Investors Should Abandon Wishful Thinking on China
CommentaryWestern investors have been very patient, and even persistent, in believing for decades that China will be the new frontier, the investing “holy grail,” even. After decades of investment and engagement with China, however, the country’s ruling Chinese Communist Party (CCP) has not become more democratic. Now that the 20th Party Congress has come and gone, it’s clear that the regime has become more insular. Xi Jinping’s grip on power is now tighter than ever. The government is more authoritarian and top-down than ever before. Its policy direction? Harder to read than at any time since the 1970s. Investors hoping to get a read on what the CCP will do next, both economically and politically, were left disappointed. One of the biggest questions in the minds of Western investors leading up to the National Congress—whether the zero-COVID policy would continue—was not answered. Or, more accurately, the answer is that it likely would continue because that is Xi’s wish. It was wishful thinking on the part of Western investors hoping otherwise. The CCP’s “grow and get rich” policy under the previous Chinese leaders Jiang Zemin and Hu Jintao is no longer the mandate. “Can China provide support to the global economy? Will China rekindle inflationary pressures?” Those were the questions posed in a recent Morgan Stanley research note on Oct. 31. Important questions if you’re a multinational business leader with operations and logistics in China, or a global investor looking to gain exposure to Chinese stocks. The sooner China can exit from it per-COVID policy, the better its economic outlook and the better the investment prospects. But the truth is, Xi doesn’t care. China’s Rules, Western Fools It may be a painful realization, but the CCP simply doesn’t play by Western rules. By stacking the Politburo and Standing Committee with his allies, Xi now has a longer leash than ever before. He can tolerate lower or even negative economic growth. Unlike Western leaders who face ongoing elections every few years, Xi doesn’t need to deliver short-term results. And China’s people? With the tightly controlled media and propaganda environment, they’re far easier to bring into line than, say, Americans. In fact, after a delay, Beijing released third-quarter GDP figures of 3.9 percent growth compared to a year earlier. It’s lower than the 5.5 percent forecasted by the regime, but it’s a positive headline. And whether it’s real or not… well, that doesn’t matter here, does it? It appears foreign investors are finally getting the message. China’s financial markets sold off after the National Congress, both in Shanghai and Hong Kong. It’s striking given that GDP growth was more positive than expected, in a sign that some investors are permanently leaving the Chinese market. And that may just be fine for Xi. He has been steering China to become more nationalistic, more closed-off, and more self-dependent. And he’s put an emphasis on security and politics even at the expense of the economy. Another big question on the minds of investors concerns the real estate development industry. Many foreign investors are holding dollar-denominated debt issued by Chinese developers, and it would have been great to get some assurances that Beijing has their back. Well, there was no substantial development on that topic from the National Congress. Authorities are unlikely to allow the housing market to completely collapse. But the policy to de-lever the real estate developers was very deliberate and came straight from the top. The CCP is unlikely to suddenly reverse course, no matter how much Western investors are hoping for it. There was also no reported easing of the CCP’s regulatory scrutiny over the technology sector, a hotbed of foreign investment activity. Of Xi’s seven appointees to the Politburo Standing Committee, none of them are proponents of the tech industry. The closest one may be Li Qiang, the former Shanghai party boss who orchestrated harsh COVID lockdowns, and who also oversaw approvals for Tesla’s gigafactory and the tech-friendly Star Market. Li and others now are more likely to push adoption of “common prosperity,” “Xi Jinping thought,” and political loyalty than tech-friendly policies. It’s no wonder that shares of tech giants such as Tencent and Alibaba sold off sharply following the conclusion of the National Congress. “The new administration doesn’t look particularly business-friendly …. There’s every indication that party loyalty trumps everything else,” Richard Harris, CEO of Hong Kong-based Port Shelter Investment Management, told The New York Times in a report on Oct. 24. Well, isn’t that the understatement of the year. If they haven’t already, Western investors need to abandon their “China dream” quickly. Views expressed in this article are the opinions of the author and do not necessarily reflect the views of The Epoch Times. Follow Fan Yu is an expert in finance and
Udumbara
Commentary
Western investors have been very patient, and even persistent, in believing for decades that China will be the new frontier, the investing “holy grail,” even.
