It seems to be quite an unusual situation unfolding in China and global markets, especially Hong Kong and Shanghai, are bearing the brunt of it. Oil futures are near 2022 lows. The People’s Bank of China also announced a 25 basis point cut in the reserve requirement rate for banks. Given that consumer and investor sentiment has been quite damaged, how badly is China looking?
I’ve been in China for 25 years and it’s by far the worst consumer and business confidence I’ve ever seen and it’s really because of the implementation of zero Covid. Most people in China actually support zero Covid because it saves lives and the Chinese government should be credited for what they did in 2020 and 2021 but in 2022 the implementation was a disaster. That’s the only way to put it. It’s hurt mental health, other health issues, and actually killed people because people can’t get to hospitals or, as we’ve seen in the fires in Xinjiang and China. ‘Urumqi, people couldn’t leave their homes.
Consumer confidence has plummeted and I think investors should think twice, maybe even three or four times before investing in China right now. The next three to six months are going to be a real struggle because the government can’t relax zero Covid without causing a lot of deaths, but it can’t continue at the current rate without causing a lot of lack of business confidence. We are in a very difficult conundrum right now. No matter what the government does, the economy is going to be weak for the next three to six months.
Where do you see things moving? Do you see restrictions continuing or could they ease a bit?
One thing we have learned over the past three years is that humanity cannot stop nature. I think the Chinese government is actually doubling its Covid zero after several nights of protests in Shanghai and across the country. They announced in Shanghai late last night that we had to take a Covid test every 48 hours; previously, it took 72 hours to access restaurants and malls.
So we are going to see the hospitality and retail sector continue to be hit hard as the government redoubles its efforts on zero Covid. Now here’s a problem. The current central government zero Covid policies are pretty good. The problem lies in the implementation at the local level.
The problem we have right now is that every province, every city, every district, even every street is making their own rules as they go along and not following the guidelines of the central government. So sometimes the street puts up barriers and says you can’t cross the street. These local elected officials do not have the right to do this, the central government tells them that they do not have the right to do this but they are so afraid of the Covid, that they still put up barriers.
Now it is hampering the mobility of business people, buyers and logistics. That’s why Alibaba’s Singles Day 11/11 went down so badly, as around 20% of the country was unreachable through their email network. So again over the next three to six months, investors will need to be cautious. I’ve been one of the biggest Chinese bulls for the past 25 years, right now you can only be negative in the short term.
We are also witnessing unprecedented protests in a country like China soon after Xi Jinping cemented his position in the Communist Party. What is this really going to mean from a bullish versus bearish perspective? Hedge funds increased their allocation to China. Will it reverse?
I think Xi Jinping has consolidated his power and he is the one pulling the strings. It’s very clear right now that he believes in zero Covid and that will continue. Much of the rise in Chinese stocks over the past two weeks has been shorts hedging their bets. In the short term, I’d be very careful with anything in China except for things like Meituan which is food delivery, maybe some of the cheaper stuff. Consumers are buying low right now, they’re not looking for value right now; they worry about their salaries. They don’t get bonuses and so everyone is down right now.
So if you’re a hedge fund, you want to enter the market to look at really cheap things like convenience stores, instant noodles, cheap tissue paper delivery. The reality is that no one can change policies until Xi Jinping changes his mind. Most Chinese actually agree with zero Covid, their problem is implementation.
When there was too much openness in a city like Shijiazhuang, they started doing the daily or 48-hour Covid tests and people had to show their health code to enter the crowded areas. Parents can’t send their kids to school, workers refuse to come to the office in person, people stop going out to shop.
The problem right now is that most of the Chinese people are quite scared of Covid and so even if the government were to open up completely and get rid of all restrictions, for three to six months minimum, consumers would be too scared of get out of the houses. That’s why no matter what the government does and if they get rid of the Covid zero and polish the implementation, we’re still going to have three to six months of difficulties. If we don’t have a recession, I consider that a victory.
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