“The nature of Monkey was… irrepressible!”

The Chinese Economy looks awful. I challenge readers to find anything positive written about it in recent weeks. A few years ago – in the wake of Economic crisis in the West, attracted by apparent Chinese liberalisation and the belief it would soon overtake the US – everyone wanted a slice of the Chinese economic miracle.

More recently a host of factors have come together to apparently crush the Middle Kingdom’s outlook, presenting a picture of a horrendous macro crisis:

1. The long-term demographic nightmare as the nation “gets old before it gets rich,” raising questions about how the cost of rising social care will impact government finances.
2. A developing credit crunch and banking crisis as the degree of ill-considered lending – especially by regional governments – becomes apparent.
3. Chinese authorities throwing the QE dice by slashing interest rates and printing cash for bailouts, raises significant “unintended consequence” and “moral hazard” risks across the economy, including future debt loads, asset-price distortion, currency weakness, and inflation.
4. The property crisis, and the de-facto failure of large developers, is unravelling finances, and raises the question of what kind of economic signal millions of unoccupied properties in empty cities send internationally and domestically.
5. Rising Cold War tensions with the West are impacting trade, development, growth and innovation.
6. Ongoing stock market weakness, with many western investors pulling back due to the lack of transparency on numbers and economic data, will continue.
7. The potential of the “Iron Rice Bowl” compact unravelling in social tension on the back of 20% youth unemployment raises potential political risks.
8. It could get worse as China exports a deflationary bust around the globe; one that will sweep back and swamp Chinese manufacturing.

It’s a picture of unremitting doom and gloom, and there is no obvious route out. Thus far the Chinese government has proved unwilling to embrace overly interventionist monetary policy for fear it may cause wider wealth inequality, triggering social instability. Instead, it addressed leverage finance by making it more restrictive, thus fuelling a credit crisis, but also exposing just how weak parts of the real economy were. Now, there is little the PBOC can do without losing face; it will wait and see what happens.

China’s attempts to boost its geopolitical heft appear to have stalled; the recent BRICS gathering may have attracted a few more members, but it’s a very diverse group of fellow travellers rather than a shared set of convictions. It tends towards authoritarianism, and is clearly China-orientated rather than a genuine independent grouping to counter US hegemony. China’s efforts to build its own global trade network, Belt and Road, have also slowed, riven by suspicion Chinese foreign investments lack transparency, don’t discourage corruption, while unnecessary megaprojects lead to Chinese debt imperialism.

US global success was based on dollar strength, the productive capacity of the economy, leadership in consumer goods and the American dream. The whole globe bought into US culture and soft-power; Hollywood, Hamburgers, Rock’n’Roll and Coke, all supported by America winning the space race and cold war. China does not “get” soft-power. There is frankly little to attract foreigners to Chinese Surveillance Capitalism or Emperor Xi’s authoritarianism.

But no matter how bad the picture looks, whenever a stock market is so pummelled, or everyone has moved one-way against a particular investment, that is the moment to reconsider. As a famous French general once said: “My centre is giving way, my right is retreating, situation excellent, I am attacking.”

When it comes to China, lace up your buying boots and get ready to buy! Selectively… Very selectively… While the economic tensions are very real, China’s economy is in transition. Some may argue its multiple problems parallel the experience in The West, and to a certain extent that is true. The West will be watching with interest as to how Beijing handles the costs of its aging population. Mature economies struggle – deal with the reality:

1. China faces slowdown.
2. It’s an authoritarian state, corruption handicaps the economy, which suffers economic inefficiency as a result.
3. The absence of reliable and transparent economic data makes prediction and investment difficult.
4. It is a nation of over one-billion consumers.
5. It will not implode overnight.

Deal with these, and remember one of my key market mantras: “Things are never as bad as one fears, but never as good as one hopes.”

The economic upside for China is two-fold:

1. China’s manufacturing export engine is not about to suddenly stop. It will remain the “cheapest to deliver” manufacturer servicing markets around the globe, enhanced by Belt and Road inputs into Africa and elsewhere. Over time, Chinese manufactures will find their cheap prices are no longer a moat against competition; but the speed at which that happens really depends on how much faster other, perhaps more nimble, Asian economies develop and raise the imbedded value of their products.
2. China’s internal economy is well into its own transition towards a more consumer driven, service orientated economy. They can’t ignore one-billion consumers. China’s internal infrastructure of fast rail, road and air-links should ensure an efficient internal market is sustained, based around online sales and working.

The trick will be picking the winners and losers, identifying Chinese and International stocks likely to benefit from however the new China economy emerges. I would remain very suspicious of state firms. China will not be so different from other mature economies; a large middle class and a top-tier will continue to develop their tastes for foreign holidays and luxury goods. Meanwhile, China’s domestic economy will continue to favour its domestic mega-techs, while possibly remaining critical in global trends, like TikTok.

A final point to consider is the geopolitical risk China does a Russia and makes itself a pariah state by invading Taiwan, perhaps to distract from rising internal tensions or to cement Xi’s strongman reputation. That’s unlikely; the Chinese are far more considered, cunning and smarter than the Russians. Sun Tzu makes two points that are relevant:

1. “Excellent consists of breaking the enemy’s resistance without fighting.”
2. “Victory goes to the army who has better trained officers and men.”

Watching the failure of Russia in Ukraine, and acutely aware the People’s Army follows similar tactical doctrine, and is similarly equipped, will give Xi pause.