Commentary on Political Economy

Tuesday 23 January 2024



Beijing’s Bazooka

It looks like Beijing might need a bigger bazooka. Shortly after reports broke that Chinese authorities are considering a bold plan to arrest a stock market rout by seeking to mobilize about $278 billion to prop it up, mainly from the offshore accounts of state-owned enterprises, investors were left unsatisfied — and with yet more questions.

The move came as the benchmark CSI 300 index plummeted to a five-year low this week, with Chinese and Hong Kong stocks in aggregate erasing more than $6 trillion in market value since their peak in 2021. That’s roughly equivalent to the entire market capitalization of Japan.

It only added to the gloom for an already morose set of traders still reeling from the protracted property downturn and the grim state of China’s economy. Money to stop the selloff is all very well, but they’ll want to know what the government would do next. “The potential support package should be able to stem declines in the short term and stabilize markets into the Lunar New Year,” said Marvin Chen, a strategist at Bloomberg Intelligence. “But state buying alone has historically had limited success in turning around market sentiment if not followed up by further measures.”

The order from Premier Li Qiang, meant to calm investors, seems to have done the opposite. China’s history of botched market rescue efforts contributed to that, fueled by uncertainties over Beijing’s long-term policy roadmap. For a metric of how much shares have slumped, consider this: The value of China’s equity market has never been this far behind the US. 

The key challenge for stocks “is the poor macroeconomic climate and investors’ skepticism as to Beijing’s commitment to investor-friendly policies, where there is no quick fix,” Michael Hirson of 22V Research wrote. “Beijing will step up stimulus in coming months, though I remain skeptical that it will be of the scale or the nature to quickly break out of the dynamics above.”

A bright spot is Alibaba Group Holding. Its US-listed shares jumped after the New York Times reported that Jack Ma has been buying stock in the company he founded. Alibaba’s 7.9% gain — its best day since July — came after a 38% decline over the past year, which mirrors broader declines in China’s equities. The blunt-spoken Ma, who adopted a far lower profile after Beijing clamped down in 2020, reportedly bought $50 million worth of stock in the quarter. Alibaba Chairman Joseph Tsai has also been snapping up shares at a much larger scale. His Blue Pool Management family investment vehicle purchased almost 2 million of Alibaba’s US-traded shares in the fourth quarter, worth about $152 million.

That aside, skepticism remains. What’s perhaps most alarming is that while the loss of confidence is palpable — despite continued growth of more than 5% in China’s gross domestic product last year — it’s nowhere near so clear exactly what has undermined it. One view attributes this to Beijing’s attempt to rein in the financial sector, fulfilling a longstanding preoccupation to avert a potential Minsky Moment. Putting serious money into the stock market will tend to vitiate this effort by funding more financial speculation. “We reiterate our August view that investors should refrain from bottom fishing Chinese risk assets,” Marko Papic, chief strategist at the Clocktower Group. “We stick to the view that a significant stimulus effort is inherently incompatible with Beijing’s aspiration to curb the financial sector in the coming years.”

Bloomberg Opinion colleague Shuli Ren suggests that the plunge in sentiment stems from alarm that the government won’t in fact have the guts to head off a financial crisis. The latest selloff has come despite a surprisingly calm response to the Taiwan election; this was possibly negated by Donald Trump’s return to the headlines, with his anti-Chinese rhetoric. 

Meanwhile, a longstanding tight relationship with the stock markets of the rest of the emerging world appears to have been sundered. Throughout China’s long expansion since joining the World Trade Organization, the rest of EM has been treated by investors as wholly dependent on Chinese growth. MSCI’s indexes for the other emerging markets have tracked China’s almost perfectly for 20 years — but now the bet is that other EMs can prosper whatever happens in Beijing and Shanghai:

Could the rest of the emerging world conceivably continue to flourish if China’s corporate sector crashes in the way the market now seems to expect? It’s at least worth asking the question. A lot of optimism about a range of countries that have spent two decades growing by serving China’s insatiable appetite seems to be embedded in current assumptions. Which brings us to New Delhi…

Arise India

India is having a moment. Its stock market capitalization has just overtaken Hong Kong’s for the first time. The combined value of shares listed on Indian exchanges reached $4.33 trillion as of Monday’s close, versus $4.29 trillion for Hong Kong, according to data compiled by Bloomberg. The first time the South Asian nation breached the $4 trillion threshold was on Dec. 5, and about half of that has come in just the past four years:

There are reasons for this. Bloomberg colleague Ashutosh Joshi explains:

Equities in India have been booming, thanks to a rapidly growing retail investor base and strong corporate earnings. The world’s most populous country has positioned itself as an alternative to China, attracting fresh capital from global investors and companies alike, thanks to its stable political setup and a consumption-driven economy that remains among the fastest-growing of major nations.

