An interesting article in The Wall Street Journal this week... https://www.wsj.com/articles/xi-jinping-aims-to-rein-in-chinese-capitalism-hew-to-maos-socialist-vision-11632150725?mod=searchresults_pos3&page=1 paywalled but I think there's a free offer to join for a limited period. Now the WSJ is scarcely ever supportive of any curb to free market but the extent of what they describe as Xi Jingping's idealogical campain to curb captialism in China was an interesting read. There are obviously very alternate perspectives but I'll be watching closely... changed policy setting in China can have dramatic effects. All this makes me more bullish on India. Just a few highlights below...
"Xi Jinping’s campaign against private enterprise, it is increasingly clear, is far more ambitious than meets the eye. The Chinese President is not just trying to rein in a few big tech and other companies and show who is boss in China. He is trying to roll back China’s decadeslong evolution toward Western-style capitalism and put the country on a different path entirely,
In Mr. Xi’s opinion, private capital now has been allowed to run amok, menacing the party’s legitimacy, officials familiar with his priorities say. The Wall Street Journal examination shows he is trying forcefully to get China back to the vision of Mao Zedong, who saw capitalism as a transitory phase on the road to socialism.
Mr. Xi isn’t planning to eradicate market forces, the Journal examination indicates. But he appears to want a state in which the party does more to steer flows of money, sets tighter parameters for entrepreneurs and investors and their ability to make profits, and exercises even more control over the economy than now. In essence, this suggests that he aims to rewrite the rules of business in what could someday be the world’s biggest economy.
“China has entered a new stage of development,” Mr. Xi declared in a speech in January. The goal, he said, is to build China into a “modern socialist power.”
Mr. Xi’s overhaul has generated more than 100 regulatory actions, government directives and policy changes since late last year, according to a Journal tally, including steps aimed at breaking the market dominance of companies such as e-commerce behemoth AlibabaGroup Holding Ltd., conglomerate Tencent Holdings Ltd. and ride-sharing leader Didi Global Inc.
“Supervision over foreign capital will be strengthened,” said a person familiar with the thinking at China’s top markets regulator, “so it won’t be able to obtain ultra-high profits in China through monopoly and capital-market operations.”
Mr. Xi’s policy changes have dashed more than $1 trillion in stock-market value and erased over $100 billion of wealth for entrepreneurs such as Alibaba founder Jack Ma and Tencent’s Pony Ma. Private companies and their owners are being encouraged to donate profits and wealth to help with Mr. Xi’s common-prosperity goals. Alibaba alone has pledged the equivalent of $15.5 billion.
State-owned companies, having already bulked up under Mr. Xi’s rule, are marching into areas that were pioneered by private firms but are increasingly seen as crucial to national security, such as management of digital data.
A ministry supervising state companies, the State-owned Assets Supervision and Administration Commission, is mapping plans to set up more government-controlled providers of cloud services for data storage, people familiar with the agency’s workings say. Such services have been dominated by private companies, including Alibaba and Tencent.
The city of Tianjin has ordered companies it supervises to migrate data from private-sector cloud platforms to state-owned ones within two months of the expiration of existing contracts, and by September 2022 at the latest, according to an official notice dated Aug. 12. More localities are expected to follow suit, the people say.
Government-controlled entities are acquiring stakes and filling board seats in more companies to make sure they fall in line with the state’s goals. ByteDance Ltd., owner of the video-sharing app TikTok, and Weibo Corp. , which runs Twitter-like microblogging platforms, recently have sold stakes to state-backed companies.
Stanley Lim perspective is worth the ~20 min time investment https://www.youtube.com/watch?v=o5XMori-8sQ
From Alan Kohler this morning on Evergrande...
Never, nevergrande
There are two questions around the Chinese real estate company inaptly named Evergrande:
I think the questions stop at the first, which is that it won’t collapse, or at least not entirely, like Lehman Brothers did.
Evergrande’s US dollar bonds are currently trading at 30 cents in the dollar, so markets are pricing a brutal haircut for offshore bondholders, but remember that we’re talking about China here.
Policymakers have been targeting the financial risk in property developers’ (read: speculators’) business models for two years so there’s no surprise with what’s happening. In fact, Evergrande itself almost went broke a year ago.
Also, US$280 billion of Evergrande’s US$300 billion in debt is issued locally, mostly to state-owned banks.
In other words, both the problem and the solution is in the hands of the government.
The situation with Lehman Brothers in 2008 was actually a bit similar: the collapse was brought on by the Federal Reserve’s tightening of monetary policy and the Fed and US Treasury could have saved it, but didn’t.
But in other ways, it’s chalk and cheese, two entirely different economic systems.
There are two types of contagion: direct and indirect. The direct kind can be economic or financial. In the direct economic kind, one country’s currency devaluation undermines another’s competitiveness. In the financial direct kind, lenders retreat from a whole class of lending when one member of the class goes bust. That’s what happened in the GFC with US mortgages.
In an indirect contagion, investors look to reduce portfolio risk generally in response to a negative event. For example, in 2013 after the Fed signalled that it would start tapering QE (the “taper tantrum”), investors started reducing exposure to emerging countries because they had to raise cash, selling assets they could sell rather than ones they wanted to.
Since most of Evergrande’s creditors are domestic and the government firmly holds the strings, there is unlikely to be a direct financial contagion. But there could be a more indirect portfolio sell-off.
That’s especially the case if the offshore bondholders are treated very differently in any restructuring.
If foreign bondholders are forced to take a bigger haircut than domestic ones, then all foreign investors in China could take fright.
According to GaveKal, debt issued by Chinese property developers, many of which are almost as highly geared as Evergrande, make up close to 30 per cent of the Bloomberg Barclays Asia US dollar high yield diversified index.
If the bondholders can’t sell their Chinese developer paper, and need to raise cash, they would have to sell other emerging market bonds, such as Indian or the Philippines. Result: contagion.
This drama still has a long way to play out, but the most likely outcome is a relatively orderly clean-up of the mess – mainly because the Chinese government has both the means and the motive for making sure that’s what happens.
But as Bloomberg’s John Authers wrote the other day, there is a broader issue with Evergrande, to do with China’s whole growth model: “Countries have grown like this in the past, but never without suffering some major crises along the way.
“This was true of Britain during the Industrial Revolution and Gilded Age America, and more recently debt-fueled expansions in Japan and the Tiger economies also reached a moment of crisis.
“Government intervention in China has, so far, averted a major crisis — but that has meant that the debt kept piling up, in a way that must logically slow down growth in the longer term. The factors of political interference, and the inevitability of interruptions after so much growth come together in the question of valuing Chinese assets.”
It leads him to conclude that while a Lehman event should be avoidable, “a big slowdown in broader growth is harder to avert, and Evergrande makes a slowdown look even more likely. Investors are braced for such a slowdown in China now.”
Obviously a slowdown in China has implications for Australia, and we have now added geopolitics to the equation when it comes to trade with China.
Christopher Joye's comments on the issue - https://www.livewiremarkets.com/wires/evergrande-and-the-perils-of-investing-in-non-democratic-states?utm_campaign=90751&utm_content=wrap+up+email+now&utm_term=evergrande-and-the-perils-of-investing-in-non-democratic-states&utm_medium=email&utm_source=campaign+monitor
Basically, most of the debt is owed to Chinese citizens, and it will be contained.