Part One:
When chip-maker Nvidia briefly hit the $2trn valuation in February it kindly 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 in poor beleaguered Europe. Chinese stocks even 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, Chinese markets dropped $1.5trn. By February the country’s securities regulator had been canned and the government was stepping in to stabilize prices. That sort of intervention would be a red flag for any capitalist with enough money to matter, but in the Middle Kingdom the government’s hand on the tiller of the people’s finances is a comfort. Or at least it was when people thought the government knew what the hell it was doing.
And why not? In 2008, when property values in the capitalist world were crashing and taking hunks of the financial system with it, China endured a single downward blip in real estate prices. So naturally, everyone from the Communist party chiefs on down assumed its success was due to the superiority of what they were calling at the time “Capitalism with Chinese characteristics.” With a better grasp of English they might have used the term “fascist.” Either way, in retrospect, the smart money is that it was simple isolation saved China’s bacon rather than anything we’d call economic management.
In Beijing’s defense, it is hard to draw a practical conclusion when the real world is incompatible with a deeply held ideology. As Upton Sinclair wrote: ““It is difficult to get a man to understand something, when his salary depends on his not understanding it.” Chairman Mao was such a true believer in the face of his country’s economic devastation that even the Soviets told “little brother” to pump the breaks on the revolution. Mao did understand, however, that his rivals in the CCP were starting to sneer so the Chairman triggered the Cultural Revolution in 1966 – and it must be the only youth rebellion against authority in history to be sparked by a 73-year-old cult of personality autocrat. When Mao died in 1976, the CCP established a two-term limit on ultimate power so it wouldn’t happen again.
His successor Deng Xiaopeng veered away from Maoism as hard any sensible person could under the circumstances. The short version is that the country lurched from a poverty-stricken backwater to merely poor by cornering the market on shower flip-flops and cheap sunglasses. After joining the World Trade Organization (WTO) in 2001, the country got dubbed the Asian Tiger for stealing all sorts of innovative technology and was the world’s second largest economy by 2011. It’s hard to recall, but at the time, most of the hated gweilos – a Cantonese slang meaning “White Goblin” or “Foreign Devil” or something equally charming – were falling over themselves to welcome China’s ascent to the WTO. Sort of like offering a rich kid a Sigma Chi bid because you need the dues and you just hope he’ll be less weird once he joins. And for a while, turning a blind eye to all the intellectual property theft, seemed to have worked.
Xi Jinping was a provincial, mostly boring, bureaucrat - or at least he appeared to be. When he took power in 2013, the party insiders in Beijing weren’t entire clear where he’d come from; other than that his father had been important enough to be eaten by the Mao’s Cultural Revolution. Xi was part that class of “little princelings”, which is what the Chinese call the children of party elites from which the party draws future leaders. This is the system the CCP uses to ensure that China will never backslide into a system of hereditary privilege. In Xi’s second year in office, 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.
Then in 2018, in Xi’s second – and what should have been final - term, someone noticed that just under $30bn was flowing out of the country and into the US real estate market. Xi decided to exert some control and steer the whole thing back into a big Maoist hug. From an economic or human freedom point of view, communism is bad idea on a good day. As it was, the world was about to embark on a series of very bad days, made worse by ham-handed attempts by government’s the world over to fix them.
In 2019, Xi decided that having the kitchen door open to the free-wheeling West was a bad idea, which led to the security crack-down in Hong Kong. In 202O came the covid lockdowns which 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 an even heavier crack-down on Hong Kong that has done its best to kill the city as a financial center.
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. That a sympathetic consolidation of historic forces is moving in China’s favor and against the West. A couple of uppity tech billionaires were not going to stand in the way of the revolution. 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.
Practically speaking, a solid belief in the grand 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.”
Even if few in China really know how he wound up at the center of a cult of personality, it doesn’t change the fact that there he is. And any man who would publish a book called Xi Jinping Thought and make it a mandatory school course every year is not likely the sort of man to sit still for a lecture in basic finance. The end result being that Xi simply doesn’t understand the global free market in which he finds himself a major player.
Had Xi spent his time reading Adam Smith rather than Chairman Mao, he’d have known that attempting to stuff the capitalist genie back into the bottle is ill-advised. Marxists think that manufactured goods are neatly divisible from the knowledge that it takes to make them, as well as the ideas on which that knowledge is based. That may not sound like much when your economy dominates the market on carnival prizes, but once micro-chips and advanced programming enter the picture the learning curve gets pretty steep. Xi 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. 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 $13.6bn went in to the US property market – and that was after both countries passed laws restricting investment.
Foreign investors have lost confidence as well. For better than a decade returns were fine, but they never really lived up to the hype or, for that matter, the official numbers. Last year China and Hong Kong stocks were the worst performers in the world. Something has misfired, but the Communist Party gets pretty touchy when foreigners have the bad form to notice it. So Beijing classed most garden-variety Western due diligence as “espionage.”
Given the bath that foreign companies have taken in the wake of Russia’s invasion of Ukraine, these antics are not going to help FDI. Now that the exodus has started, it’s hard to see why investors would come back anytime soon. Still, there are places to go… Which brings us back to India – since 2021 they’re stock market is up by 35%.
Happy Diwali to you, too.
Part One: Drooping Tiger, Wheezing Dragon