CHINA’S REGULATORY CLAMPDOWN: BANE OR BOON?
China’s wave of regulatory interventions across a very wide range of sectors have become a major topic for discussion in financial markets, above all for equities and commodities.
It is all too easy to depict these often abrupt moves as authoritarian and anti-capitalist rollbacks, with strong echoes of the Maoist era, above all reasserting the authority of the CCP. But this is a very narrow ideologically driven perspective, which serves western political beliefs and stereotypes, while ignoring the antecedents. To be sure, the seemingly endless interventions are a seedbed for volatility in Chinese financial assets, and will continue to be a very prominent risk factor for investors, but should not per se be seen as a prompt to cut exposure to China.
In an era of protracted and intense ‘financial repression’, cutting exposure to an economy like China, in which many investors are underinvested, and which is and will continue to be a key engine of global growth, makes little sense, above all when generating positive inflation adjusted returns is so challenging. But as with the stereotypical political narrative, this is rather too much TINA (“there is no alternative”) and FOMO (“fear of missing out”) to this perspective, at least in terms of trying to comprehend what is happening and why.
As I have suggested in prior Ghost In The Machine articles on China (e.g. “Visions of China”, “About that China ‘devaluation’ and ‘debt crisis’” and “The Digital Currency Challenge Is Real”), there is a long history of Chinese authorities having to fire-fight excesses
24 | ADMISI - The Ghost In The Machine | Q3 Edition 2021
and imbalances in their economy, above all financial, which is hardly surprising given the explosive growth in its economy over the past four decades, and which its governance and regulatory structures have struggled to keep up with. In truth the developed world has done little better in evolving its regulatory structures to keep up with the technological revolution and digitalization of the global economy, and one can argue that there is an element of chutzpah about some of the criticisms levelled at China. After all the near monopolies that have been allowed to emerge such as Alibaba, Baidu or Tencent are really no different to Amazon, Facebook, Google or Microsoft, all of whom are as much subject to intense anti-trust scrutiny in the US and EU, as China’s digital giants are by China’s Communist Party.
To be sure, the crisis which has emerged around property giant China Evergrande has been brewing for more than a decade, and is above all a very familiar story about colossal leverage crashing on the rocks of liquidity issues, which then morph into solvency problems. It is equally a tale of the Chinese authorities’ historic mobilization of the colossal pool of private savings into investment in property as a key road to prosperity, and the myriad of wealth management products (WMPs) often sold as insurance, which have attracted enormous inflows due to the promise of high yields and rates of return. It is too early to say how this will unfold in terms of consequences, but the antecedents of the Evergrande debacle are a very, if not the most, significant part of the regulatory intervention push.
The facts are in many ways uncomplicated, and the similarities to the US ‘housing bust’ which in turn triggered the Global Financial Crisis are hard to ignore. Concerns about China’s over-reliance on debt to power its growth are anything but new. But over the past five years China’s overall debt to GDP ratio has grown by around 45%, and far more significantly much of that debt has gone into
CONCERNS ABOUT CHINA’S OVER-RELIANCE ON DEBT TO POWER ITS GROWTH ARE ANYTHING BUT NEW.
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