I've been increasing my invested position rapidly over the week and half as the market sold off Chinese stocks en-mass. Today we're moving towards 105% invested in equities and moving our China allocation towards 50% (if including CNOOC and COSL, this is >60%) from 40% before. I will continue buying towards the 150% max invested position as long as valuations remain attractive. Along the way I also expect to sell-down PSTH and cash similar positions e.g. Tobacco stocks to fund purchases.
Chinese stocks are obviously cheap but the market concerns are systematic in nature - Chinese government destroying capitalism. For myself, I think these fears are overblown and contrary to my understanding of Chinese policy objectives. We've seen by past policy examples: One Belt & Road, opening of China's bond markets, move to market pricing for equity and credit risk, removal of restrictions on foreign financial institutions, etc, that the goal of China is to strengthen its financial system and trade networks to eventually supplant the US. There has been no evidence that these goals have changed - China still wants to become rich and powerful and the chance of it becoming the dominant global economy within the next 10-20yrs seems high given the large wealth gap which exists today: $10.3k GDP per capita China vs $65k for the US. I also think Chinese leaders understand China's weaknesses and that the only way forward is a transparent and market driven system which encourages technological and financial investment flows. In my opinion these past policies have generally been counter-cyclical and well thought out.
Commenting specifically on the recent policy moves:
Education: perhaps the surprising (though fortunately we had no exposure) and probably the one I'm most skeptical about. I think its focus on life balance for students and equality for lower income areas is noble but flawed since it doesn't address: a) the competitiveness of society, and b) the quality of the public education system, particularly the direct instruction based teaching instead of inquiry based learning
The crackdown on big tech seems overdue. Anti-competitive practices by the big tech is more pervasive in China than elsewhere in the world given their dominance of individual fiefdoms and walled garden ecosystems. This is akin to the antitrust lawsuits in the 90s against Microsoft's abuse of Windows and today against Amazon, Google and FB
Anti-competitive practices. China's big tech and flush VC monies fund proxy wars where the objective is to monopolise end markets. Consumers may benefit short term but suffer longer term when competition dies off and they end up with inferior products and prices
Gig economy. This is similar to California and London ruling against the ride-share companies classifying their drivers as contractors. In China's case these gig economy employees are losing out on 20% compulsory social security benefits
SOE and major company failures. Finally we take off the training wheels move to market pricing for risk! In a healthy economy, nothing should be too big to fail
With perhaps the exception of the education policy, I largely agree with all the other policy moves and have no problems with China sacrificing short term growth to create a more robust framework for longer term wealth. Additionally I think the government pushing through these reforms today reflects their confidence in the real economy. If the market continues to deteriorate and starts to affect the real economy then supportive policies will likely appear. Western confidence may be down right now but people underestimate how much domestic capital there is in China. Eventually sentiment will recover.
To me the risk/reward offered is very skewed to the upside and the risk of absolute loss seems limited - if the world's second largest economy becomes an insular shell, what are you doing buying US stocks? Buy guns, tinned food and a bunker in New Zealand! Capital has no safe haven if China becomes a North Korea. I'm probably too early in my buying but market timing has never been my strong area. I've already reached the limits of quantitative analysis, what remains is to follow through and push in the chips.
Comments