Blain’s Morning Porridge 28th June 2023: China and the West are Diverging – how must less investible will The Middle Kingdom become?
“Cheap things are not good; good things are not cheap.”
China and the West are diverging into different economic camps. It stings both ways – Western companies trying to build new but more costly secure supply chains, while the Chinese economy struggles with lost orders. Can there be an accommodation?
I am regularly told why I should be invested in China. I am equally regularly told why I should not be! I remain …. open to discussion.
When I used to visit the Middle Kingdom I was always mightily impressed – modern one moment, and then some extraordinary historical monument around the next corner. In the 1990s I picked up prints in flea markets I am now told may be worth something – but I would never sell them. It’s an absolutely fascinating place. No nation has ever lifted so many people out of poverty in such a short time. No nation has built such a surfeit of modern infrastructure, property or established itself as a leading global economy so swiftly. Over the years I’ve taken time to learn a little of its history – but there is simply so much.
But – I wonder at how real it might all be.
Like most western financiers, deep down I am deeply suspicious and distrustful of how Autocracies play to a very different economic and market vibe than Western Democracies and Free Markets. China has succeeded in way Russia never could – it was organised and focused. It has done well through hybrid markets and state direction, but in recent years the clamp down on exuberant technocrats, surveillance capitalism while closing its’ “cloud-borders” to outside news and influence demonstrates how different it is.
As a result, it’s fair to say the performance of the China part of my investment book has been…. disappointing.
A quick glance at the state of play in global geopolitics shows how the gap between the economics of democracies and free markets, and the state autocracies have widened massively in recent years reflecting not just the Ukraine War, but the coming struggle for global dominance. The West? China? The Gulf? Brics? The Global South? India? Its all a very different and changing economic environment.
When it comes to China… This morning there are a number of stories around China that caught my attention.
The FT sets the tone: China censors financial blogger as economic recovery falters. Financial commentators – probably not unlike myself – are being blocked from Weibo (China’s Twitter) for posting tales that disagree with the official narrative of growth and prosperity. If you want to write about finance in China – you need to be positive – support the narrative. Finding out what is really going on in China has always been…. challenging. You see and hear what you are supposed to see and hear.
The second story is on Bloomberg: Xi Vow to Protect Foreign Investors Ramps UP Charm Offensive. The slowing economy, the imperfect post Covid recovery, the efforts of the West to de-risk from over-reliance on uncertain supply chains, and the perception China has closely re-aligned with Russia, has created economic uncertainty as foreign investors and trade counterparts hold back. These are further compounded by the west disengaging economically for reasons including China’s bellicosity over Taiwan, its crude debt diplomacy, human rights, and the rest.
(Another tale of misalignment with the West is HSBC becoming entrapped into providing banking services for the Crypto Businesses China has decided to incubate in Hong Kong: HSBC pressed by Hong Kong regulators to take on Crypto clients.)
Strip away the positive narrative of China welcoming global entrepreneurs to the “Summer Davos” in Tianjin this week, and the reality is hard to determine. A snapshot of China’s rising youth unemployment – nearly 21% – should be a flashing warning signals! In the early days of the Chinese economic revolution the Iron Rice Bowl was an accommodation between the people and government: jobs for life and economic growth in return for letting the Chinese Communist Party govern. Nothing terrifies the CCP more that disaffected youth without jobs, angry about the environment and getting antsy just as a previous generation did on Tiananmen Square decades ago.
Today the Chinese economy is suffering many of the same problems as the West as it transitions from an export-led to domestic consumption led model. If it can do so successfully, with a prosperous middle class continuing to thrive, then it will solve much the same economic issues as we have in the West. There are banking problems, there is a property problem, there is the over-indebtedness of some provinces and there is the developing demographic crisis as China threatens to age faster than it can stay wealthy.
One thing that has always stuck me is the sensitivity of Chinese officials that we accept their narratives, while being utterly insensitive to the concerns of others. That’s a product of autocracy – top-down instructions being hard rules rather than diplomatic guidance. China tends not to listen to concerns on human rights, on Hong Kong, the “lost province” of Taiwan, yet now we have Chinese officials blaming Western Governments for wrecking the global economy by breaking global supply chains. Chinese officials are using this week’s Summer Davos to urge foreign companies to deal direct with China, hoping to to circumvent Western Government’s falling into line behind Biden and the US locking China out of new secure tech supply chains.
That’s a narrative that is unlikely to play out well in future as tech supply chains are going to be the most valuable part of the global economy..
Meanwhile, one of the more intriguing stories I’ve been following recently is the contentious breakup of one of the most successful Venture Capital firms ever – Sequoia. The story has become something of a metaphor for the difficulties of investing between China and Western markets in this more challenging era of fractured geopolitics.
The VC firm will split into three separate, completely new firms independently focused on US/Europe (Sequoia), China (HongShan), and an Indian business (Peak 15). The firm’s senior partners apparently fell out with each other and the US government about what it is doing in and outside China, and how China has been driving its numbers.
Founded 50 years ago Sequoia became a giant of the venture capital markets – leveraging up bets on Apple, Cisco, Nvidia, Google and others initially in the US tech markets and then in Asia. Sequoia China, under legendary China insider and investor Neil Shen was an early supporter of Alibaba and ByteDance, parent of TikTok.
But the most successful of capitalist firms can’t be seen to be playing both sides of the emerging China/US geopolitical Cold War – especially when both sides seek to dominate tech in chips, AI, robotics, quantum computing and everything else Tech needed to win on the battlefield, business, and cyberspace. The US government made it very clear that was unsustainable to the US part of the VC firm to be assisting China growth – even as it was raising some $8.5 bln to pour into Chinese firms from US investors!
The split has been described as a “solution to global ambitions in conflict”, but it’s basically about a separate VC ecosystem in China from the rest of the World.
Investing in China remains…. Problematical? According to a piece in the FT a few weeks ago funds went to Sequoia to invest into China because it was perceived to have the insider ability to “decipher signals from policymaking and regulations” and understood how “China is not going to decouple its markets from global markets.” Sequoia’s success in China demonstrates the importance of an insider guide to the China markets.
For those of us without the connections, insider insights and access to Neil Shen of HongShan (incidentally Chinese for RedWood – hinting the former partner firms share genetics), investing into China now feels a bit of an illicit coin toss… We don’t really know what is going on. We don’t really now how the politics will work. China’s political objectives – as a long established autocracy/empire – are not aligned with the immediate gratification of re-election which drives politics in the West. What China perceives as a rational long-term decision may make little sense here in the West.
We fear what we don’t know.
Five Things To Read This Morning
FT US weighs tougher restrictions on AI Chip Exports to China
Torygraph Forecasting failures under Bailey have made inflation worse, admits
WSJ New York Landlord Vornado Bets $1 Billion That More Commuters Will Return
BBerg Pimco Loads up on Aussie Bonds On Inevitable Recession Call
Businessweek The World’s Office Buildings Have Become a Debt Time Bomb
Out of time, and back to the day job
Bill Blain
Strategist – Shard Capital