Blain’s Morning Porridge July 29th 2021: China Syndrome and Taper Tantrums – just two of many things to fret about…
This morning: Some of the heat was taken out the escalating China Syndrome yesterday when the Chinese regulator held a “secret” meeting with global firms, while Jay Powell took the pressure out of immediate taper fears. Both issues remain sources of massive future pressure on markets – they are sorted for now, but not resolved!
There are, apparently, only two things to factor into markets this morning:
- China rowing back on its market-crashing “regulatory” attacks on the “system”, and
- The Fed’s mixed “We’re going to talk about when to taper but its lower-for-longer in the meantime.”
If these are the only things you are factoring this morning.. then look again.
Let’s start with the China Syndrome
One big investment theme this year has been how much to put into China… but for anyone who bought the story, like myself, it’s been expensive. The Chinese seem determined to crash their own market – a new version of the China Syndrome. Yesterday they finally noticed and the Chinese Securities Regulatory Commission “invited” a dozen or so prominent Western investment banks and fund managers (the usual suspects; Goldman, JPM, Blackrock et al) to listen to scripted explanations for their recent actions in banning educational IPOs, and touching on greater regulation e-commerce and fintech payments.
It was a rushed affair, the news carefully leaked to calm a gathering series of panicky headlines about enforced China liquidations, a sell-off in bonds and FX, and a general rush by global investors to dump any and all China and HK assets. The market sort-of-stabilised.
As always there are two ways to read yesterday’s meeting.
It was either the Chinese waking up to the damage done to the emerging consensus on China’s future investibility: ie China will soon be the largest economy, and investment funds remain significantly underweight China and South-East Asia where the bulk of future GDP growth is set to occur.
It sounded a bit of a “we have no more territorial ambitions” in the 1938 Munich sense of the expression. The meeting was a “piece of paper” waved from an airliner step to diffuse immediate tensions that had threatened to destabilise China’s markets.
I suspect the latter.
The Chinese don’t want a global market crash any more than anyone else – at least, not yet, if ever. But the Party has more to do to complete its framework for economic control. It is attempting to create a free-market model, but with Chinese-charateristics that give it very strong control of domestic social and strategic objectives. That probably means more specific clampdowns on sectors to come – healthcare seems an obvious one where China won’t want western interference in its social health objectives.
Key to the new China framework is setting the State’s very much more interventionist regulatory platform, and rolling out the state’s surveillance platform. It is going to create a very different global-facing, capital-based future Chinese economy. The Party has already done some of some of the preliminary work; reining in entrepreneurs, disciplining the stand-out nails who dared to criticise, and made sure business leaders understand their futures are closely aligned with how well their business successes and future profits are seen to support the party.
The CCP are not daft. Xi and his minions understand human nature, why Communist Run State Economies have repeatedly failed and repeatedly lose to competitive free markets. Their new model seeks to encourage private business and competition, but to align its success as the Party’s success.
Thus far, it sounds like an advanced version of the old Soviet NEP (New Economic Policy) – the attempt to align state and commerce following the Russian Revolution. NEP failed for a number of reasons as the economics didn’t align, but largely on the back of the state responding to perceived weakness by culling the very business leaders they needed to drive a recovering economy.
There is no guarantee Xi’s Party will be any more successful. But, a key pillar of the new China Model will be its’ attempt to perfect Surveillance Capitalism. A critical element will be the state’s digital currency – which many observers believe will allow it knowledge of all flows within the economy and the ability to enforce “correct” social behaviours upon citizens, with oversight of exactly how corporates use cash: who is being paid off, and how best to facilitate taxation. It’s a scary model – if it works and isn’t circumvented.
But does yesterday’s China meeting we should relax a bit and put our China buying boots on? After the crash is China now a buying opportunity? Why? Because China stocks are undervalued? Not particularly – its more the West looking overpriced for its relative and long-term declining share of future global GDP.
Strip out all the recent noise on China’s actions and its quite simple… Will China institute a successful state economy? Can an economy controlled by the state ever succeed or will it stultify and slunk into a morass. The jury is still out on that one…
Meanwhile, Back in the USSA
Fed Head Jerome Powell’s post FOMC comments were dovish and hawkish. One day it will taper, but not yet. There has been progress towards full employment and, recent spikes aside, inflation remains sub optimal but trending in right direction. Powell is waiting for more improvements, seeing “more ground to cover” before it shuts the $120 bln per month QW spigot.
That puts us right back to where we were last week, and the weeks before that… what is really happening in the recovering global economy – more inflation? Or will it prove transitory? Are the commodity spikes due to hoarding, and supply chain glitches? Or are real inflationary pressures now in the system.
I’m taking the view they are.. Thus far all the inflation created by the monetary policy actions of global central banks since the Great Global Financial Crisis has been absorbed by financial assets – stock markets tripling in a deflationary environment and bond prices rising isn’t inflation? (US Readers: sarcastic rhetorical question alert.) There are always consequences – and they are coming due for payment.
The problem for central bankers is they know it – but their policy levers are limited. There is little they can do to restore real rates and restore values without risking a catastrophic market correction…
The problem for investors is dancing along the jagged edge of the market – as long as central banks keep up the market support then to sell stocks would be to plumet off one side and lose any future market gains. To hang on to stocks means the risk of being caught wrong when it crashes. Devil or the deep blue sea?
What’s the solution? Real assets and buy a new boat! Yay!
Five Things To Read This Morning
FT – El Arian – China lays down challenge to West on Crypto
FT – US Treasury Market needs Urgent Reform urge policy makers
Torygraph – Parents told to buy Christmas presents early to avoid shortages
BBerg – Powell Sees Progress on Taper Conditions, but Way to Go
WSJ – Credit Suisse Failed to Act of Archegos Report
Out of time, and back to the day job..
Strategist, Shard Capital
As you note, the CCP’s “capitalism with Chinese characteristics” is not some gloriously original Chinese creation. It’s Marxist state capitalism along the lines of the old Soviet NEP. The question is: should investors from the West take profits and look elsewhere? At this point, it looks like Xi is going to bollocks it up just like the Soviets did. He’s just a power-hungry despot like all the rest of the tyrants of world history. There is no rationale, no “Xi Jinping Thought,” other than that.
I must acknowledge my biases as a retired American naval officer husband of a Cantonese wife who grew up in Hong Kong under British rule. The bloody mainlanders have ruined HK.
Bill Meeker (3/4 Scottish despite the Anglo-Irish surname)
Will XI prove as economically incompetent as Stalin. Perhaps. But I suspect not. The party rules and is content for XI to bask in its glory – I suspect the upper echelon cadres of the party are heavily invested in the success of the Chinese economy and know they have to demonstrate growth and prosperity to ensure no repeat of 1989.
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