China Bull Case Is Always Folly

It almost feel gratuitous to pound the table on China’s disappointing economic rebound and attendant aversion to Chinese assets.

And yet, what happens to China’s economy has implications for the entire world, particularly during periods when the global growth impulse wanes. When it comes to the currency, scarcely any macro meme has more momentum than de-dollarization, and the de-dollarization narrative is almost synonymous with stories about an internationalized yuan. As for local equities, they were supposed to outperform in 2023.

On Monday, H-shares fell to the brink of a “bear market” (note the scare quotes) in a fourth day of losses. Frankly, I’m not sure it makes sense to talk about bull markets and bear markets in the context of Hong Kong shares at this point.

At the lows following the Party congress in October, Xi’s efforts to eviscerate China’s homegrown tech titans had succeeded in driving city-listed Chinese shares down ~60%. The Hang Seng China Enterprises Index did attempt a rebound late last year (and into 2023) as investors bet on a post-“COVID zero” economic renaissance and an easing of the two-year regulatory blitz set in motion by Jack Ma’s Icarus moment in October of 2020. But it fizzled with the gauge still some 40% below early-2021 levels. Indeed, if you pan all the way out, it’s not obvious that H-shares will ever reclaim their all-time highs seen prior to the GFC.

Consider this as well: The Hang Seng Tech Index, the poster child for Xi’s crackdown, rose 70% from the October lows to the local highs in late January and it was still down 55% from the peak in February of 2021. That’s how much damage Xi did. The gauge is now down nearly 25% from this year’s highs.

On the mainland, things aren’t much better. The CSI 300 is down 34% from February of 2021 and 9% from its best levels of 2023. Simply put: This isn’t working. And it’s no secret why, even if it’s a mystery to too many market participants. Xi is a dictator who fashions himself a reincarnated Mao. That’s anathema to the notion that China is a place where foreign capital should flow.

Xi’s decision to commandeer Hong Kong’s democratic institutions means the city is no different conceptually than Shanghai or Beijing. The idea of Hong Kong as a thriving hub for foreign capital (for foreign anything, really) in an era of bitter strategic competition with the West is laughable. Does anyone seriously believe Xi is going to allow Hong Kong to serve as a conduit for capitalism and democracy at a time when the US is actively attempting to stymie China’s rise by, among other things, choking off the flow of technology to the country and curbing investment in critical sectors like A.I.?

In September of 2021, George Soros warned that Xi was attempting “to put in place an updated version of Mao’s party.” “No investor has any experience of that China because there were no stock markets in Mao’s time,” he wrote, in an Op-Ed for the FT.

Not everyone agreed then, and not everyone agrees now, but what we know for sure is that China thinks in decades and centuries. Westerners think in minutes, and that’s on long attention span days. Sure, Chinese equities will go up and down, Xi will step in to arrest selloffs that threaten social stability (like the Party did in 2015) and bank strategists will continue to see “opportunities” when shares overshoot, but make no mistake: Foreign capital is very low on the list of concerns in Beijing if it’s on the list at all.

On Monday, Bloomberg quoted a managing director at a Geneva-based private bank. “Investors will only return [to Chinese stocks] in a meaningful way when concerns about geopolitics and [the] broader economic recovery are allayed,” the person said. I can’t speak to when investors might feel better about the economy, but I can tell you that if you’re waiting on the geopolitical situation to improve you’ll need to think, like the Chinese, in decades and centuries.


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