The China Narrative That Really Matters

Submitted by Ben Hunt via Salient Partners' Epsilon Theory blog,

I'm a China bull, let's get that out of the way first. But like anything connected with the global industrial and commodity complex today, from Emerging Markets to MLPs to oil prices, it doesn't matter what the Truth with a capital T might be regarding the real world economic or business fundamentals. The story is broken. The stocks are broken.

 

I've written a lot here in Epsilon Theory about what's happening in China and what it means for the China growth story to break.

Most directly on the topic, read "When the Story Breaks". It's a quick read and introduces an Epsilon Theory perspective for how to think about China.

 

Most recently on the topic, and why the Chinese currency devaluation kicks US equity markets right in the teeth, read "Storm Warning".

 

Most fundamentally on the topic, and why the Chinese currency devaluation is an existential issue for the Beijing regime, read "The Dude Abides: China in the Golden Age of Central Bankers".

 

There are other notes on China if you're so inclined, including: "The Donkey of Guizhou", "Rosebud", and "The Power of Why, Exhibit 4,512 in a Continuing Series".

 

For a related note on the overall Emerging Market story, read "It Was Barzini All Along". For an Epsilon Theory perspective on oil prices, read "The Unbearable Over-Determination of Oil".

Now most stories heal themselves over time, and the China growth story is no exception. Or rather, over time these broken stories evolve into a market-supportive story, for example from a growth story into a value story. You see this in market narratives all the time.

 

But there's one aspect of the China story that can't heal itself or transform into something more benign from a market perspective, and that's the Narrative of Chinese Government Competence. To quote myself in "When the Story Breaks":

"This is a completely different Narrative than the growth story, and it’s the story that one-party States rely on to prevent even the thought of a viable political opposition. In highly authoritarian one-party nations – like Saddam's Iraq or the Shah’s Iran – you’ll typically see the competence Narrative focused on the omnipresent secret police apparatus. In less authoritarian one-party nations – like Lee Kuan Yew’s Singapore or Deng Xiaoping’s China – the competence Narrative is more often based on delivering positive economic outcomes to a wide swath of citizens (not that these regimes are a slouch in the secret police department, of course). From a political perspective, this competence Narrative is THE source of legitimacy and stability for a one-party State. In a multi-party system, you can vote the incompetents (or far more likely, the perceived incompetents) out of office and replace them peacefully with another regime. That’s not an option in a one-party State, and if the competency story breaks the result is always a very dicey and usually a violent power transition."

So when I read an article this morning in a famous media outlet owned by famously Beijing-friendly Rupert Murdoch that "the impression left on investors is that Chinese authorities are out of their depth" and that "certainly with respect to the stock market, their reputation for incompetence is well-earned", I get nervous. 

 

I get nervous because the next move in China is going to be a political move, and political moves are never well anticipated by markets. The Beijing regime is going to take steps to defend itself, or at least insulate itself, from the growing Narrative that they are incompetent. Heads will roll. Literally, in all likelihood. But the incompetence genie is very hard to stuff back into the bottle, and depending on whose head is on the chopping block, regime stability can deteriorate very quickly. Now that's what will make me change my bullish stance on China fundamentals, and that's what will make the US market swoon of last August look like a gentle spring rain. 

 

From an Epsilon Theory perspective, a collapse in the Narrative of Chinese Government Competence is the biggest systemic risk out there right now, and that's where I'm focusing my risk antennae.

Comments

[Vinividivinci]

SDR inclusion, AIIB, SGE, BRICS, CIPS, just acquired largest gold/silver vault in London and the physical ownership of vast amounts of precious metals to fill said vaults on foreign soil (in preparation for the gold-backed RMB) who are we kidding...they will demolish what's left, that is still barely holding the West together financially.
It's only a question of time...the hour of the petro-dollar's demise, is at the leisure and pleasure of the East.

[spanish inquisition]

I am confused, which single party state that does not entertain the thought of another are we talking about...

[Fuku Ben]

a collapse in the Narrative of Chinese Government Competence is the biggest systemic risk out there right now

One of my comments yesterday included this very important point. If the government loses the trust it has built up with the Chinese people since Deng Xiaoping started initiating reforms and their prosperity has expanded their goose is cooked. The various generations in the population now participating in the fake global stock market will cast it out very quickly to protect themselves. And any resulting market effects will carry over globally.

Some of the problems here are that the existing market in the West was a fraud that has expanded and progressively gotten worse as China had entered into it. On top of this China had its own pre-existing problem areas that weren't dealt with before entering this market (i.e. shadow lending). These compound their risk and consequently the risks of others. Not only in the market but with their currency and position in the IMF. The IMF which is just another extension of global fiat fraud.

Ben used "Heads will roll" for a communist government which I found amusing because that's the famous fascist character Major Hochstetter's line. Heads will roll is a common reaction of all types of governments that rule tyrannically over their people after they fail in their duty and their jobs effectively. I'm confident the Chinese government is more than capable of managing their situation in a way that retains the confidence of the public without being heavy handed and addresses their existing issues without escalating tensions.

China won't be able to do this without international financial cooperation. And the more the world's economies are integrated the worse this will all get. At least until everyone's preexisting issues are identified and fixed, the global marketplace is allowed to find its actual realized value and all nations have stopped positioning for self-serving goals. This patchwork can't continue indefinitely.

[bilbert]

I was especially impressed by how the author quoted HIMSELF in the article.

Well Done!!

[Bull Bear Nice Pair]

The most important narrative is that both the Chinese government and investers are learning. Their market will be less volatile as they accumulate more experience.

[galant]

Mr Hunt quotes the Murdoch media which “has the impression that Chinese authorities are out of their depth”.

 That does not apply to the  US Fed?

Mr Hunt predicts “heads will roll.”

Isn’t that what’s needed at the US Fed?