China, including Hong Kong

vanguard of the people

In the mid-19th century, Karl Marx theorized that working conditions in factories in economically advanced countries like Germany were so bad that abused workers would spontaneously rise up and throw off their chains. When that didn’t happen, late nineteenth-century activists like Lenin decided that workers needed to be pushed into action by a cadre of militant revolutionaries, the “vanguard of the people.”


Mao used the Leninist idea to reshape Chinese society during the second half of the last century. The vanguard in this case is the Chinese Communist Party, whose highest goal is to perpetuate itself as the source of political power in that country. Economic and social objectives were set by the Party’s central planning and disseminated to businesspeople and local/regional politicians, all of whom were Party members.

By the 1970s, the economic flaws in the central planning model were more than evident. GDP was dominated by antiquated/inefficient state-owned enterprises, which lived in an alternate universe along with government planners, in which planning targets were sensible and always met–despite overwhelming evidence to the contrary. In effect, the biggest threat to the Communist Party in China, whose survival is the country’s highest economic/social goal, came from the central planning ecosystem.

Deng Xiaoping addressed this existential threat in the late 1970s, by supporting ” socialism with Chinese characteristics.” Making a corporate profit was now permissible and Party membership and approval were not immediately necessary for entrepreneurs. A well-respected Hong Kong-based economist I knew at the time prepared two series of periodic reports for her clients back then. The content was identical. In Hong Kong, they were were called Capitalism with Chinese Characteristics”; on the mainland, however, they were titled “Socialism with Chinese Characteristics.” I think this accurately described the situation. The result was a decades-long explosion of economic growth.

Thirty-some years later, Xi Jinping faced a different set of problems when he assumed control of the Party apparatus in 2012-12.

–enough high-ranking Party officials had used their influence to make themselves and their families fabulously wealthy during the Deng era, and were flaunting their new status, that the disparity between them and ordinary citizens was becoming a deep source of popular discontent

–while the (mind-boggling, in my view) inefficiency of the industrial base during the Mao era had been addressed, the banks were still in poor shape. More than that, they had given loan support to many hare-brained, economically ruinous schemes hatched by Party elites

–some newly-minted billionaires were forgetting to give even lip service to the central role of the Party in directing the country. If press reports are correct, Jack Ma of Alibaba even openly to financial officials last year about his plan to undermine the banking system through his Ant Group; and the Didi ride-hailing group ignored Chinese regulators’ orders not to list in the US without their approval.

For what it’s worth, it seems to me that Xi is by nature an anti-Deng, a more orthodox Leninist and a promoter of politically correct state-owned enterprises. His decision to end Hong Kong’s status as a Special Administrative Region a quarter-century earlier than China’s agreement with the UK called for is, I think, an exercise in Realpolitik as well as a message that obedience to the Party is paramount. Still, one could argue that part of what Xi is doing is reining in excesses that gradually developed during three decades of laissez faire.


–conventional wisdom has been that the big prize for China is eventual reintegration with Taiwan and that China would treat Hong Kong with kid gloves so that it would serve as a case study in tolerance for non-Party views. That’s out the window now. One area of strategic significance for Taiwan is the world-leading role of TSMC in chip manufacturing. This is an art where in terms of capacity the US and Europe have slipped behind Taiwan, Japan and China. This year’s chip shortage has underlined the vulnerability this represents. I’ve been saying for some time that the semiconductor manufacturing business will be booming for the next few years.

–the example of Jack Ma suggests that China-based multinationals won’t be quite as aggressively innovative as they have been in the recent past. It’s unclear how long Beijing’s current crackdown will last, nor how Chinese firms will act, post-crackdown. To my mind, this makes the publicly-traded companies harder to handicap. They’re already trading at lower earnings multiples than before, but I don’t have a strong idea whether they’re cheap now or not.

–the disastrous collapse of the Hong Kong stock market in 1987, in a brokerage scandal triggered by Black Monday in the US, led to a regulatory overhaul that has transformed it into one of the premiere listing destinations in the world. Arguably, Chinese firms listing in New York have done so because they are unable/unwilling to meet Hong Kong’s more rigorous standards.

China’s repudiation of the terms of the handover agreement and its subsequent anti-democracy crackdown in Hong Kong have removed a lot of the luster from the SAR’s stock market, as well as from Hong Kong’s viability as a regional hub where multinationals can safely open businesses. This has negative implications for the property market there as well as tourism to the casinos in nearby Macau.

It’s conceivable, though hard to fathom, that Xi has given no thought to this consequence of the crackdown. The result is the same, though. More equity raising will have to be done through the mainland Chinese stock markets.

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