Policy making in democracies is interminable and infuriating. Leaders and parties bang on for years about their broad objectives. Usually nothing big happens. When it does, once a decade or so, it’s debated and whittled down until everyone is sick of hearing about it — which gives special interests plenty of time to arrange their loopholes.
Investors are appreciating anew that this is the worst system except for all the others, specifically China’s.
Xi Jinping and his comrades do things the other way around. They act first, decisively and unpredictably. Then they explain themselves, if you want to call it that, through laconic phrases plucked from dense directives. The objectives of Xi’s current reform blizzard are not so different from what Western progressives want: more income equality, less power for internet giants, more affordable housing, a crackdown on useless for-profit education. It’s the methodology that’s producing market havoc.
Beijing’s destabilization from above only looks to be gathering steam under the catch-all banner of Common Prosperity. China could doubtless benefit from some income redistribution after decades of emphasizing growth. The country’s “Gini coefficient,” a standard measure for inequality, stands around 0.47, way worse than Western Europe and Japan, and just a hair behind the plutocratic U.S.A. But how Xi intends to spread the wealth is unclear, to say the very least.
A coherent Common Prosperity program might raise taxes on income or consumption to fund social programs. It could institute property tax, raising the cost for wealthy Chinese to warehouse second or third apartments. Property tax would also undermine the unholy alliance between developers and local governments, which currently rely on land sales to survive. That bond helped create the unfolding debacle at China Evergrande Group.
Xi & Co. could loosen their draconian restrictions on capital export, so upscale Chinese could buy housing abroad again, easing pressure on domestic prices. They could do a lot of things.
China’s bosses don’t seem to favor systemic solutions, though, certainly not ones that are aired out for public discussion. Like a partisan guerrilla army, they prefer serial attacks that maintain the element of surprise. That’s good strategy if you’re trying to overthrow a government, maybe less so if you are the government.
If Beijing, like God in the Book of Job, taketh away, it can also giveth to industries and companies momentarily in favor. Stocks that are “aligned” with state policy, like biotechnology developer Wuxi Biologics (ticker: 2269. Hong Kong) or electric vehicle battery pioneer CATL (300750.China), have doubled or better over the past year, while the broader China index has been flat.
The problem is that favor can be fickle. Ages ago, like last year, everyone assumed platform collosi Alibaba (BABA) and Tencent (700.Hong Kong) were national champions, destined to spearhead China’s offensive in the coming Tech Cold War. It didn’t turn out that way. The list of sectors in line for further “reform” is forbidding: housing, health care, financial services, gig economy. Safe havens are limited and looking amply priced.
The bull counter-argument for China rests on a few premises: Past regulatory waves have subsided. This one should too — either early next year, when Beijing wants to jolt growth again, or late next year, when a Communist Party Congress rubber-stamps Xi for an unprecedented (since Mao Zedong) third term in power.
More fundamentally, it’s rather ridiculous for the semi-stagnant West to criticize China’s economic management, which has boosted income per capita tenfold this century, and lifted half a billion people into the middle class.
You can’t invest in a rising middle class directly, though, only in companies that sell to it. That’s where guerrilla government is a problem. Stocks in dynamic China have outperformed the policy-paralyzed U.S. in spurts: all of 2017, post-pandemic 2020. But the valleys in between have made them a longer-term laggard. A little tedious transparency at the top might change that. Don’t hold your breath.