The bubble finally bursts for Chinese capitalism

While dissecting the opaque and convoluted party rhetoric has never been a top priority for fund managers in New York or London, they are suddenly paying attention. For example, Xi made it clear in 2018 that he was not a fan of China’s out-of-school tutoring system, which made a fortune by taking education out of state hands.

The world doesn’t engage much with China, ”said Tim Murray, Chinese expert and founder of hedge fund research firm J Capital.

“So when the masters of the universe, the people who control billions of funds, shit, and their wallets go down 20%, they’re like, ‘Oh damn, what happened in China? Is this a decisive turning point? It’s as inevitable as the sun rising in the morning that it was going to happen.

Regulators put pressure on Jack Ma and his business empire. PA

“The Communist Party wants to control everything at all times. In business in China, if you want to be successful, you must align your goals with those of the state. You have to accept authoritarianism to be successful. But some of these people have become so rich and control so much that they threaten the state. “

The wake-up call for pension funds and hedge funds in the United States, Europe and, to a lesser extent, Australia, occurred last month.

Chinese billionaires have been dropping like flies since Xi came to power in 2012. His iconic anti-corruption campaign has erased many excesses that characterized both the state and the private sector.

In 2017, China began to impose restrictions on the inflow of capital out of the country and cracked down on indebted conglomerates such as real estate group Dalian Wanda and HNA Group, which were spending heavily overseas in Australia. and elsewhere.

In the same year, the founder of financial giant Tomorrow Group, Xiao Jianhua, was torn from a hotel room in Hong Kong and taken into police custody. Last year, real estate billionaire Ren Zhiqiang was jailed for 18 years after publicly criticizing Xi. Sun Dawu, an agricultural mogul, was also sentenced to 18 years in prison last month for pushing back on the government.

The passing of Ma, China’s second most famous person after Xi himself and the country’s most successful entrepreneur, was another harbinger for global investors. In November, Chinese regulators canceled the $ 52 billion IPO of Ma’s financial services giant, Ant Group, just days before its listing date. Ma later reappeared, but his control over the business empire he founded was significantly watered down.

But the wake-up call for pension funds and hedge funds in the United States, Europe and, to a lesser extent in Australia, happened last month.

In April, the actions of food delivery giant Meituan were beaten after Beijing launched an anti-monopoly investigation amid criticism of how it treats its delivery drivers. Shares in Melbourne-based carpooling giant Didi were wiped out after it was banned from signing new customers just days after it was listed on the Nasdaq. Last week’s crackdown on the after-school tutoring industry confirmed that all major listed stocks that influence Chinese society, especially education, are no longer safe.

China’s latest assault on its once-prized corporate behemoths came on Tuesday morning this week when a state newspaper criticized online gaming as “opium for the mind.” In Hong Kong, Tencent shares initially fell 10%, fearing the government would target the gaming industry. Tencent, one of China’s biggest tech giants, is now worth around $ 550 billion, up from nearly $ 1,000 billion at its peak last year.

Understanding what is going on is complex. Investors are racking their brains and wondering why Xi would want to undermine the market system that has helped fuel China’s growth.

“This is not a stock market story, not a technological story. It is a story of social harmony and a story of national security.

– Andy xie

Some of the companies affected by the latest crackdowns have several things in common. They control huge amounts of data that the Chinese government does not want to fall into foreign hands, or they are linked to social issues in China such as an aging population, the wealth gap or the health of children.

“This is not a stock market story, not a technology story,” said Andy Xie, a Shanghai-based independent economist. AFR weekend. It is a story of social harmony and a story of national security. Education reform is just the start and it still has a long way to go. The Communist Party is so powerful that it can pull all the levers in society.

Xie compares the ongoing change in the way China deals with capitalism with what happened in (former US President Donald) Trump’s America. From Beijing’s perspective, he argues, the American model is shattered because tech companies have been allowed to crack down and increase inequality without contributing to the greater good of society.

“In the West, great wealth and big business create a power that allows them to enter the political system. Such a system is not stable. You can’t have someone like Jeff Bezos who owns the Washington post as a propaganda tool. The Communist Party will prevent this kind of thing from happening. In China, to have great wealth, you have to serve the country.

Murray also agrees that the way Chinese leaders manage capital is influenced by what they see in the United States.

“Trump becoming a corporate celebrity and controlling the United States was something that really made Xi Jinping think. If a stupid billionaire could run America, why couldn’t they run China? People like Jack Ma have huge celebrity status, ”he says.

Chinese President Xi Jinping is seeking to cut costs for educating children to support his third child policy. PA

Chinese economists say Xi is not waging a war on capitalism per se, but is strengthening an existing system that prioritizes social stability and state control above all else. After tackling extreme poverty and coming out of the coronavirus pandemic in a more powerful position, the focus has shifted from decades of double-digit growth to greater self-reliance and social policies designed to keep people alive. happy masses.

“We are at an important moment in the history of China’s economy and capital markets: after a ten-year journey to eradicate absolute poverty, Beijing is shifting its governance priorities from growth to balance between growth and sustainability: social equality, data security and self-sufficiency, ”Morgan Stanley analysts wrote this week.

“New Chinese regulations on fintech, big tech, extracurricular tutoring, cryptocurrency and carbon emissions over the past nine months underpin this major regulatory reset. “

China’s clumsy messaging and often necessary but inappropriate regulatory crackdowns that prioritize politics above all else, have also affected Australian exporters, miners and commodity traders. Mixed signals late last week about whether China would cut steel production to meet Xi’s carbon reduction targets initially pushed iron ore prices down. They then recovered after the Politburo signaled the cuts should be more moderate than expected.

For many, China is still worth the risk due to the huge size of the consumer market.

Tencent is one of the top 10 holdings of the flagship global fund of Magellan Financial Group. Founder Hamish Douglass still believes in the opportunities offered by the rise of the Chinese middle classes.

Australian super funds are underinvested in China compared to pension funds in the United States and Europe. Wilson cites figures from the Australian Bureau of Statistics which show Australian investment in China fell 25 percent last year.

But while Chinese stocks look riskier than they did two months ago, the country’s $ 16 trillion bond market remains attractive due to its relatively high yields and changes to market infrastructure that make it easier to invest. investment than before.

“We don’t think the risk profile of bonds or currencies has changed. There are no sustained outflows from American or European investors, there are in fact regular inflows, ”Wilson said from Exante Data.

“If ever this flow were to have any problems, it would be a systemic level macro event. We believe this is highly unlikely as China has too much to lose in terms of its long-term goal of internationalizing the renminbi. “

As investors come to terms with the new reality of investing in China, Xi is unlikely to lose sleep over the recent massive sell-off.

Xie says China’s economic recovery does not depend on the success of its big, publicly traded tech companies. And on Wednesday of this week, mainland investors were already reinvesting Hong Kong stocks with capital inflows reaching HK $ 2.5 billion ($ 435 million).

Murray says the West needs to change the way it views China as a money-making machine. “Global capital markets don’t matter to Chian anymore and I think they’re going back to autarky,” he says.

“The reality is that for us, as a nation doing business with China, the game has changed. It is not going to go back and we have to accept it and we have to diversify our relations with other countries of the world. “

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