I am much more bearish on China. Savings in the economy exceeds 40% of GDP. In the past, the savings have mostly funded housing and infrastructure investments. Housing is obviously in the doldrums, but I think infrastructure investments are the next shoe to drop. Many LGFVs have debt/EBITDA multiple in the teens. Their financials make US HY corporate issuers look good in comparison. And local government finances have been permanently weakened by the weak housing demand. The decline in infrastructure investment will have as big a macro impact as the housing downturn.
There is a great deal of merit to your thesis as a short term tactical trade, but long term investment in China requires a belief that Xi and the party have a rational view and the wherewithal to execute - ultimately you would need to believe that Xi is ready to allow the free market and the creativity and innovation of the Chinese people to flourish. Over the past 3-4 years Xi has followed an entirely authoritarian approach to COVID lockdowns, leadership of the communist party and financial regulation in general. Allowing the failure of property companies aligns with constraining the activity of their entrepreneurial leadership - control. Ultimately until there is a change, investing in china requires acceptance that you are investing in Xi as your partner, not the Chinese people. That seems like a very risky bet…
Thanks for this feedback Simon. I understand your objections and think they are very valid considerations. I think part of the crackdown has been part of the "common prosperity" concept in which private sector wealth has been targeted - whether that be in property or technology. And that doesn't not bode well for private investment in the country. It remains to be seen whether this is a terminal trajectory for the country, or whether the pendulum may swing back as the country seeks to improve domestic sentiment or begin to attract international capital again. And yes, I guess an unspoken part of the thesis is that the country remains open to some level of international commerce and capitalism, despite the authoritarian governance. That isn't a surefire bet, and you are correct to note its risks.
Liked it!!
Fantastic! Thanks David
I am much more bearish on China. Savings in the economy exceeds 40% of GDP. In the past, the savings have mostly funded housing and infrastructure investments. Housing is obviously in the doldrums, but I think infrastructure investments are the next shoe to drop. Many LGFVs have debt/EBITDA multiple in the teens. Their financials make US HY corporate issuers look good in comparison. And local government finances have been permanently weakened by the weak housing demand. The decline in infrastructure investment will have as big a macro impact as the housing downturn.
Loved this article Mr Bear! Thank you for the insights!
There is a great deal of merit to your thesis as a short term tactical trade, but long term investment in China requires a belief that Xi and the party have a rational view and the wherewithal to execute - ultimately you would need to believe that Xi is ready to allow the free market and the creativity and innovation of the Chinese people to flourish. Over the past 3-4 years Xi has followed an entirely authoritarian approach to COVID lockdowns, leadership of the communist party and financial regulation in general. Allowing the failure of property companies aligns with constraining the activity of their entrepreneurial leadership - control. Ultimately until there is a change, investing in china requires acceptance that you are investing in Xi as your partner, not the Chinese people. That seems like a very risky bet…
Thanks for this feedback Simon. I understand your objections and think they are very valid considerations. I think part of the crackdown has been part of the "common prosperity" concept in which private sector wealth has been targeted - whether that be in property or technology. And that doesn't not bode well for private investment in the country. It remains to be seen whether this is a terminal trajectory for the country, or whether the pendulum may swing back as the country seeks to improve domestic sentiment or begin to attract international capital again. And yes, I guess an unspoken part of the thesis is that the country remains open to some level of international commerce and capitalism, despite the authoritarian governance. That isn't a surefire bet, and you are correct to note its risks.
Great read ,thank you.Its always refreshing and insightful to read your views on China,wonder if if you get another endorsement from Cassandra