In order to have a reasonable, well-informed opinion of how China and its policies impact the global economy and financial markets, you’d need to have a solid understanding of Chinese civilization, history, traditions, geography, and culture, not to mention its current economy, real estate market, politics, and stock markets. In this episode, we’re not going to be able to cover all these vast, complicated topics, in the manner they deserve. Instead, we’ll endeavor to take a shortcut. In the latest episode of In Search of Green Marbles, G3 (Gregg Schoenberg) talks to Weiss Deputy CIO Mike Edwards about his framework for assessing China.
Aside from synchrony, the other key pillar in Mike’s framework is globalization. As we think about globalization, Mike reminds us that since the fall of the Berlin Wall, the export of cheap Chinese labor has enabled market participants to inflate profit margins and keep the cost of goods down, while lifting millions out of poverty in China and creating a massive middle class.
Broadly speaking, the CCP is trying to keep people happy and satisfied enough that there’s no actual mandate for significant change. As a political force for stability, we are also seeing the echoes of a “Beijing Backstop” in markets, which is to say that large market moves or massive volatility, if destabilizing, is anathema to the very political legitimacy that has been so hard-fought over several regimes. This Beijing Backstop is different from the “Fed Put” in the US in so far as the former has more ballast to ensure that the will of the government is translated into the desired outcome.
Looking ahead to 2022, G3 ponders if it is possible for the Biden administration to advance a pro-climate agenda, appear to be doing something on inflation, and maintain the perception that they are tough on China. Practically speaking, Mike says no. Take, for example, solar panels. China is the largest, cheapest producer globally of solar panels and solar is a big part of the green agenda in the US. Having an anti-dumping case and massive tariffs on Chinese solar flies in the face of our priorities.
What would any discussion about Chinese policy and markets be without touching on the Evergrande situation? Mike asserts that the most important number to remember here is 89. That is the percentage of Chinese households that own their own home. By comparison, this number is 64% in the US, 60% in Japan, and 50-51% in Germany. So, when you talk about the role of the property market in the perceived well-being of the common person in China, it’s damn important. And with the diversification of personal net worth in China not being as robust as other developed markets, this creates a situation whereby the CCP cannot tolerate the level of protests and indignation if people were to experience their net worth crash due to a faltering property sector.
Finally, G3 and Mike discuss the possibility of an invasion of Taiwan. Mike cuts through the noise by reminding us that the threat of invasion is useful to Beijing and Washington for political reasons. However, at Weiss, we believe in the wisdom of markets, which would suggest that stock markets in Taiwan would not be at all-time highs and IP would be fleeing the island if the citizens were worried about an imminent invasion.
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