China phase II

The Chinese Communist Party’s celebration of its first century in power was a perfectly oiled and impressive affair. While there was no fresh agenda released on that occasion, there are must-know KPIs for investors since being invested today in any risk asset implies taking a stance on China.

What needs to be highlighted?

It is worth remembering how wrong the Western community has been when Xi Jinping took the helm eight years ago. He was then regarded as benevolent and willing to pursue some degree of modernisation as fostered by Deng Xiaoping. Already very sophisticated finance and e-commerce platforms were regarded as indicative of a high degree of political flexibility/innovation, itself supported by a shift to consumer-led growth.

Such a reading had then all the hallmarks of wishful thinking, i.e. the West replicating what it knows (economic growth patterns, financial mechanisms) on something it cannot grasp, i.e. an inward-looking, millenary culture with an impossible to model governance. Today, China is a way stronger, way stiffer and way more assertive proposition than anticipated then. The PCC will not be told anything. There is one but essential message when it comes to China’s outlook: stop believing that Western-type common sense is a basis for discussion and risk taking.

With this in mind, few things can be deemed certain. We venture a few axes that investors would do well to keep in the back of their mind. We obviously have no view about how long the CCP’s strangle on power will last and how stressful the convulsions will be when it is past its prime.

In random order of importance:

– The e-Yuan probably ranks very high. This central bank digital currency aimed at Chinese depositors (and Chinese tourists set to spread it across the planet) is a game-changer for the planet as it forces every central bank to react. NOW. None will escape the dilemma of anonymity associated with a digital currency. It is a governance issue. The PBoC has no such concerns as individual rights are accessory to the common good. The PBoC is already forcing other central banks into a minefield.

– Data: Xi’s CCP took its time to realise that personal data as owned and managed by Chinese internet stars (Tencent, Ant, Alibaba, ByteDance, Didi, etc.) had the potential to manage crowds possibly in competition to the Party. The realisation has been sudden and brutal with the Ant IPO ditched (worth $300bn…) and now the blow to Didi Chuxing right after it listed in New York. The message is that personal data is political and there is no price tag high enough to divert it from the Party’s control. No personal data can belong to the market/wider ownership.

– Consumer spending: social peace has been largely achieved by rising living standards and freedom to spend, including on highly discretionary items. Where are Rolls Royce’s Phantom VIII and Hermes’ Kelly bags sold if not in China? There are another 500-600m poorer citizens willing to walk above the poverty line. That gives birth to simplistic financial market blurb that they are ‘a further potential for western luxury brands’. Such hopes also come to explain that Luxury (bags & Autos) stocks have gained about €400bn in market cap between 2019 and 2021. Late Professor Gini and his eponymous coefficient are not happy about wealth distribution though, so that a CCP’s kneejerk on the political implications of supporting foreign Luxury through easy taxes / virtual duty free is a near certain outcome.

– Pushing hard the military to equal that of the US will mop up considerable Chinese resources and lead to even worse tensions. That is not a growth perspective, it is about wasting resources, but it will happen. Military affirmation is a prime reason for China to go down the 3nm route for semiconductors, go quantum computing, go to Mars and multiply biotech initiatives. China is made of hundreds of millions of well-educated people that will accelerate technological progress. Western tech sectors will soon discover that they are not alone at the frontier end.

Environmental matters are the only source of political worry that one can identify. No government can survive a population stressed by environmental / health issues. COVID-19 had a lucky outcome as children were not exposed so that the Chinese citizen did not overreact (or any population for that matter). The CCP would not survive an environmental disaster so would be expected to react very brutally. The implications are that China will lie about environment matters as long as it is needed and will shift responsibilities on the west for even longer. Debunking lies will be difficult. On the other side of the environmental equation, learning curve effects in China will put to misery most of the Western providers of green solutions.

We cannot but conclude by mentioning the submission of Didi’s management after it has been told (2/07) to behave by the CCP: “We sincerely thank the competent authorities for guiding Didi to investigate our risks, and we will earnestly rectify and reform”. Valuations will not benefit.