The fate of post-WWII China was determined when Mao defeated rival Chiang-Kai-shek, who fled with his army to take control of Taiwan. This established the Chines Communist Party (CCP) as the ruling force on the mainland.
A seminal Maoist idea was that the economy should not be led by private companies but rather controlled by state-owned enterprises run by high-ranking members of the CCP and following the dictates of central planners in Beijing. This created an unholy mess.
In 1978, the then head of the CCP, Deng Xiaoping, announced a new direction for the economy which he called “Socialism with Chinese Characteristics.” No more central planning. The economy would be led by private sector entrepreneurs, as the state-owned enterprises were gradually shrunk. Put another way, this was US-style capitalism. And the result was an explosion of growth.
This renaissance lasted more or less until Xi Jinping became the head of the CCP in 2012. Xi, apparently scandalized by the fact that considerable power had shifted away from the CCP to the private sector, launched the return to Maoism that continues today. Not surprisingly, a lot of oomph has gone out of the economy.
This is why I think the apparent wild enthusiasm for China on Wall Street continues to be misguided. It’s still dangerous to be an entrepreneur there, so why take the risk. Without this spark, however, China has revered to being a rapidly aging, slow-growing economy. In addition, the less healthy business environment + import restrictions are causing manufacturers of goods for foreign consumption to shot elsewhere in Asia.
There’s a second issue: the property market. Three reasons:
–People in China don’t trust the banks as places to store their wealth. More lucrative and safer to own property, where wealth will be less visible to the CCP and the chances therefore lower of being hauled in for interrogation or having the assets seized
–All mayors, governors and other civic officials are members of the CCP. Promotion comes from showing strong economic growth. One simple way of “manufacturing” growth is for a mayor to get a loan from the local bank, whose president will be a lower-ranking CCP official and so won’t look too closely at feasibility, and build something–an industrial park, say, or a gigantic residential suburb. The mayor will hope to be promoted and long gone before anyone finds out whether this was a good idea or not. Very often it’s not.
–the sale of residential apartments in China has an options market-like aspect to it. People typically stand in line to make a down payment on a flat that may be completed 18 months or so later. Buyers commit themselves to additional progress payments and a large final installment on taking possession. At least some intend to sooner or later sell their place in line at a profit to a third party. Developers also leverage themselves financially, partly to pay for construction expenses, partly in an effort to make a higher profit on the equity they’re committing to the project.
This is a little like the atmosphere in the US during the mortgage loan fiasco in the US in 2006-07. And, like the US two decades ago, the speculative bubble formed in China has also burst. A real–and huge–financial mess.
This is why I’ve been bemused at China bulls in the US encouraging global investors to dive right in. Yes, a huge rally since late September has brought the index into positive territory for the year, but…
A related issue: I was actively involved in the Hong Kong stock market for over two decades starting in 1983, when China was in the early stages of reopening to the West. The beauty of Hong Kong back then is that, like Taiwan, it too had been a destination for Shanghai residents fleeing Mao. Once Deng opened the door to better relations with other countries, the financiers in Hong Kong began to reestablish personal and business ties with friends and relatives on the mainland–and to list the higher quality corporate names in Hong Kong. The city soon became a wealth of knowledge about the good and the bad of the mainland–that was not available anywhere else. That all ended when Xi reneged on the agreement to a 50-year transition period, starting in 1997, for the return of Hong Kong to mainland rule, when he began to impose mainland legal/political control about a decade ago. That basically cut off the information flow–and created the risk that securities analysts could be jailed simply for writing sound fundamental analysis.