Xi’s ‘Profound Revolution’ Renders Market Calls Worthless

As it turns out, Xi Jinping’s sweeping regulatory blitz (which, if you date to Jack Ma’s criticism of global regulators and the subsequent icing of Ant Group’s IPO just days later, is approaching its one-year anniversary) is a “profound revolution.”

That’s according to a WeChat blogger who, writing under the name “Li Guangman: Ice Point Commentary,” penned a lengthy recap of Xi’s efforts this week. In what was described by some Western media outlets as an “unusual” move, it was subsequently reposted by a hodgepodge of prominent Party mouthpieces, including the People’s Daily, Xinhua, CCTV and PLA Daily.

“From the suspension of Ant’s listing, to the central government’s rectification of economic order and anti-monopoly push, to the fine of Alibaba and the investigation of Didi, to the solemn commemoration of the 100th anniversary of the founding of the Party by the central government and the proposal to take the path of common prosperity, the series of rectification actions by the People’s Republic of China are telling us that China is undergoing major changes, from the economic, financial, cultural, and political fields to a profound change, or a profound revolution,” the commentary proclaimed, calling the push “a transformation” from a socioeconomic environment increasingly beholden to capital, to a conjuncture that’s “people-centered.”

Although Xi’s crackdown long ago metamorphosed into something much broader than an anti-monopoly push, Western investors have attempted to characterize it in benign terms. Just last week, for example, MSCI CEO Henry Fernandez told Bloomberg that regulatory compliance tends to take center stage in China “every three, four, five years [but] very quickly afterwards, the markets have recovered and gone through to new heights.” The day after his comments, Chinese tech shares promptly rebounded, but the rally fizzled late last week.

In the 72 hours from Friday to Monday, Beijing unveiled still more decrees, including a campaign to scrub the internet of commentary that “bad mouths” the world’s second-largest economy. Xi wants less of that, and more of what you read in the excerpted passage above. The same commentary (from “Li Guangman”) cautioned against attempts to “block the profound people-centered change” which was described as “a return to the original intention of the Chinese Communist Party [and] a return to the essence of socialism.”

As you can imagine if you’re familiar with his dailies, Rabobank’s Michael Every had quite a bit to say about this. “Western market analysts and MSCI, who are far happier dealing with Marks & Spencer than Marx & Engels, have tried to explain away the phrase ‘common prosperity’ as a series of technocratic measures or periodic regulatory compliance procedures,” he wrote, adding that “MSCI would have a whole lot of egg on its face to say otherwise, of course, as would Western investment banks who just opened wealth management arms in China.”

George Soros, writing in an Op-Ed for the Financial Times, delivered a stark warning to investors which I’d be remiss not to mention echoes my own talking points around market participants’ unwillingness to come to terms with the reality of authoritarians and autocratic regimes.

“Foreign investors who choose to invest in China find it remarkably difficult to recognize [the] risks,” Soros wrote, adding that,

They have seen China confront many difficulties and always come through with flying colors. But Xi’s China is not the China they know. He is putting in place an updated version of Mao Zedong’s party. No investor has any experience of that China because there were no stock markets in Mao’s time. Hence the rude awakening that awaits them.

Late last month, while documenting Xi’s decision to effectively wipe out China’s $100 billion EdTech industry, I asked readers the following question:

In a society where school children gather in matching outfits for ceremonies featuring, among other spectacles, choreographed song and dance routines where performers chant “Listen to the Party, be grateful to the Party, and follow the Party,” how realistic was an investment thesis predicated, at least implicitly, on the idea that the government will allow the nation’s youth to be taught by a collection of privately-run, for-profit companies, some of which have overseas listings?

It was rhetorical. When it comes to analysts (and market participants more generally), nobody ever learns, stuck as they are in a fantasy where capital is a jealous deity capable of bringing even the most ruthless dictators to heel. It’s conceptually similar to what happens when purported EM “experts” (many of whom have years of experience trading EM FX and debt) take Turkey’s Erdogan at his word.

Now here we are, a year on from Ma’s “big mistake,” as I’ve called it, staring at a “profound revolution.”

Of course, there is a restraint. Time and again I’ve emphasized that, ironically, plunging stock prices can serve as a check on Xi, but only if they threaten the social stability he’s attempting to foster.

Soros agrees, for whatever that’s worth. In the same FT Op-Ed, he described Beijing’s (at times bungling) attempts to keep any collateral damage in equities from spiraling out of control. “Xi does not understand how markets operate,” Soros charged. “As a consequence, the selloff was allowed to go too far [and when] it began to hurt China’s objectives in the world, Chinese financial authorities [went] out of their way to reassure foreign investors.”

He went on to deliver another stark warning. “That is a deception,” Soros said, adding that “Xi regards all Chinese companies as instruments of a one-party state.”

In his Tuesday missive, Rabo’s Every listed several possible ramifications for markets. “This is likely to see Chinese equities (and housing?) continue to underperform those in the US,” he began, on the way to suggesting Xi’s “profound revolution” may also “add to pre-existing downward pressures on Chinese growth,” could influence Fed and ECB policy and may exacerbate geopolitical tensions.

Most poignantly, Every wrote that, “If all you understand is neoliberalism, knowingly or unknowingly, your market calls are not going to be worth much when the really big shifts happens.”