People think I’m a China bear. I’m not.
I mean, I am in the sense that I’m bearish on totalitarian dictatorships. Dictatorships are different from autocracies. I don’t love autocracies either. Who would, other than autocrats? But they can “work” — sort of, with scare quotes. Dictatorships almost never work. Totalitarian dictatorships are a one-way ticket to hell. China, under Xi, has undergone a hideous metamorphosis from autocracy to dictatorship to now totalitarian surveillance state.
Xi’s caught up in one of the oldest political adages in the book: Power corrupts, and absolute power corrupts absolutely. He’s not “corrupt” in the Western sense of the word. In fact, Xi’s the opposite of that sort of corrupt. He murders people who’re corrupt in a Western sense — graft, theft, even greed, to the extent it’s deemed societally injurious, are punishable by death in Xi’s China. Or at least by death sentences, which may or may not be commuted. Xi would emphatically insist he’s a man of the highest moral principles. But he isn’t. He’s a tyrant. And there’s no purer form of corruption than tyranny.
I doubt things will end well for China on its current arc, although I readily concede the odds of my living long enough to personally witness a democratic transition are quite low. But until such a time as the Party at least returns to the kind of feigned, half-hearted commitment to glacial reform that typified the pre-Xi era, I won’t be comfortable investing in the nation’s equities.
That’s certainly not to suggest there isn’t money to be made. Plainly there is. Just ask anyone who bought Chinese stocks early last month then sold five weeks later for a 35% gain. But, again, I’ll wittingly forgo those quick-hitter profits, and even the long-term opportunity inherent in China’s ongoing transformation to a high-income country, until Xi’s gone. No matter how large the potential upside.
Some of you would rather not miss out on that upside, though, particularly not if the potential reward justifies the risk. So, how to quantify it? The prospective reward, I mean. There are any number of ways to go about that, but one I found attractive from a kind of elegance-in-simplicity perspective, is illustrated by the figure below, from BofA.
So that’s… well, it’s just what the axis labels say it is: Household consumption as a share of economic output plotted with GDP per capita.
The implication is that if the Party succeeds in bolstering domestic demand and rescuing the property market, there’s a lot of upside from the latest stimulus push.
The bank’s Michael Hartnett walked through another one of what I’ve described, not charitably, as “speculative math exercises.” “This week’s China stimulus [called for] an extra CNY2 trillion so local governments can double purchases of private property to CNY4 trillion,” he wrote, calling that “meaningful” in the context of CNY8 trillion in annual residential property sales.
“Unlike the past 20 years, China stimulus in 2024 is targeted at households,” he went on, adding that consumption in China as a share of GDP is “very low” versus the country’s developing-nation peers. It’s time, he suggested, to “buy China consumer stocks.”
Maybe. But Mao’s a hard pass for me, thanks.
LGs buying unsold homes from developers is not consumer-directed stimulus. Central govt investing to complete construction of sold but unbuilt homes seems more intended to keep consumers paying their mortgages. PBOC-funded buying of stocks may have some wealth effect.
The direct stimulus to consumers seems rather specific and limited – more student grants, more aid for lowest-income, incentives to buy appliances, etc.
Thank you for the consideration
I agree with you, given the current status of China with Xi at the helm.
However, I attended the Paris auto show yesterday. I was absolutely blown away by the number of/quality of the Chinese e-cars with higher performance, build quality, design and better range reliability than what the US and European automakers were presenting. Very scary to observe this because I fear for the US auto industry. These Chinese automakers are quietly beating the pants off of the US/ European automakers- an observation that I confirmed with my “number one nephew”, who works at Tesla as an engineer.
Once Xi is gone/removed, if China becomes a better global citizen and capitalism is allowed to flourish (the “tell” will be when Jack Ma moves back to China), the US auto industry won’t be able to compete anywhere it isn’t protected by tariffs. This will be when I immediately put a lot of capital into Chinese companies/ downsize my SPY position.
If I were in the market for a small, electric, luxury crossover SUV (I am not- as I am actually looking at several gasoline powered cars with manual shifting), I’d want an Aito M5.
I’m planning on getting me a new Ram Longhorn truck.
Just bought a Hundai Ionic due to it being the most efficient electric in the USA. I am amazed at it’s performance. At 15 cents per kwh I get a mile on 3 cents of electricity. My Mazda 3 recently was 10 cents and newer was no better than 7.5 cents. The car after incentives was $26K and it will pay for itself on fuel savings over 10 years I typically hold cars. Once I go with solar charging it will be zero fuel cost per mile in town.
I think it is a little premature to count out USA on auto manufacturing. The structural advantages of China cornering commodity markets is being eroded by technological change and government investments. Recently nearby in Wyoming a very large deposit owner was giving 100’s of millions to build a processing plant. We are seeing large scale lithium development which is partly funded by U.S. government. I think these developments will break china’s grip on these critical commodities which underpins china’s competitiveness in auto manufacturing.
The Ioniq 6 was on my shortlist when I was in the market. After a weirdly bad experience with several Hyundai dealerships, I got a Polestar. It’s the most amazing car I’ve ever owned. No one needs 412 horsepower, but by god it is fun.
Polestar is actually a spinoff from Volvo… which is controlled by the Geely automotive group… which is how I unwittingly came to drive a car that was made in China.
SeaTurtle’s comment above is spot on. China makes an incredible EV.
In a fit of clarity I bought 1000 shares of BYD six years ago and gifted it to her. The Chinese market is not a really good place to play around but so far she is happy. I love that they are kicking Tesla’s butt globally.
“Her” is my daughter.
I knew that, even before you clarified 🙂