysts believe the impact 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 in-depth read on this is the recently published The world upside down by Clyde Prestowitz. You will not only get a first-class lesson in Chinese history, but also the best real-time understanding of US policy and the inability to understand Chinese intentions.
Xi has all power consolidated in itself for life. Now, for the first time since Mao’s death, there is 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 circuit. Everyone is being watched by cameras linked to artificial intelligence facial recognition. About 300 key party members appear in plenary sessions and unanimously vote yes on what Xi tells them. He is a modern emperor incarnate … Hong Kong is crushed and the influential free thinking newspaper closed, journalists have been jailed.
Soros’s observations are accurate. He watches China build a muscular army, including a massive new nuclear capability, to challenge everyone in the world South China Sea and beyond. Soros’s concerns about Xi’s policy towards Taiwan can best be summed up by Xi .’s 2019 comments that the attempt to separate the island from the mainland would result in “shattered bodies and ground bones to powder.” Comments not exactly welcome from those seeking dialogue and mitigation of conflict about this semiconductor-rich country.
Investors, who already have lost half their money in the Goldman Sachs basket of US-Chinese equities from their peak in early 2021, take at least some consolation that they are not alone in the losing end of Xi’s wrath. Korean K-pop boy bands like BTS are also in trouble. But so are luxury handbag manufacturers, bling bling suppliers, Aston Martin and other luxury car manufacturers. It’s hard to achieve Xi’s new goal of “common prosperity” when driving a vehicle worth more than an entire rural village. Princeling tech billionaires like Jack Ma are tailor-made, and his hopes for the Ant Group’s financial IPO were dashed on Xi’s orders.
Why all the talk about “common prosperity?” Probably because more than 300 million Chinese live on less than $5 a day. The urban poor who earn more also suffer from high housing, education and medical costs. About 60 percent of China’s wealth is in the hands of the one percent. This is a Latin American Style Inequality difficult to understand in a “socialist” society with or without ‘Chinese characteristics’.
For investors, the absurdly opaque nature of all foreign holdings in Chinese companies creates uncertainty. This so-called “variable interest entities” a layer of self-serving fictitious distance between owners and their equity. If a Chinese citizen in America wants to buy a share of Apple, he is free to do so. His rights are the same as those of any other shareholder. Do you want to invest in Alibaba or Tencent? You must do so through a shell company listed in the Cayman Islands. You have no rights because your shares are not actually registered. To add insult to injury, Chinese regulators have threatened to investigate these deals.
How this uncertainty will be resolved is a mystery. Some like Ark investor Cathie Wood and the multi-billion dollar company Invesco think they can guess what Xi is thinking and are therefore buying companies he may prefer… such as surveillance equipment or technology used for AI facial recognition. Others are simply going to rely on “insider” information that will be disseminated by those close to Xi or claiming to be close to Xi. In the past, predicting the emperor’s thoughts was reserved for mystics, not stock analysts.
However you look at it, the investment climate in China is undergoing a landslide. The thundering days of technological advancement (Huawei), or online lending platforms (PPDAI group), or even delivery apps (Ele.me) are certainly numbered. Every company of a certain size now needs a Member of the Communist Party (CCP) either in the administration or in the workplace, not to represent the interests of the actual workers, but the party itself. How this differs from karting and sanitation companies of yore with the mafia as silent partners is beyond me.
The bottom line: with mountains of internal government debt, an expansive foreign policy built upon even more debt (The Belt and Road Initiative), formally private companies awash in debt and with a strongman concerned about the amount of makeup and eyeliner on pop idols, the investment landscape seems mired in haze.
In this regard, I am long Soros and short BlackRock and any other institution that would put money into China. Looking at China’s 5,000-year history (of which the CCP is just a minor outlier), one man rule never ends well.