A tale of two Chinas

“It was the best of times, it was the worst of times, it was the age of wisdom, it was the age of foolishness, it was the epoch of belief, it was the epoch of incredulity, it was the season of Light, it was the season of Darkness, it was the spring of hope, it was the winter of despair …” – Charles Dickens, A Tale of Two Cities

CHINA seems to exist in parallel worlds. Today, one can paint a promising, modern, advanced China, or a bleak, back-pedalling, hopeless China. One can fear the return of Maoism or celebrate a successful, modern, Marxist nation harnessing capitalism’s best traits while taming its dark side. One can view “common prosperity” as wealth redistribution, or more wealth creation so that more can be distributed.

Today, there seems to be some optimism after the arduous 3.5-hour meeting between China President Xi Jinping and US President Joe Biden at the G20 Summit in Bali, Indonesia. Many Asians can now take comfort in the fact that China is not about to use military force for Taiwan reunification, nor is the US likely, at least for the short term, to use Taiwan to provoke China. China had already subtly telegraphed its intention to the world through its Taiwan Affairs Office in September that China would exercise “strategic composure and historic patience” over Taiwan, not long after US House Speaker Nancy Pelosi’s provocative visit.

This seems to suggest that the best minds in Beijing believe that China’s goal of modernisation is far more important than the dream of immediate reunification, even with chip foundry TSMC as a mouth-watering prize. At the time of writing, the thrashing of Tsai Ing-wen’s Democratic Progressive Party in local elections seems to suggest that most Taiwanese prefer to maintain the status quo. This is partly due to China still enjoying a massive trade surplus with the US, in the region of US$400 billion a year.

However, Washington will continue to do what it can to slow or stop China’s technological advancement. I expect this to continue until around 2027, when China’s gross domestic product (GDP) will likely achieve parity or exceed that of the US. China knows that economic power and wealth are the overriding factors determining bilateral relations and military might.

We see this in German Chancellor Olaf Scholz’s visit to China in November, soon after the party congress, with the chief executive officers of 12 industry titans such as Volkswagen, Deutsche Bank, Siemens, and BASF. His visit came less than a week after Vietnam’s Communist Party General Secretary, Nguyen Phu Trong.

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Domestically, we think fears of China regressing to the Mao era are unwarranted. It is worth spelling out that any leader of a communist party or socialist party from time to time must mention in their speeches and writings their views on principles along the lines of common prosperity, suggest ideas on how to achieve it, and propose ways to create equal economic opportunities for all. Why will Xi be different from his predecessors?

We should note, however, that key phrases from President Xi’s “common prosperity speech” delivered in August 2021 at the 10th meeting of the Central Committee for Financial and Economic Affairs included calls to upgrade skills, upgrade the industrial complex, and to work hard, in a nation that is aiming to advance technologically.

“Common prosperity depends on hard work and wisdom...give top priority to high-quality development...create more favourable and equitable conditions for the people to receive better education and improve their development capabilities...provide chances for more people to become wealthy and avoid ‘involution’ and ‘lying flat’,” the speech goes.

Xi’s latest views on common prosperity also resonate with the Zhejiang Plan, the socio-economic blueprint released about 20 months ago. There is no evidence in Xi’s speeches that China will return to communal economic organisation, a policy which had disastrous economic consequences in the past, or that China will achieve “common prosperity” as is envisaged by Western media.

Thus, I think nothing of materiality has changed or will change after the party congress. Xi is still the same Xi whom we have got to know over the last 10 years. His views on the China Dream, economic development, common prosperity, corruption, property speculation, and monopolistic behaviour will remain largely the same.

Economic achievements will define the success or failure for China leadership’s new five-year term. The average Chinese today still cares much more about bread-and-butter issues than ideology. Xi and his new team know this, and therefore they know that their number one key performance indicator would still be economic growth. I would be surprised if the GDP target for 2023 would be set at markedly less than 5 per cent.

A new era for Internet stocks?

Offshore China funds and hedge funds are still huge holders of Internet stocks such as Alibaba, JD.com, Pinduoduo, Tencent, and Meituan. Even high-net-worth investors are big holders because their private bankers recommended those stocks.

Many have argued in the past year that these Internet stocks are undervalued and cheap, as stock prices had declined by more than half. They also argued that business will return to the good old days because regulators have gone gentle on them as the economy slowed.

Investors’ obsession with Internet stocks is still strong. In the past month or so, euphoria seemed to have returned to these stocks, for the wrong reasons, in my view.

Internet stocks are big components of the index and hence investors cannot afford to get them wrong. First, labelling Internet stocks as tech stocks is arguably the biggest bluff of the past decade because there is nothing highly “technological” about them. Most of these businesses, be it e-commerce, food delivery, video games, car sharing, or fintech, have low entry barriers. Any aspirant with capital can start a new business within a year!

In e-commerce, Meituan, Douyin, and Kuaishou have already become worthy and formidable rivals to the incumbents within two years. The golden period of 2014-2020, where the e-commerce sector took significant market share from the brick-and-mortar retailers, is arguably over. Today, the sector is in a long and dark winter. Billions of dollars of capital can no longer be raised to spur growth. Regulators will now root out monopolistic behaviour and violators will be fined heavily. Selling below cost is strictly not allowed. Blue-collar workers must be provided with adequate medical, pension, and social benefits.

China’s e-commerce markets have reached very high penetration rates countrywide, and therefore topline growth has slowed significantly. Many companies have started to retrench staff and shut down unprofitable businesses. Valuations must reset from growth-stock valuations to matured-stock valuations. A good number of these valuations ought not to exceed that of telco operators or the major banks, whose price-to-earnings multiples are in the 5-8 times range.

The writer is founder and chief investment officer of APS Asset Management.