Nvidia briefly hit the $2trn valuation last Friday – and seemed to bring the rest of the world with it. The S&P500 and Dow hit new highs; records were set and broken on Japan’s Nikkei and the Stoxx Europe. Even the China’s stocks got a lift from the rising tide that benefited the rest of the financial universe. It won’t be enough to rekindle the fire in the economic dragon… it’s more of a tired wheeze.
Since its peak in 2021, Chinese stocks have shed some $7trn – around 35% of their value. For context, over the same period, US stocks have gained some 14%. And India – well I digress. In January alone the market dropped $1.5trn. By February China’s securities regulator had been canned and the government was stepping in to stabilize prices. While that sort of intervention would be a red flag for any capitalist with enough money to matter; in China Big Panda’s paw on the tiller of the people’s finances is a comfort. Or at least it was when people thought Big Panda knew what the hell it was doing.
The property sector was another matter. With the exception of a single downward blip in 2008 – when the rest of the world’s property bubbles were bursting – values had gone steadily up. The meltdown triggered a secondary crisis of confidence over free markets in the West, but China fared much better. So naturally, everyone in the Middle Kingdom from the party chiefs on down assumed it was due to the superiority of what they were calling “Capitalism with Chinese Characteristics.” Or, more accurately, “facism.” Maybe. The smart money is that simple isolation saved China’s bacon rather than anything we’d call economic management. Here’s why:
In Beijing’s defense, it is hard to draw a conclusion from reality when it is incompatible with a deeply held ideology. In late 1970’s, President Deng Xiaopeng veered away from Maoism as hard any sensible person would and the country lurched from a poverty-stricken backwater to the world’s second largest economy by 2011. Xi Jingping took power in 2013, a year later foreign investors were given greater access to Chinese stocks via Hong Kong. All seemed swell and financial journalists started scrambling for Crouching Tiger Hidden Dragon metaphors.
Sometime into Xi’s second term, in 2018, likely noticing not quite $30bn leaving the country for the US real estate, he decided that it was a good idea to exert some control and steer the whole thing back into Marxist hug. In January of 2020, the covid lockdown started and would trickle on, in one awful form or another, for three years. That was also the year of the crack-down on Big Tech that rolled into a crack-down on Hong Kong in general with National Security Law that has done its best to kill the city as a financial hub.
While baffling to a capitalist, the method behind Xi’s thought process was that baseline Marxist assumption that all of history points to the ultimate triumph of communism. He firmly believes that a consolidation of historic forces is moving in China’s favor and against the West. A couple of Tech Billionaires getting uppity aren’t going to change that. The Soviets had the same theory – and given the ideology’s circular logic – the USSR’s collapse only proves Xi’s point: Moscow lost faith, and the system fell apart.
A solid belief in “the forces of history” over simple cause and effect makes for skittish and arbitrary policy. Yet nowhere in Xi’s personal history is there really anything to suggest that the man is mercurial. All reliable sources paint a picture of a man so stable that you’d never notice him until it was too late – let’s call it “stealth boredom.”
Practically speaking, the most likely scenario is that Xi simply doesn’t understand the global free market in which he finds himself a major player. He seems to know that there is a problem – but his training and devotion in an impractical economic theory creates a disconnect that can only be maintained by the true believer.
Down in the trenches, where people actually have to earn a living, they are a little more practical. And dubious. The “forces of history” rarely move fast enough to do your retirement account any favors. Chinese investors and entrepreneurs are losing confidence in the system. Analysts reckon that the country’s capital outflows are in the neighborhood of $500bn, although Beijing’s balance of payments data are hazy. Last year some $13.6 went in to the US property market – and that was after both countries passed laws restricting investment.
Foreign investors, have also lost confidence. For better than a decade Chinese returns were fine, but they never really lived up to the hype. Last year China and Hong Kong stocks were the worst performers in the world. There is an obvious problem, but Communist Party is pretty touchy foreigners have the bad form to noticed it. On top of lousy returns, Beijing has classed a great deal of garden-variety Western due diligence as espionage. This is problematic as noticing “an obvious problem” is something the profit-minded Western analyst more or less specializes in.
Now that the exodus has started, it’s hard to see why investors would come back anytime soon. And China’s economy isn’t out of the woods yet.
Still, there are places to go… Which brings us back to India – since 2021 their stock market is up by 35%. And happy Diwali to you.
Richard Murff is the founder of 4717 Insights. For more on the world, how it got here and a stiff drink, head to the 4717. Murff is the author of Pothole of the Gods: On Holy War, Fake News & other Ill-Advised Ideas, Drunk as Lords, and the upcoming Horrible Political Jokes in Ukraine.