No, Xi’s China Is Not ‘The Alternative’

“China is the Alternative,” read the title of a somewhat dispiriting blog post published Friday morning in Hong Kong.

It was penned by Bloomberg Television anchor David Ingles, a mainstay of the network’s Chinese market coverage.

The thesis was simple enough. If Jerome Powell’s resolve doesn’t break, the Fed will likely get US rates to 5% and keep them close to that level for most of 2023, while in China, a pivot away from Xi’s quixotic “COVID zero” strategy could come early next year, while market participants will get hints about China’s economic agenda at the Central Economic Work Conference and annual legislative meetings in March.

“Not to mention China’s likely entering an economic recovery in 2023 — the same time the US feels the pinch of this year’s Fed hikes, and as far as valuations go, Chinese equities are substantially further below their historical norms than US peers are,” Ingles wrote. “Get used this to acronym: CITA.”

To be sure, he may be right about a Chinese pivot. Although Chinese officials pushed back on the reopening rumors responsible for this week’s 9% surge in Hong Kong shares (figure below), you could almost perceive a kind of coyness.

“We must resolutely maintain the general approach of ‘preventing imported cases and domestic resurgence’ and the overall strategy of ‘dynamic COVID zero’,” The National Health Commission said Wednesday, following a meeting.

China is reporting thousands of new cases per day, which means the real number is likely multiples of that. Mass testing and quarantines are still the norm. A lockdown in “iPhone City” made international headlines for all the wrong reasons. And Disneyland found itself tangled in Xi’s virus dragnet. Again.

Still, a Beijing that wants to dispense, once and for all, with unfounded rumors, isn’t a Beijing that lets any version of those rumors linger. And linger the reopening rumors most assuredly did, to dramatic effect in beleaguered local equities, which came into the week reeling from Xi’s power consolidation at the Party congress last month.

In addition to the Hang Seng’s best week in more than a decade, Hong Kong-listed Chinese shares had their best week since 2015. And the Mainland benchmark rose more than 3% Friday. It was the second 3% rally this week (figure above). That’s rare.

China is concerned about capital outflows, and although the PBoC has allowed the yuan to depreciate, it’s been a managed affair. So, it’s certainly possible that authorities in Beijing are merely countenancing unfounded rumors because it serves a purpose — namely, getting people excited about Hong Kong and Chinese shares again, after the word “uninvestable” made a comeback following the Party congress.

But let’s be clear: Xi Jinping is a dictator. As I’ve reiterated at regular intervals for three years running, international investors can’t trust their money in Hong Kong or China. I don’t care what John Lee said during his farcical opening address to this week’s business summit in the city.

Although Xi wouldn’t describe himself as capricious, outsiders have no way of knowing how far he intends to push the envelope on various policy priorities, or when he plans to pivot from them in the interest of pursuing other, competing priorities. So, even if there’s a method, it still looks like madness to the rest of us. He may be entirely predictable in the eyes of his inner circle, but because Party policymaking is opaque, Xi is de facto capricious to the rest of the world.

Those peddling buy-the-dip calls for mega-cap Chinese tech shares over the past two years have (or haven’t, whichever the case may be) learned a hard lesson about autocrats. They can’t be brought to heel by markets. Just ask anyone who insisted, starting in early 2018, that lira depreciation would eventually force Recep Tayyip Erdogan to abandon his unorthodox views on the interplay between rates, inflation and the currency.

Although experts on Turkey (and here I mean real experts, not EM fund managers) may disagree with this assessment, Erdogan’s autocracy is much softer than Xi’s. As noted above, Xi is an out-and-out dictator now. And he’s turning China into a totalitarian state.

As long as Xi’s in power, China will never be “the alternative.” Not in the market context, and not in any other context either.

To be fair to Ingles, you can’t say that in Hong Kong anymore.