Indian economic ambitions are stirring further excitement. Prime Minister Narendra Modi speaks of arriving as a “developed nation” by the centenary of independence in 2047. To bulls, there is no stopping India from notching an even higher ranking. Shilan Shah of Capital Economics believes the country can become the world’s third-largest economy within the next decade. He does warn, however, that emergence of generative artificial intelligence could well hamper India’s rise by reducing western demand for its business process outsourcing (BPO) sector. 

“The emergence of AI could knock about 0.3% points off annual productivity growth over the next 10 or so years,” wrote Shah, the firm’s deputy chief emerging markets economist. But that needn’t lead to the “complete disappearance” of India’s BPO sector. “And neither will it preclude relatively strong rates of economic growth over the coming years. After all, India will still benefit from a positive demographic outlook, as well as productivity gains from friend-shoring as the global economy continues to fragment.”

Another voice of relative caution comes from Alexandra Hermann of Oxford Economics, who made this measured assessment: 

The economy looks likely to achieve the highest growth rate out of all the major economies and reach upper-middle income status over the next decade. But becoming a high-income country is a tougher target, requiring per capita GDP rising to around US$14,000 from under US$2,500 currently. Achieving this target by 2047… [would be] highly ambitious both by historical standards and our forecasts.

Oxford Economics illustrates this here:

In short, Modi is setting out to beat the “middle-income trap” that has ensnared most other developing nations. That’s a big ask. While the necessary conditions for growth are in place, with strengthening corporate balance sheets and returning foreign investment, Hermann cautions that “structural barriers to greater investment remain.” In particular, she reports that many Indian investors had “acute” concern “with regards to the size of India's bureaucracy, especially when it comes to land and labor regulations and the pace of reform implementation.”

A final issue is the difference between the economy and the stock market. Valuation gives some cause for skepticism. Using cyclically adjusted price/earnings multiples, Barclays data show that Chinese stocks for several years traded exactly in line with the US — a fact that with hindsight suggests remarkable overconfidence in China’s corporate governance and in the intentions of the ruling Communist Party.  

There are lots of great things about India. In the long run, it should be a safe bet to log faster economic growth than the US. But should the Indian stock market really be trading at the same multiple as America’s, which is loaded with the world’s most powerful and well-entrenched tech companies? That is a reach. In hindsight, it wasn’t such a great idea to extrapolate Chinese growth into the future in a straight line, and assume that equity market capitalization could match it. The risk is that the money surging out of China will redirect itself on equally shaky grounds. There are opportunities in India, but they should be selected with care. 

Survival Tips

New Hampshire seems to have sprung a surprise again, even if it wasn’t a bona fide upset. With seemingly all of Donald Trump’s other Republican opponents throwing in the towel and endorsing him on the eve of the state’s primary, it seemed inevitable that Nikki Haley would be forced to abandon her own campaign. At the time of writing, she appears to have received enough votes and sufficiently managed expectations to fight onward to her home state of South Carolina. A battle between Trump and his former UN ambassador would be a good story, so colleagues in the media should be happy to feed the narrative. New Hampshire’s primary has long shown the perils of overconfidence, along with the potential to inflict grievous damage on apparent front-runners, although it remains surpassingly hard to see how it could catapult Haley to the White House. 

The Granite State gave the world Franklin Pierce, not the greatest of presidents but in many ways a tragic figure, and one of the best fictional presidents, Jed Bartlet. Played by Martin Sheen in The West Wing, Bartlet was a Nobel-winning economist and former governor of New Hampshire. In keeping with the motto “Live Free or Die,” it’s also been a great sanctuary; for the brilliant fictional villain Walter White in Breaking Bad, and reclusive authors like J.D. Salinger, who wrote Catcher in the Rye. Real-life Nobel laureate Alexander Solzhenitsyn settled just across the state line in Cavendish, Vermont. The poet Robert Frost lived in a New Hampshire farm for many years, and the state inspired a paean of praise in a collection that included his most famous poem. Whether or not New Hampshire is really as powerful in selecting the nation’s president as some say, it deserves its four-yearly turn in the spotlight.

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