Contrary to popular perceptions, the leadership of the Chinese Communist Party is clear about its aspirations. They openly communicate their long-term goals, visions, and plans to direct the actions of their cadres. The trick is to find the clues in their speeches, resolutions, reports, and directives and to have the necessary knowledge of Party history to fully understand them.
In 1985, Deng Xiaoping inaugurated decades of rocketing growth with a single commandment: “To get rich is glorious.” The goal was to make China a “moderately prosperous society” defined as doubling the per-capita GDP to roughly $10,000 per year and housing 60 percent of the population in cities. To achieve that, Deng said, China had to “let some people get rich first.” The deadline was set to 2020.
What followed was state capitalism with rapid economic liberalization and the growth of private enterprise. To everyone’s surprise, the poverty rate dropped from 60 percent to 10 percent. The goal of building a moderately prosperous society was declared accomplished in July 2021 by Chinese President Xi Jinping, who stated, “We have brought about a historic resolution to the problem of absolute poverty in China. We are now marching in confident strides toward the second centenary goal of building China into a great modern socialist country in all respects.”
After decades of prioritizing economic growth, China entered a new stage of development focused on “common prosperity for all,” which Xi hailed as an “essential requirement of socialism, and an important hallmark in China’s modernization.” Looming behind those efforts are what many in China called the “three big mountains,” the costs associated with housing, education, and healthcare.
Source: Cato Institute
In 2017, Beijing started to tighten the real estate market based on the principle that “housing is for living, not for speculation.” That was the signal to get out of property stocks. The share prices of Evergrande and Country Garden peaked in the same year and never recovered. The regulatory “three red lines” introduced in August 2020 to address the sector’s heavy debt load were the final straw.
In January 2021, the Communist Party’s Central Commission for Discipline Inspection criticized the overexpansion of the private-education industry. Xi Jinping condemned the after-school training services as a “stubborn malady.” That was the cue to sell China’s education stocks. New Oriental Education and TAL Education both peaked in February 2021 and fell 95 percent.
Beijing was overhauling a sector it believed had been “hijacked by capital” to relieve pressure on overworked students and parents and address the sluggish birth rate (under a premise that less money spent on tutoring would mean a greater incentive to have babies). Many of China’s most prominent online tutoring firms have since either shut, downd, or pivoted.
In November 2020, Ant Group was set to raise $34.5 billion in the world’s largest IPO, valuing the company at $313 billion. The public listing was quashed at the last minute in Shanghai and Hong Kong. Chinese regulators summoned 27 major internet companies, including Tencent, food delivery giant Meituan, as well as TikTok owner ByteDance and Alibaba, accusing them of engaging in unfair competition, monopolistic tactics, and counterfeiting.
In February 2021, the Anti-Monopoly Guidelines on China’s Platform Economy were released. China’s senior officials sent a clear message: stop the “disorderly expansion of capital” to prevent the “barbaric” growth of China’s internet industry. It was time to make for the exits. Chinese internet stocks plunged 80 percent.
Source: Barchart.com
Two-and-a-half years later, the regulatory offensive has ended with fines on Ant Group and Tencent. In July, China’s powerful economic planning agency, the National Development and Reform Commission (NDRC), offered unusual support for internet companies, praising them for their contributions to the country’s growth and technological progress. Premier Li Qiang called them “trailblazers of the era.”
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The Politburo, China’s top decision-making body, flagged its intention to boost stock prices in the minutes of its July 24 meeting, saying it wanted to “enliven capital markets and increase investor confidence.” Xi’s mantra that “housing is for living, not for speculation” was left out of the readout. As reported by the Economic Daily:
“How can capital markets play a more positive role in promoting consumption and expanding domestic demand? It is necessary to take measures to increase market activity, and push stocks toward a ‘slow bull’ market. The wealth effect brought about by a rise in the stock market can directly increase investors’ income and boost income growth expectations, thereby translating into actual consumption.”
A series of steps have been taken by regulators in recent months to try and revive the stagnant demand for A-shares, which have declined for six consecutive months.
The Shenzhen, Shanghai, and Beijing stock exchanges cut their transaction fees by 30 to 50 percent in August. The Ministry of Finance reduced stamp duty, a levy on stock trades, from 0.1 percent to 0.05 percent for the first time since 2008. The securities regulator, the CSRC, lowered margin requirements from 100 percent to 80 percent, and pledged to slow down the rate of IPOs to keep cash from leaving the secondary market and going toward new issues.
Domestic institutional investors—the social security fund, insurance firms, and asset management subsidiaries of banks—have less than 6 percent of their assets invested in stocks, far lower than over 20 percent in developed markets. To encourage long-term investment in stocks, regulators implemented new standards in September to assess insurance firms’ performance over a three-year period rather than a one-year time frame, while lowering the risk weighting attached to their stock holdings.
Rumors emerged of a state-backed stabilization fund in October to support China’s $9.5 trillion stock market. Additionally, Xi Jinping signaled that a sharp slowdown in growth and lingering deflationary risks won’t be tolerated. The government increased its headline budget deficit to the largest in three decades. In November, Xi visited commerce and finance hub Shanghai for the first time since 2020 as a signal of his determination to reinvigorate investor confidence.
Source: China Daily
China’s benchmark index, the CSI 300, has declined for an unprecedented three years in a row. Hong Kong’s Hang Seng index is down four years running. The Dow was the last major market to go through that during the Great Depression, from 1929 to 1932. In 1933, it rose 66 percent. The Hang Seng index’s short-sell ratio hit its second-highest level of 29.6 percent on November 24, after reaching a record high of 31.6 percent in July
In December, Moody’s cut its outlook for Chinese sovereign bonds to negative, underscoring deepening concerns about its debt levels and persistently lower economic growth. This adds to the obvious reasons you would avoid China. Right? Wrong. We encourage you to re-read our thoughts on the matter. Sometimes the obvious is not what it seems.
Betting against Chinese stocks remains the second-most crowded trade, according to Bank of America’s global fund manager poll, behind long exposure to big-tech winners of the artificial intelligence boom. Will Xi manage to rekindle a bull market, or will Chinese stocks remain among the world’s worst performers in 2024?
When the Party broadcasts its intentions, history tells us how reliably they execute them. We’re betting on Xi.
If our words fail to persuade you, maybe these charts will capture your attention. The CSI 300 index is perched on an eight-year trend line, BYD is finishing a three-year triangle consolidation, Alibaba is ending a wave 2 corrective pullback, and a number of Chinese banks are forming either double bottoms or inverse head-and-shoulders patterns.
Source: Trading Economics
