Xi Jinping may be done bleeding China’s largest tech firms (for now), but a purported “end” to the two-year crackdown on the country’s internet behemoths won’t be sufficient to restore investor confidence. Not with the Mainland economy floundering.
As you might’ve heard, the Party last week fined Ant Group and Tencent a combined CNY10 billion in connection with a hodgepodge of alleged infractions, marking what analysts and the financial media naively assessed to be the end of a long-running shakedown.
On the off chance you’ve never lived in close proximity to a protection racket, allow me to enlighten you: There’s no “end” to these sorts of arrangements. The fines levied on big-cap Chinese tech by the Party are indistinguishable from protection payments: “Nice companies you got there. Shame if something happened to ’em.”
Efforts to contextualize the Party’s investigations into domestic tech companies by way of ideology were admirable to the extent market participants had trouble coming to terms with the reality of a man who styles himself after Mao. But with apologies, the standard “Ignorant Westerners haven’t read Marx” lament felt pitiably pompous and wholly superfluous by year two of Xi’s crackdown.
Pitiably pompous because nobody in the 21st century cares how much theory you’ve read, so insisting on the point just made you look like the guy at the party with an upturned polo shirt collar (you think it looks haughty, but everyone else just thinks you look like a moron). Wholly superfluous because at this point, the Party is less Mao and more Tony Soprano.
The victims of protection rackets in many cases aren’t paying for protection from other people, they’re paying for protection from the people running the racket. That’s the whole game. Xi’s tech crackdown is best conceptualized through that lens. It’s never going to be “wrapped up.” If you invest in those companies, you’re investing in the local pizza shop that has to hand an envelope with $5,000 in it to a Bonanno soldier at the first of every month. It’s just that simple. Failing to come to terms with that reality will leave you perpetually frustrated whenever there’s a new “fine” or a new “probe” or some editorial in state media suggesting “wrong behavior” needs to be “rectified.”
Consider the language China used this month to push back on a bearish Goldman note about Chinese banks. Goldman, China Merchants said, was being “illogical,” and its analysis “lacked basic common sense.” Last week, state media accused Goldman of “misinterpreting the facts” in connection with the same note. If Goldman were a Chinese bank and an employee who “lacked basic common sense” wrote a note which “misinterpreted the facts” about critical state enterprises, that “misinterpretation” wouldn’t go unaddressed. There’s a reason why Jack Ma spent so much time out of the country.
Meanwhile, the Chinese economy continues to exhibit signs of frailty. Although not unexpected, Monday’s flat CPI reading (for June) was a testament to lifelessness. Core ran at just 0.4% last month.
Remember: Disinflation isn’t a good thing in China. Rather, it’s a sign that domestic demand remains anemic.
Efforts to revive an economy which labored for the better part of three years under COVID curbs far more draconian than those seen during comparatively fleeting lockdowns in the Western world, have generally come to nothing. That’s evidenced in part by nonexistent price growth, although obviously, the CPI and PPI figures are influenced by any number of factors.
Producer prices fell more than 5% YoY last month, the deepest bout of factory gate deflation in more than seven years.
Officials seem paralyzed. The dribs and drabs easing continues (see last month’s rate cuts), but Beijing’s aversion to big stimulus now borders on a phobia. It’s certainly refreshing that at least one major economic power feigns concern for responsible policymaking, but China is slipping into outright deflation.
To the extent the PBoC is concerned about policy divergence and the read-through for the yuan, they’d do well to note that the lackluster growth impulse is putting downward pressure on the currency anyway. They’re being forced to lean into the fix seemingly every, single day. Apparently, nobody is impressed with the discipline on display at the central bank. It looks more like masochism.
Global demand is likely to weaken going forward. Domestic demand is already weak. China could revive both with a big stimulus push, but it’s obvious by now that the Party doesn’t intend to go that route.
I wonder if Ms. Yellen gently made the same points in the recent 5 hour meeting…
H. You sure can write. The pieces always fit perfectly. However, as an aside, I’ve been popping my polo collars for 65 years, only because it feels protective. My dad and his brother both got skin cancer on their necks from decades in the sun. I never liked that idea. It killed my uncle. Besides, no one else does it very much and I like that.