I love saying, “I told you so,” maybe because I so rarely get to say it.
My loyal readers, both of them, know that I’ve long been a China “Bear,” not just on the Chinese stock markets but on the country in general. When I first started writing about China, in about 2000, I was more or less the only China bear on the planet. Everyone – everyone – believed that China was an unstoppable colossus that would quickly (by about 2020) overtake the US as the world’s biggest economy and that would be, even per capita (!), wealthier than the US by mid-century. Balderdash.
More recently, being a China Bear has been a less lonely position, but only marginally so. In fact, last month, when I began my four-part series on emerging markets, I got an irate call from a prominent China “Bull.” He expressed an intemperate opinion of my IQ and went on to tell me all the ways in which I’d gotten China wrong. Here’s a quick summary of his views:
* The recent China slowdown, from 14% annual GDP growth before the Financial Crisis to 7% now, isn’t a sign of trouble but a sign of progress. The slowdown was necessary in order for the Chinese leadership to orchestrate a much-needed transition from an industrial economy to a consumer-based economy.
* The new leadership team, under Xi Jinping, knows precisely what kinds of reforms it needs to implement to keep growth going, keep the people happy, and avoid the kinds of economic crises so common to the West and the political crises so common to most of the rest of the world.
* The Chinese leadership are, to the last man, vastly smarter and better educated than the bozos (I paraphrase) we elect to high office in the US. That alone is reason enough to bet on China versus the US. (There’s even a couple of TED talks on this point, if you have the stomach for it.(1))
* People like Curtis make the mistake of listening to what the Chinese leadership says – which is solely for domestic consumption – rather than what it does. Xi knows reforms are necessary and they will be rolled out over the balance of this year and throughout 2014.
Wondering if I might be speaking to a member of the Central Committee in disguise, I asked the China Bull what sorts of “reforms” he thought were necessary. Rolling his eyes (I’m sure, I couldn’t actually see it through the phone), he condescendingly spelled them out for me. Oddly, they are more or less the reforms I’d suggest if I were a daring member of the Central Committee (i.e., one with a death wish):
* A movement toward Western style participatory politics
* Improved attention to human rights
* Less reliance on huge, state-owned-enterprises and more reliance on smaller, more entrepreneurial companies
* More tolerance for freedom of expression
* An aggressive crackdown on corruption
Unbeknownst to my confident China Bull, back in April Xi’s central party office in Beijing had issued the now-infamous Document No. 9. Unfortunately for my friend, Document No. 9 didn’t take the ‘reformist” position on the major issues of the day in China. Instead it took the Maoist position.
In case you think I’m exaggerating, let me quote at length from the New York Times, which itself was quoting from Document No. 9:
“Communist Party cadres have filled meeting halls around China to hear a somber, secretive warning issued by senior leaders. Power could escape their grip, they have been told, unless the party eradicates seven subversive currents coursing through Chinese society.
* * *
These seven perils were enumerated in a memo referred to as Document No. 9 that bears the unmistakable imprimatur of Xi Jinping, China’s new top leader. The first was “Western constitutional democracy”; others included promoting “universal values” of human rights, Western-inspired notions of media independence and civic participation, ardently pro-market “neo-liberalism,” and “nihilist” criticisms of the party’s traumatic past.
* * *
The internal warnings to cadres show that Mr. Xi’s confident public face has been accompanied by fears that the party is vulnerable to an economic slowdown, public anger about corruption and challenges from liberals impatient for political change.
* * *
Opponents of one-party rule, it says, “have stirred up trouble about disclosing officials’ assets. … The warnings were not idle. Since the circular was issued, party-run publications and Web sites have vehemently denounced constitutionalism and civil society. Officials have intensified efforts to block access to critical views on the Internet. Two prominent rights advocates have been detained in the past few weeks… “Now the leftists feel very excited and elated, while the liberals feel very discouraged and discontented,” said Professor Xiao [of xxx University]… “The ramifications are very serious,” [Xiao continued,] “Because this seriously hurts the broad middle class and moderate reformers — entrepreneurs and intellectuals.
* * *
Since the document was issued, the campaign for ideological orthodoxy has prompted a torrent of commentary and articles in party-run periodicals. Many of them have invoked Maoist talk of class war rarely seen in official publications in recent years. Some have said that constitutionalism and similar ideas were tools of Western subversion that helped topple the former Soviet Union — and that a similar threat faces China.”(2)
Told you so.
(2) The news was broken by the New York Times on August 19. http://www.nytimes.com/2013/08/20/world/asia/chinas-new-leadership-takes-hard-line-in-secret-memo.html?pagewanted=all&_r=0.
Next up: The Trouble with Bull Markets
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Please note that this post is intended to provide interested persons with an insight on the capital markets and is not intended to promote any manager or firm, nor does it intend to advertise their performance. All opinions expressed are those of Gregory Curtis and do not necessarily represent the views of Greycourt & Co., Inc., the wealth management firm with which he is associated. The information in this report is not intended to address the needs of any particular investor.