After decades of investment and engagement with China, however, the country’s ruling Chinese Communist Party (CCP) has not become more democratic. Now that the 20th Party Congress has come and gone, it’s clear that the regime has become more insular. Xi Jinping’s grip on power is now tighter than ever. The government is more authoritarian and top-down than ever before. Its policy direction? Harder to read than at any time since the 1970s.
Investors hoping to get a read on what the CCP will do next, both economically and politically, were left disappointed.
One of the biggest questions in the minds of Western investors leading up to the National Congress—whether the zero-COVID policy would continue—was not answered. Or, more accurately, the answer is that it likely would continue because that is Xi’s wish.
It was wishful thinking on the part of Western investors hoping otherwise. The CCP’s “grow and get rich” policy under the previous Chinese leaders Jiang Zemin and Hu Jintao is no longer the mandate.
“Can China provide support to the global economy? Will China rekindle inflationary pressures?” Those were the questions posed in a recent Morgan Stanley research note on Oct. 31. Important questions if you’re a multinational business leader with operations and logistics in China, or a global investor looking to gain exposure to Chinese stocks. The sooner China can exit from it per-COVID policy, the better its economic outlook and the better the investment prospects.
But the truth is, Xi doesn’t care.
China’s Rules, Western Fools
It may be a painful realization, but the CCP simply doesn’t play by Western rules. By stacking the Politburo and Standing Committee with his allies, Xi now has a longer leash than ever before. He can tolerate lower or even negative economic growth. Unlike Western leaders who face ongoing elections every few years, Xi doesn’t need to deliver short-term results. And China’s people? With the tightly controlled media and propaganda environment, they’re far easier to bring into line than, say, Americans.
In fact, after a delay, Beijing released third-quarter GDP figures of 3.9 percent growth compared to a year earlier. It’s lower than the 5.5 percent forecasted by the regime, but it’s a positive headline. And whether it’s real or not… well, that doesn’t matter here, does it?
It appears foreign investors are finally getting the message. China’s financial markets sold off after the National Congress, both in Shanghai and Hong Kong. It’s striking given that GDP growth was more positive than expected, in a sign that some investors are permanently leaving the Chinese market.
And that may just be fine for Xi. He has been steering China to become more nationalistic, more closed-off, and more self-dependent. And he’s put an emphasis on security and politics even at the expense of the economy.
Another big question on the minds of investors concerns the real estate development industry. Many foreign investors are holding dollar-denominated debt issued by Chinese developers, and it would have been great to get some assurances that Beijing has their back.
Well, there was no substantial development on that topic from the National Congress. Authorities are unlikely to allow the housing market to completely collapse. But the policy to de-lever the real estate developers was very deliberate and came straight from the top. The CCP is unlikely to suddenly reverse course, no matter how much Western investors are hoping for it.
There was also no reported easing of the CCP’s regulatory scrutiny over the technology sector, a hotbed of foreign investment activity. Of Xi’s seven appointees to the Politburo Standing Committee, none of them are proponents of the tech industry. The closest one may be Li Qiang, the former Shanghai party boss who orchestrated harsh COVID lockdowns, and who also oversaw approvals for Tesla’s gigafactory and the tech-friendly Star Market.
Li and others now are more likely to push adoption of “common prosperity,” “Xi Jinping thought,” and political loyalty than tech-friendly policies. It’s no wonder that shares of tech giants such as Tencent and Alibaba sold off sharply following the conclusion of the National Congress.
“The new administration doesn’t look particularly business-friendly …. There’s every indication that party loyalty trumps everything else,” Richard Harris, CEO of Hong Kong-based Port Shelter Investment Management, told The New York Times in a report on Oct. 24.
Well, isn’t that the understatement of the year. If they haven’t already, Western investors need to abandon their “China dream” quickly.
Views expressed in this article are the opinions of the author and do not necessarily reflect the views of The Epoch Times.
