Eric Peters: "The Chinese Know This. Why Are They Doing It?"

Some contemplations from the latest "Weekend Notes" by One River Asset Management CIO, Eric Peters, on recent developments in China...

Contemplation

He went for a long walk, trees bare. Considered his discussions with historians, experts, strategists, analysts. Articles, analyses, theories. The largest nation on earth, with 18.5% of humanity’s population, the 2nd biggest GDP, had lifted term limits for its leader. No one seemed to care, which itself seemed fascinating, said something.

But what? He wondered. Nearly everyone accepted the rough narrative that by lifting term limits, Xi Jinping strengthened his control, allowing him to complete the anti-corruption drive, and the Belt and Road Initiative.

He didn’t buy it. Xi Jinping surely had time to groom a successor with similar beliefs and priorities before his 2nd term ends in 2023. Besides, there’s precedent for former leaders to remain active in the wings, well beyond their formal rule.

The 2-term limit was introduced in 1982 to save China from the ruin of uninterrupted leadership - Mao’s late legacy prompted the constitutional change. Throughout history, great nations and empires fail when they surrender their institutions to an individual.

The Chinese know this. Why’d they do it?

Is Beijing preparing for instability? Chinese banks have $40trln balance sheets (50% of global GDP, 3x Chinese GDP). US banks hold $17tlrn balance sheets (less than 1x US GDP).

Might China be preparing for internal economic instability? Or perhaps it’s that the West is in deep political disarray, fractured, fighting itself.

The unipolar American world order is crumbling, the US relinquishing leadership. Such transitions have historically produced periods of profound global risks, opportunities - Beijing knows this.  What’s the trade? He wondered.

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... and on the history of (de)regulation in the US, and why it is only a matter of time before the government cracks down on the internet giants of the day:


Glory Days:

“May Day 1975 marked the start of Wall Street deregulation,” said the historian. “Banks and brokerages flourished thereafter, expanding their power and political influence.” 1998 marked peak deregulation with Clinton’s repeal of Glass-Steagall. “Pump and dump schemes of all sorts propagated; Wolf of Wall Street excesses. Then came the dot com IPO madness which led to Sarbanes Oxley.”

The final debauchery was exposed in 2008, and led to sweeping Dodd-Frank financial regulation. “Wall Street’s been in lock-down ever since.”

“The 1996 Telecom Act protected America’s nascent internet companies,” continued the historian. AOL started in 1985. Netscape launched in 1993, went public in 1995. Amazon launched in 1994. Yahoo 1995. Facebook 2004. YouTube 2005. “The Act protected them from liability for anything republished on their sites.” They were too weak to withstand such liability and needed nurturing to foster innovation.

“But Facebook has a $460bln market cap. It’s not responsible for what it publishes but the NY Times is. That’s now preposterous.”

“When Wall Street lacked regulation, any product, no matter how absurd, was welcomed through the front door and pumped out to clients through the back door,” explained the historian.

“The greater the flow, the higher the profits. Those were the glory days.” Then regulations raised costs, stymied product development, crushed the profit model.

“Today’s internet companies suck in free customer data through the front door, and sell it out the back door. The greater the flow, the higher the profits. They’re dominant. They’ll soon be regulated.”