How Much For The Mogwai?

“Beaten-down technology shares have enticing valuations,” read the deck on a Bloomberg piece published Monday.

Spoiler alert: The linked article was about mega-cap Chinese tech, which 42% of people who haven’t read any Marx said is the best choice if you’re looking to add exposure to Chinese assets.

A Bloomberg survey of terminal users and website readers conducted earlier this month showed that nearly three-quarters of retail investors would add “beaten-down” Chinese tech stocks. 57% of professional investors said the same. Hilariously, 12% of retail investors chose “real estate credit.” I’d love to hear a retail investor describe their strategy for buying Chinese developer bonds. You can’t just go to Chinatown and say, “How much for the Mogwai?”

I bring this up because, thanks to a 16-point plan to rescue the property market (which Xi deliberately undercut), and a 20-point plan to rescue the economy (which Xi likewise undercut), we’re all supposed to pretend that Chinese assets are investable again.

If you’re inclined to say you’ve heard this story before, you’re not wrong. Every two months or so, the Party sketches out a plan, the financial media explains why the new plan betrays a sense of urgency not evident in previous plans, local assets rally, then something happens to undermine confidence again, and everybody’s back to square one.

On Monday morning in Hong Kong (where you can’t saying anything bad about Xi), Bloomberg’s anchors, with an on-set assist from resident “expert” Sofia Horta e Costa, debated whether the latest plans are too little, “too late.” If the question was about saving the Chinese economy (and to be fair, I think it was), then maybe we can have that discussion. If, however, the question is about whether it’s too late for, say, Chinese tech, there’s nothing to discuss. Yes, it’s too late. Here, have a look:

The omission of a secondary heading on the chart was purposeful. The title is its own punchline. It’s not a “dip,” it’s just one, long descent into totalitarian hell which, unhappily, mirrors the plight of Hong Kong’s populace.

Sometimes, I’m genuinely unsure about investors’ grasp of simple math. If something you own loses 75% of its value, the only way you’re going to see record highs again anytime soon is if the asset in question is extraordinarily volatile. Maybe you buy a meme stock at $100, it falls to $25 and then it rebounds to $95 because management — I don’t know — gets into the NFT business, promises to send every shareholder a pack of Starburst and the Reddit crowd takes the opportunity to engineer a gamma squeeze. Outside of that, a 75% drawdown is a death knell.

The caveat is that Chinese tech is volatile, and most assuredly has scope to stage a monumental rally. But if you’re an investor (as opposed to a day trader) I implore you not to lose track of the math. In order for the Hang Seng Tech Index to reclaim the February 2021 highs, it’d have to surge 290%. That’s exceptionally unlikely given Xi’s commitment to “common prosperity,” an unspoken pillar of which is preventing tech moguls in China from accumulating too much wealth.

The same challenging math applies to H-shares and especially to property companies. In a separate article Monday called (try not to laugh) “Chinese Stocks Storm Into Bull Market on COVID, Property Shifts,” Bloomberg noted, correctly, that the Hang Seng China Enterprises Index is up 20% since the October lows. But, as Shikhar Balwani was courteous enough to point out, “the milestone may be less relevant than usual given this year’s high volatility and the fact the gauge is still down more than 25% this year.”

I’d call that an understatement. Even after a 20% rally from the lows, the gauge would have to double just to get back to levels seen at the onset of Xi’s crackdown early last year. It’d need to rise 147% to reach levels witnessed at the height of China’s ill-fated equity bubble in 2015.

The figure (above) gives you a sense of how H-shares are behaving (or misbehaving) amid the new “bull” market.

Overseas investors (read: Dumb money which hasn’t studied any sort of history) apparently bought a combined $4 billion in A-shares through the links on Friday and Monday.

And why not, right? After all, capital goes where it’s most welcome, and nothing says “Welcome, foreign capital!” like a guy dressed in a Mao costume threatening to “crack the heads” and “spill the blood” of foreigners. How’s that for red carpet treatment?

The problem is always the same: Neither the fundamentals nor the technicals matter. They may matter when policy isn’t shifting, but when it is, only Xi matters. I can understand why someone with $1,000 to gamble might throw it at the Golden Dragon Index. What I can’t understand, though, is why anyone would commit a large amount of capital to Chinese assets knowing that, at any given time, all the analysis you did (all the fundamental work, and all the time you spent analyzing momentum signals), can be rendered meaningless by an abrupt policy shift. Think about it this way: Would you buy Meta down 70% if Joe Biden could unilaterally declare it property of the state and seize all its profits by overnight decree? Of course you wouldn’t. That’s the kind of power Xi wields.

But who knows. Maybe these new plans (which again, are aimed at bolstering the real estate market and easing some virus curbs) do indeed mark a turning point. As one would-be comedian informed me last week, a handful of calls he bought on a China-focused ETF were up sharply since my suggestion that Xi’s China will never offer a viable alternative to Western capital markets. Who you gonna believe, right? Xi himself, in word and deed, or the $750-dollar paper gain in your E*Trade account?

Ultimately, it all comes down to follow-through. Will the Party or won’t the Party do enough to put a floor under the collapsed property market? Will Xi or won’t Xi be willing to join the rest of humanity in conceding that COVID is endemic and thereby not conducive to any prevention strategy which revolves around preventing any and all transmission? (China reported nearly 16,000 new local cases on Sunday. It was the fourth straight day local cases exceeded 10,000. The last time China was reporting this many local cases, Shanghai was locked down under Li Qiang, who’s now Xi’s No. 2.)

As one Hong Kong-based strategist put it over the weekend, “execution remains key.” In that regard, Xi’s new plans for real estate and COVID are similar to his anti-corruption strategy.