I am not going to lie. I used to cover China’s economy and stock market extensively in my old job as an economist.
But I got sick of it.
Not because I was not interested in doing the analysis. I loved being an economist and stock market analyst. But corporate just sucks, and that’s it. The amount of bullshit anyone has to wade through, really makes me admire people who wants to climb the corporate ladder. At the end, you are just greeted with more bullshit.
Now that I am out. I can finally take a deep breath and actually analyse my views and opinions on the Chinese economy and stock markets.
Story of the Week
When Chiang Kai-shek lost to Mao Zedong in 1949, communism became the new ideological currency for China. And boy, did Mao Zedong use that currency.
For close to 30 years, an ambition to turn China into a communist heaven, descended into one that killed almost 30 million of its own people. This was not an economics problem, but a political one.
Power was so concentrated in the hands of the few, that very few dared to oppose any of Mao’s policies. And in the end, the Chinese people paid for it in blood and empty stomachs.
If you are wondering why I am being so dramatic, this context is key for me to understand investments in China.
Right now, I am seeing a similar trend in the concentration of power in a few especially Xi Jinping. His words are law, and even more so, as he has repealed the law that gave him only 2 terms of presidency. He can be president for life now, just like Mao Zedong.
My key thoughts on China are — Policies are not the problem, but power and confidence.
China’s policies can best be described as socialist. In the past 3 decades since Deng Xiaoping, power has increasingly been distributed to the provinces and the economy is allowed to produce according to what the Chinese markets need.
Industrial production skyrocketed (albeit from a very small industry initially) and China found a lot of markets abroad that wanted to buy their cheap products.
Hence, exports became the focus. If you are producing clothes, you fetch a higher price overseas and many companies found relatively cheap labour, especially from the rural parts of China to keep their costs down.
Many labour-intensive industries thus flourish as the government decentralised power and let ‘market forces’ come into place.
See how I put ‘ ‘ into it.
While the Chinese Communist Party (CCP) has been content in giving out some power to the provinces, it remains a ‘guiding’ federal government.
Here’s what happens: it gathers maybe once or twice a year. The top dog (president) and his head honchos discuss how to set policies. Then, it will draft ‘guiding principles’ or ‘policy philosophies’ to be distributed as ‘[President] Thoughts’ to all the government departments.
It’s up to them to interpret what the policies mean and implement them according to their local context. But, if the CCP don’t like it, they would have to conform to whatever the central government wants.
Therein lies the problem.
Currently, I think the central government or Xi Jinping himself, has too much of an influence on how policies are done on the ground.
Think of a micro-managing CEO telling you how to record your sales in an Excel sheet.
That, I think, is why China’s policies have been relatively ineffective in recent years. And by effectiveness, I mean people’s confidence and trust in the policies.
There are essentially three trends that I want to highlight here.
- The property market collapse
- Chinese consumers are not confident and youths are out of job
- The ongoing trade/technology war with the U.S.
Property Market Collapse
The property market collapse has been a long time in the making. But the government kept kicking the can down the road until it collapsed on itself in the past 3 years.
I look at this as Chinese people hold most of their wealth and savings in property. And a house is a cultural thing. You need to have one to house your family and prove to your in-laws that you are capable of supporting one.
However, houses are so unaffordable in China. House price to annual household income is 30 times, where normally, it should be 3 times to be affordable.
But a house is a home. And Chinese people want it. So, they plough all their money in despite it being so expensive. The government is more than willing to support this, by giving out loans despite their ability to repay them.
And Chinese developers look at this and go, “Free money it is then” and sell them at ever-so inflated prices. See the problem here?
It doesn’t help that most of these developers are bankrolled by Chinese government-controlled banks and financial institutions. Do you see this vicious cycle?
All these factors contributed to property developers cutting corners, building housing units in places that don’t need them, and ultimately defaulting on their debts. And also, they didn’t complete the houses and left the buyers dry.
So, when the collapse came, house prices plummeted, wiping out most Chinese people’s wealth and savings. No one will want to spend in these types of conditions.
Chinese Consumers are Not Confident, While Youths Are Unemployed
Consumer confidence is … well, not good. Even the data quality for consumption is suspicious.
When I was analysing and forecasting retail sales (which is how much consumers are spending in retail shops) in China, I might as well throw a coin to see heads or tails to judge the trend and throw a dart at a board to get the number.
Even the established research houses had the same problem looking at China’s data. Sometimes, they just said ‘This is the published data. We don’t know how they computed this, but we have to use them”.
Therein is the problem. The fact that no one can reliably say whether the data is of good quality, speaks volumes on what’s happening on the ground.
Chinese consumption is just not strong. The official retail sales data shows that it has grown by a range of 2% to 6% only this year, far from its 7% to 10% before this.
And this all, in my opinion, stems from everyone tightening their stomachs as their housing wealth continues to nose-dive in the current property market collapse.
The government has been talking about ‘reviving consumer demand’ for three years now but has very little to show for it.
The Chinese people are just not confident in spending and government policy — full stop.
And youth unemployment. Part of it has to do with the disillusionment that the younger generation has on the working culture, but most of it has to do with salaries not being high enough and the cost of living increasingly being unbearable in the big cities.
The Hukou system effectively prevents people from other provinces from buying houses in the provinces that they are working in. Hence, they pay exorbitant amounts of rent that could have gone into a housing loan.
What’s worse, China’s population growth has flattened. Even in 2023, the population declined. China needs, more than ever, for its young people to go to work.
But its 9–9–6 culture is a big turn-off for peanuts money, living at the poverty line.
Trade and Technology War with the U.S.
Remember when I talked about how China depended on exports from the start? They still do even though it has committed to transition away from it and rely on domestic Chinese consumption to drive growth.
That hasn’t gone to plan.
As much as the CCP wanted to shift away, its people were so used to producing for exports. And they didn’t have much faith in government policies. No doubt, the subsidies that came from the government helped a lot, but they all went to encouraging more … exports.
Hence, the ongoing war with the U.S. seems to be hurting China more than it is hurting the U.S. China is desperately trying to import important AI chips that are 6 nanometres below as they themselves can’t really make it.
The U.S., knowing this is their pain point, imposed restrictions on exports into China of high-tech chip products.
And what does China do? Introduce more policies to encourage more local development of technologies.
However, it did nothing to encourage more consumption among Chinese consumers. All it did was say, “pump more money into the economy”, which I think the Chinese are not falling for anymore.
The Takeaway
Well, I have listed down my doubts about the Chinese economy and stock markets. But the picture is not done yet. There are still good fundamental reasons why China is worth taking a look at and investing in.
I will talk about them in the coming article of this week.
