Twilight of China Accelerates
The announcement of Xi Xiping's annoinment as the head of China has caused an acceleration of the bear market in Chinese stocks and debt. What we are seeing is the destruction of 30 years of dramatic economic growth. I have stated in the past that China’s economy will never surmount the United States economy. Many people find this shocking as we have been trained over the last 30 years to believe that this is the century of China not the US.
But just look at the headlines from today:
- Renminbi hits 2007 low after Xi unveils harder line leadership
2. China bulls hammered by stock rout as Xi consolidates power
3. US charges Chinese officers with trying to interfere in Huawei probe
All indications are that China will continue to grow in the coming years but at a rate of generally less than 3% per year. We will actually start to see China have a real recessions rather than just slow downs in growth.
Xi is interested only in consolidating his power and maintaining his power. He is not interested in growing the wealth of the country. He is interested in maintaining power and that requires that the economy is not a disaster. But he doesn’t need strong economic growth to maintain power.
So you may expect that he will continue to increase the size and scope of the surveillance state, the police force, and the military. In addition you may see him continue to increase his nationalistic rhetoric because nationalistic rhetoric motivates people to sacrifice for the common good.
What this means economically is that China will no longer be the major buyer of commodities in the world. We have gone through a multi decade phase where China was the bulk buyer of nearly all commodities including grains and industrial metals. Now, they will back off from that. Yes they will still be buyers but not at the scale they were before.
This is going to have a heavy impact on countries such as Southeast Asia, Australia, and Canada as these were major suppliers of raw materials for China. That means that shorting those countries stock markets and currencies will be a major play for us in the future.
It also means that we will see the Chinese stock market and currency drop significantly over the coming couple of years. The reason is that the Chinese stock market and currencyare overvalued given the new reality of an authoritarian China. There is no need to be buying Chinese stocks or Chinese currency if China is moving to a slow growth policy going forward. So this will also be one of our major themes going forward.
Another thing to consider is the effect of the depreciation of the Chinese one on the world. China will continue a policy of slow depreciation of the yuan. They won’t let it drop dramatically or they will suffer currency manipulation sanctions by western countries primarily the United States. But it’s low depreciation will mean that Chinese goods will decline in price for foreign buyers and thus increase sales of those export goods. That means the China will go back to competing with other low cost producers such as Vietnam. Countries like Vietnam, Thailand, and Nigeria had moved in to take market share away from China during the Covid pandemic and China will now mount a counter offensive. So look for those extra those cheap production countries to suffer a bit.
We can also short certain sectors of China and make even more money. For example, the banking sector is bankrupt yet the share price is remains elevated. So there is still lots of money to be made on the short side of Chinese banks. The housing sector probably has more to go but we are closer to the bottom then to the top in that sector.