The market’s maxim appears to be ‘Buy and sell on rumour, reject fact’.
While this volatility may feel like a turning point to observers further afield, at street level there is a clear understanding of China as the ultimate player of the long game. Unlike Elijah, Chinese history is a guest at every meal. It feeds and fuels a sense of cultural superiority second to none. When asked to explain Chinese chauvinism, a dear Wharton-educated friend of mine observed that his ancestors were wearing silk while mine were still shitting out of their front windows.
From fireworks to paper to pasta, it is pretty easy to make a case that China has always been great. The aberration, argues this point of view, was the Middle Kingdom’s weakness during the 20th century, with the last couple of decades a spectacular case of mean reversion. If the two most important numbers in investment are point of entry and point of exit, then perhaps Chinese shareholder value should be measured from quarter century to quarter century.
Unfortunately, as anyone that has ever cooked a league table will know, the mean only ever tells part of a story. Bear in mind that Berlin is roughly the same distance from Athens as Beijing is from Hong Kong. No one would wallpaper over their differences with the common label of ‘European’. Why then do people speak of China so homogeneously? This is as much of a fiction as every planet in Star Trek featuring a single civilization (even the black/white and white/black aliens were hardly the United Colours of Benetton).
To miss this is to misunderstand China. It is the granular differences of everyday lives that shape much of Chinese policy. Social stability is its pre-eminent goal; it meets at a nexus of resource security, historical identity and the challenge of keeping 1.3 billion people productively occupied rather than out in the streets throwing stones. The real fear in China is not doomsday but dislocation.
The two cities of Chongqing and Chengdu provide a ready example. The former is a bastion of state owned enterprises, heavy industry, and associated concerns about local government indebtedness. Two hours away on the high speed rail ‘Can do!’ Chengdu boasts (in an endearing advertisement featuring a panda astronaut) of having half the Global Fortune 500 on the ground and an economy grounded in private-sector services. Differences of this nature abound throughout China, compounded by language, religion and rural/urban divides.
How often does the ECB find its hands tied in trying to reconcile the needs of the 340 million inhabitants of the eurozone? Try raising the game by a factor of four and then salt and pepper with the numerous regulatory bodies at a national and regional level that attenuate policy. Markets previously accepted gradualism in economic reform as an aspect of the long game and necessary, given the circumstances. Whether you pity or praise Chinese policy makers in trying to legislate for such differences probably reflects the performance of your portfolio.
The consensus around Hong Kong’s famous Chinnery Bar is that a perceived lack of leadership by regulators has exacerbated the recent red in China’s market. It is not the ‘known known’ of a slowing economy that has roiled the markets. Instead, it is a loss of confidence in the stewardship of the economy as regulators have broken from the long game and have been trying – unsuccessfully – to shore up markets in real time. Inflating an asset bubble is one thing, containing its blowout while at the same time trying to internationalise the renminbi is entirely another.
Why, oh why the change in regulatory behaviour? It comes back to social stability – the paramount objective of policy. Citizens already restive from the varied forces of inflation, the corruption crackdown and internal migration could grow positively revolutionary at seeing their livelihoods disappear in collapsing markets. This is not a risk the party is willing to run, so all organs of power have been deployed in response. The unfortunate truth is that the regulatory action is a blunt instrument in the short term, one dulled even further by white-washed economic information.
Do not mistake this for an apology before the hemlock. The broader Chinese economy faces challenges, there are acute pockets of calamity requiring decisive intervention. Of particular concern is capital flight, with Fitch sounding suspiciously like Dr Evil in touting an estimate of $1 trillion spirited away. Perverting a fundamental macroeconomic relationship, it is protection of savings that equals overseas investment. This is perverse insofar as what ails China aids others. How many are waiting for a drop of dragon’s blood to revitalize their economies or enterprises?
Panda Breath: (noun) a state of being where, regardless of origin, one expresses views on the world through an Asian perspective. ‘Saigon. Shit. I’m still only in Saigon. Every time I think I’m going to wake up in the jungle I find myself on the floor with strong opinions and panda breath.’