It seems to me that if there’s a single unifying principle in Chinese politics, it’s to do whatever is necessary to keep the Communist Party in power.

In macroeconomic terms, this originally meant state control of all productive assets, both public and (formerly) private. Under Mao’s rule (1949-1976), businesses and local governments functioned under the stewardship of a structured hierarchy of leading Party members, all of whom ultimately took their orders from, and reported results to, a central committee of party elders in Beijing.

When I started investing in Hong Kong in the early 1980s, I quickly learned that this system had become totally dysfunctional by the time Deng took over in 1978. The central planning goals were nonsense. And there was a widespread conspiracy among local government leaders and company bosses to fabricate reports that showed them meeting or besting the required performance. Company A might be told to make, say, 100,000 diesel engines for trucks. In reality, it might make 10,000, none of which worked very well. Still, it would invoice Company B, which made trucks, for the full 100,000. Company B would make 10,000 faulty trucks, all of which might remain at the factory. But Company B would invoice Company C, a distributor, for the full 100,000. C, in turn, would invoice Companies A, B and a bunch of others, for 10,000 of non-existent trucks each.

The wheels, so to speak, of this gigantic charade were greased by local banks, run by minor party officials eager to curry favor with higher-level cadres, that provided a stream of loans to keep the scheme from collapsing in on itself.

Deng’s attack on this mess was to declare that the time had come for Communism “with Chinese characteristics,” meaning a slightly modified form of western capitalism. New firms were allowed to be created, even by non-Party member entrepreneurs, and with only light Party supervision. These would either compete directly with Party-controlled firms or enter into newer, more innovative lines of business.

Foreigners would be allowed in as well. They’d be provided with land for factories and the promise of available labor plus the road networks, clean water and power needed to make and distribute their output at home and abroad.

This decision kicked off a decades-long economic expansion in China. It also addressed the problem of dysfunctional state-owned enterprises, which were forced to either create genuine economic output or die.

Then came 2012 and the ascendence of Xi Jinping.

more on Monday

A few days ago, mainland China’s government announced that its overall population has begun to shrink. This is not a crucial issue for today. And the working population, which is a more direct driver of economic growth, has been declining–at a faster rate than the overall population–for some time. In addition, outside observers figure that the Chinese population has been contracting for half a decade or so. even though the official statistics don’t reflect this.

What this announcement does do, however, is to focus attention on prospects for India, which will soon have the largest population on earth, if it doesn’t already.

The demographic worry for China is clear enough. There are two aspects to this:

–in its simplest form (always a plus for me), the two big drivers of economic growth are having more workers and making workers more productive. The latter comes either from workers having better tools to use or achieving a higher level of skill (through better general education and/or industrial training). A shrinking working population takes the first out of play

–having the working population shrink faster than the non-working, suggests that supporting senior citizens and other non-workers takes an ever larger chunk of GDP

The issue of Communist Party control of the country presents a second obstacle to growth.

more tomorrow

Reports have come out recently showing that the population of China is starting to decline, for the first time in over fifty years, as commentators are putting it. This is, of course, a tap dance around the large purge of businesspeople and intellectuals engineered by Mao in the late1950s, and which caused the population to shrink back then.

This is partly a result of Beijing policy, partly the mess Xi Jinping has made of the country during his tenure.

More about this, and the possible shift in world economic emphasis to India, tomorrow.

I was reading the latest issue of Foreign Affairs last night. The book review section contains comments on two recent books that deal with the covid pandemic: Pandemic Politics: the Deadly Toll of Partisanship in the Age of Covid, by Gadarian et al: and The Trump Tapes: Bob Woodward’s 20 Interviews with President Donald Trump (an 11-hour+ audiobook).

The reviewer, Jessica T. Mathews, makes the following points:

–officially, 1.1 million people in the US died from covid, which is only a tad shy of the 1.2 million American soldiers killed in all the wars the US has been involved in from the Revolution onward

–the actual total is more likely 2+ million, which would be a worse result than any other developed country and, ex India, worse than most large developing nations

–Pandemic Politics argues that the “core explanation” for this “calamitous” performance was Donald Trump, who thought it would damage his reelection prospects if he acknowledged the looming public health crisis and took (GDP-slowing) measures to combat it. More Machiavellian than I’d given Trump credit for

–The Trump Tapes argues that Trump knew in January 2020, from a briefing epidemic experts in the government who had lived through SARS and had deep contacts in the medical community in China, that covid was the deadly equivalent of the flu epidemic of 1918. 50 million Chinese were already in quarantine and thousands were dead. Trump ignored the information, and now denies that anyone told him

–the reviewer’s take is that several hundred thousand Americans died unnecessarily (more than all the American servicemen killed in WWII) and that “incredibly, neither Trump nor and Trump administration officials have been held to account,”

I’ve finally updated my Keeping Score page for 2022. ex Energy, an ugly year.

flavors of value investing

A basic tenet of value investing is that bad companies don’t stay bad. Something will happen, sooner or later, to cause a change.

–It may happen internally: the company directors do the jobs they’re being paid to do (fat chance) and encourage better business practices; or a set of less skilled executives may retire and be replaced by stronger managers.

–The economic environment may become more favorable.

–Or, the most likely–or maybe just the most likely to succeed, an outside agency may either mount a takeover bid or, at the very least, acquire a large enough stock position to force changes in the way the company is run.

What I think of as value purists will hold shares in a company simply because the financials scream that it’s undervalued. They are content to sit and wait, on the idea that eventually something good will happen.

Others only enter after a catalyst is visible. This may be as simple as evidence of unusual buying activity. Or it may be, as is now the case with Disney, a powerful outside investor who specializes in shaking up underperforming companies signals an interest.

Non-investment companies that compile the indices against which professional investor performance is benchmarked, typically also provide sub-indices that they label growth or value. The S&P 500 Value and S&P 500 Growth are examples. Where value investors deal in absolutes, the indices deal in relatives. They don’t say that anything is cheap or fast-growing in absolute terms at any given time. Rather they tend to tag, for example, the highest price to book value stocks at a given time as growth, the lowest as value. But this describes the relative valuation of one group vs. the other, not that either is in absolute terms expensive or cheap, growthy or stagnant.

shares with extra voting rights, a key distinction

Is META a value stock? It’s trading at 12x earnings and 7x cash flow. This compares with deep-value “sin” stock, tobacco company Philip Morris, which is also part of a conglomerate (a bad thing, from change of control perspective), and which is trading at 18x earnings and 11x cash flow.

Why is META so cheap? Although founder Mark Zuckerberg only owns a small proportion of the overall number of shares, his have 10x voting power of regular ones. So there’s zero chance of ousting him and running the company differently. No matter how low the price/book or price/cash flow might be, it’s not a true value stock.