Is What You (as an institutional investor) Need to Know About China
It’s never been easier to escape reality, nor more necessary to face it.
Easy – video games, Netflix, mind-altering substances, endless phone-checking & Internet scrolling
Necessary – facing the new financial normal, and its increasingly uncomfortable prospects, to wit:
FOUR CHALLENGES IN THIS FOURTH TURNING
Cheap money and predictable returns are gone
2. The consequences of their drivers are upon us: inflation, liquidity crunches
3. The global order is fragmenting, thus too the global economic & financial order
4. Traditional, institutional equity/bond portfolios are insufficient for prudent wealth management
I can only imagine snake-oil and crypto salesmen disputing 1.
The financial industry is awash with reports, articles, and podcasts dissecting the interplay of 2 & 3.
Only a tiny subset of humanity is truly concerned about 4. If you fall in that subset, it is to you I write, for it is that small group who can benefit most from the largest macro-dislocation of our times: the politically-promoted narrative that China is uninvestable, and the very real, blue (if not aquamarine) ocean of alpha being systematically fished here, as I write this.
SOME PRINCIPLES FOR THE NEW NORMAL
I spend far too much time reading about macro-economic trends, trying to figure it all out. I only admit this because I suspect that, if you have significant wealth to manage in these – how are the folks at Davos putting it now? – “polycrisis” times, you hope that gorging yourself on information justifies delaying decision, and action. It’s human nature.
I also read too many economic articles because of my America vs. China “yeah but” mania. There is always a far more versed and experienced adversary in my head, and online, telling me about China’s many risks and challenges, against whom I counter with America’s, and Europe’s.
“Basta”, as the Italians say. Let’s counter the 1-4 above with a 1-2-3.
1. Increasingly intelligent diversification is a must now.
Will there be an extended global recession? If so, when will it hit? How much is China’s opening-up going to affect inflation and upstream costs? I don’t know – I’m not fit to polish Roubini’s oversized spectacles.
I do know enough to realize that when so many less-publicized, non-prime time experts and analysts warn of extended downturns, and present compelling data, that it’s high time to think well past bull traps and the current yield curve. Even more so when Davos is inventing vocabulary to tell us, yes, the janky but comfortable global financial regime as you’ve known it is over.
2. China will keep developing, economically and financially.
That Three Gorges dam is collapsing any time. Evergrande’s collapse means China’s economic collapse is assured. China’s demographic disaster of too few babies means its manufacturing base will collapse.
I’ve spent too much time preaching to pagans instead of the choir. “China isn’t collapsing,” was my article of faith. But isn’t the western press, federally-funded to help prevent the rise of China, sounding more and more like they’re the ones praying, in this case for the destruction of their self-made enemies?
Surely that upcoming invasion of Taiwan will be the collapse of China, won’t it? How’s the ruble doing versus the dollar? Collapse comes from col – together, and labi – slip. Any truly big slip-ups, like another Ukraine-style proxy war, mean we’re all going to slip together. Who’s going to get back to their feet faster? Putin’s still swinging in round 11. Who honestly thinks China’s getting knocked down for the count? Anyone who tells you it can and will is shilling for the military industrial complex – Mike Pompeo, bless his heart.
3. Managing money in China is scary and risky. FOR YOU.
“Regulatory risk and opaque reporting and existential threats…” Sure, I get it. Sound wealth management is sound long-term risk management, in a nutshell. But for starters, as the eminent Jason Hsu so succinctly puts it, “You are already a China investor.”
Now to the vast majority of investors, ETFs and ADRs must be the way to go vis-à-vis China. The right China A-share ETFs can provide long-term capital appreciation. Buying the CSI 300 is not intelligent diversification, though. Banks and liquor companies aren’t reflective of China’s growth trajectory. As for broader indexes, China’s once and future volatility will always be a crouching tiger.
3a. Managing money in China is challenging but lucrative. FOR TOP CHINESE ASSET MANAGERS.
I just interviewed Stephen Zhou, COO & CFO of Mingshi, the best-known quant investment manager in China. It was embarrassing. He was prepared to take a deep dive into his AI-enhanced high turnover trading strategies. But for most investors thinking about China, that would have been like taking a new rafter down the God’s House stretch of the Kenali River.
So I did my best to get him to opine on whether value was coming into rotation, and how he coped with the specter of regulatory crackdowns. Maybe when I interview Ronaldo I’ll ask him if a hostile crowd affects his game.
The point is Mingshi makes money in markets up, down, and sideways, no matter what’s coming out of Zhongnanhai, how many Chinese have COVID, or where Nancy Pelosi’s plane is. The colossal but colossally under-appreciated fact of the world’s second largest equity market being 80% retail traded, is somehow enough to keep Steven’s hands from trembling too much to hit a buy order.
He’s not alone. There are scores of incredibly talented, disciplined, and internationally experienced teams ready to take on international institutional clients and allocations, with every manner of style and strategy one could wish for.
Things still aren’t dire enough in the West to bring institutions running to have their China allocation managed by great Chinese IMs. There’s still a window of time when doing things as they have been done makes the most sense. But that window’s collapsing.