By Michael Every of Rabobank
Political developments in China have been front page news in the financial press over the past few months, and are again today. To recap, Beijing’s initial crackdown on Ant Financial, of course dismissed by Wall Street, then spread to China’s version of Uber, Didi, and then on to the broader sectors these firms championed, fin- and transport-tech. Then it grew to encompass whole swathes of the economy, from tech to health to education to property to food delivery to gaming, which Wall Street could not so easily ignore.
In terms of tech, there are now sharp limits on IPOs in the US (mirrored from the US side) and new algo/pricing and data regulations that require Beijing to hold on to it; the private tuition field has been made non-profit; there has been a sharp reduction in credit to property developers along with the official message that “houses are for living in, not speculation.”; and yesterday under-18s were limited to only 3 hours of computer-gaming a week in allotted weekend evening slots, sending the share price of related firms tumbling.
Beijing has also called for curbs on “excessive” income, and for the wealthy and profitable firms “to give back more to society” --and Tencent has already pledged $15bn-- matched by: a social campaign against excessive business drinking, “unpatriotic” karaoke songs, and celebrity/idol culture; ‘Xi Jinping Thought’ being made obligatory at all schools and universities; growing censorship which, as Bloomberg puts it, means “China to Cleanse Online Content that ‘Bad Mouths’ its Economy”; and today China cracked down on private equity funds, saying it will stop public offerings disguised as private equity, weeks after stopping PE from investing in residential property.
This has all taken place under the slogan of “Common Prosperity”. Western market analysts and MSCI, who are far happier dealing with Marks & Spencer than Marks & Engels, have tried to explain away the phrase as a series of technocratic measures or periodic regulatory compliance procedures. MSCI would have a whole lot of egg on its face to say otherwise, of course, as would Western investment banks who just opened wealth management arms in China.
However, commentary reposted by Chinese state media yesterday stated that while Common Prosperity does not entail “killing the rich” (hugely encouraging to MSCI and Wall Street), these changes are a “profound revolution” sweeping the country, and warned that anyone who resisted would face punishment.
It added: “This is a return from the capital group to the masses of the people, and this is a transformation from capital-centred to people-centred,” marking a return to the original intention of the Communist Party, and “Therefore, this is a political change, and the people are becoming the main body of this change again, and all those who block this people-centred change will be discarded.” Notably, a WeChat blogger originally made the post, but it was then reposted by major state-run media outlets such as the People’s Daily, Xinhua News Agency, PLA Daily, CCTV, China Youth Daily, and China News Service, showing high-level, wide-ranging official approval. Marginal tax changes and compliance tweaks this is not.
The author also wrote that high housing prices and medical costs will become the next targets of the campaign – which is crucial given how high and ever-rising property prices matter in most economies, with China no exception. (The vast majority of household wealth is held in that form, for example, and up to 30% of GDP is tied up directly and indirectly in property construction and fitting out.) Moreover, it was also stressed that the government needed to “combat the chaos of big capital,” adding “The capital market will no longer become a paradise for capitalists to get rich overnight. The cultural market will no longer be a paradise for sissy stars, and news and public opinion will no longer be in a position worshiping Western culture.” Underlining a geopolitical element, the post also added that if China relies on “capitalists” to fight “US imperialism” it could suffer the same fate as the Soviet Union. MSCI and Wall Street will no doubt be busy trying to find some way to spin this all as positive.
After having just decried them, the ironic question then flows: what does this mean for markets?
1) If all you understand is neoliberalism, knowingly or unknowingly, then your market calls are not going to be worth much when the really big shifts happen: Brexit in 2016 was one wake-up call; Trump in 2016 was another; this should be a third. Yes, there will still be an army of Wall Street ‘experts’ shilling away or genuinely believing that everyone everywhere is Homo Economicus (rather than Sovieticus) right up until the “profound revolution” is at their door - and then shrugging and saying “geopolitics”, as if that translates into anything other than a collapse in their fund’s value. Yet as I keep trying to stress here, the neoliberal order is hardly smelling of roses right now anywhere, criticisms of it are very valid, and there are other, older “-ism” prisms out there to understand and react to how the very unfair world around us works.
2) This is likely to see Chinese equities (and housing?) to continue to underperform those in the US.
3) It may add to pre-existing downward pressures on Chinese growth - or it may lead to sustained high growth of a more balanced kind… but that still won’t be an economy Wall Street will benefit from. Exporters to China will also be unhappy either way. Try to imagine if this “revolution” fails…. but imagine if it succeeds! What would that say about How the West was Lost?
4) Even though most of the Fed or ECB likely couldn’t find major Chinese cities on a map, this is going to matter to the US and EU economies too. It may mean more “fictitious capital” (i.e., QE), just as China tries to focus on the “productive”. (Again, imagine if China is right…)
5) It is an ironic positive for global bonds, and government bonds in China – as a one-way street for those who get in early to the latter and then realize they are there for the duration of the ride, wherever it eventually leads.
6) it is more likely to be a major long-run negative for CNY. In the short-run, however, the rhetoric on capital markets hardly suggests any appetite in Beijing for FX volatility. If we see a universal move in USD higher, e.g., should the Fed prove they cannot find China on a map by tapering, then CNY will move lower – while staying largely unchanged against every currency except the Dollar.
7) Geopolitical tensions, which flow back to the economy and markets, are only going to worsen. Which is exactly what a world seeing the US defense umbrella blowing away (or providing far less cover) does not want to imagine – but will have to regardless.
Unless it can convince itself that everything that is happening is just technocratic adjustment and periodic regulatory compliance measures. Good luck with that.