Is Every Investor Wrong About China? (I Went to Find Out) 🇨🇳

So I've just got back from China and I thought I would update you on some of the things that I've seen, some of the things that I'm thinking about when it comes to the markets. And part of that is trying to figure out this very, very complex setup there. There's an ongoing trade war, there's arguably a tech war being fought out over AI, but there's a complete divergence in interest rates. The US is at around 5%, and unless you've been under a rock the last few months, that's basically what all the talk has been about. Now, at the same time, the stock market in America is still pretty much at an all-time high, give or take. So despite inflation, despite 5% interest rates, for now at least, US stock market, the US economy is towards the top of the cycle. It's at record highs. In China, we're seeing the reverse. The interest rate there is just 1.7%. So that has continued to fall over many years now, going back, I think, till probably 2015, 2016 time, doing the opposite of basically what's happened in the West from that period. So if you were to just go off that chart alone, you might well think that China would be the place to invest. After all, it looks as though the government's easing, and that's always been good for stocks, right? But the truth is that it's not as simple as that, because what's actually happening is that China is massively tightening. And that doesn't make sense, right, compared to what you see on the screen? Now, there's a really prominent analyst by the name of Albert Edwards, not Einstein. And he's known as being something of a bear as a China analyst, but nonetheless an expert on China. And he in the last few weeks has been pointing to one of the most important indicators of China's business cycle, and it's in fact the indicator that I personally use to figure out not only where China is, but where the rest of the world will likely be 6 to 12 months from now. This lead indicator is known as the Bloomberg— it's compiled by Bloomberg, but the Credit Impulse Index. What this indicator tracks is a truer representation of exactly what's going on within lending, within the economy. The levers that any government has to pull. But what's happening is that interest rates are low, so the price of credit, the cost of borrowing, should be attractive. And yet people just are not borrowing in the quantities that you would expect at that level of interest rates. And that affects the quantity of credit being created in the economy. So that's why there's a disconnect here. So when we look to what the stock market is doing in China, it's not as near to record highs as we see in the US despite those low interest rates, because we are also seeing the Credit Impulse Index, well, towards the lows. It peaked a year ago, and that's That's the key thing for China, similar to the ISM in the US. You don't go buying stocks when that is still falling. So why the hell am I sat here sipping a coffee still thinking about China? Well, it was my first time there. I'll try not to swear. It was bloody amazing. I've seen things that I haven't seen elsewhere in other parts of Asia, including developed Asia. I'd actually arrived from South Korea, from Seoul, spent a week there. Before heading into China, and it was even more advanced. Not only that, there were many things, at least from a traveler's perspective, which I'm not going to get into in this video, focusing on the the markets and the investment case here, that just made it so much more comfortable, so much more convenient, and a hell of a lot cheaper and friendlier, might I add, to travel around in the country. It was awesome. But there's the lingering doubt, guys, of whether or not it's all. This white elephant. So let's think about the structural issues that China faces, because at a superficial level, you can arrive in a mega modern airport, maybe get a connecting train at a station that looks like a bloody airport anywhere else in the world. High-speed train, as advanced if not more so than Japan, just as efficient, cheaper. Maybe then hopping in a Didi, which is the equivalent of Uber, or in Southeast Asia, Grab taxi. You're in a brand new electric vehicle, and believe me, I was formerly something of a car guy. I've never sat in a car as comfortable as— I think it was a bloody Nissan. It wasn't even a Chinese manufacturer, wouldn't have even been the top of the range model, and it was seriously even, even more comfortable than the others I'd been in. And to go back to it, the ride was costing a couple of dollars. I transited via Beijing going into Chengdu. I picked up a Starbucks in the absence of other coffee, and I had a quick transfer because the plane was delayed. I think it was about £4, not far off Western prices, but you're in Beijing Airport. The taxi then from arriving in Chengdu, 30 or 40 minutes across town to the middle of the city, again Showing you the the scale of the city, which never cease to amaze. That cost 25% less than that coffee at the airport in Beijing that you didn't even flinch at. But anyway, I'm getting distracted by the aesthetic, which is easily done because it's bloody amazing. But here's how it links in to the structural issues that the country no doubt faces. I think there are headwinds, and how this needs to be factored into the investment case, guys. I'm working to try and figure out here. China had a booming population, I think through the '50s and '60s. For many years, there was a plentiful supply of young people. In other words, of cheap labor. And that essentially is how China gained its competitive advantage and title as the world's factory. Now since the one-child policy, basically to fast forward a number of decades, they kind of overshot there. The one-child policy was effective. But then it didn't bounce back when they eased those restrictions, hoping for population growth to pick up again. And unfortunately, it's just not coming back. So I think the reason why China is pursuing technology at the rate it is, and specifically as it will relate to automation and electrification, is in part trying to regain a competitive advantage in the absence now, relatively speaking, of having this abundant supply of cheap labor because it just does not have as many young people coming into the labor force. They're substituting labor with, for example, driverless cars, with industrial automation within factories, manufacturing or assembly processes. Demographics, as they say, are destiny. Now for consumers and for tourists, that's bloody amazing because you step into the future. Everything works perfectly. It's a much higher standard, a much cheaper price. Same for hotels, the oversupply of accommodation. It's fantastic. But as I say guys, you need to separate the material from the underlying themes. It's not as simple as just piling into things like Didi. ridesharing apps, or Pony, for example, which listed I think about a year ago. The share price is crashing, but is the driverless taxi app. You might know Wuhan for other reasons, but apparently that now— it was ground zero for something else supposedly back in 2020, but it's now ground zero as the cities within China go for driverless taxis, driverless cars. More than half of the cars on the roads are driverless. And that's surely just a proving ground now for deployment throughout the rest of the country. It's not as simple as just investing in those, in those companies. There are different reporting standards in different countries, and there's also a huge language barrier as well as potential government regulation that exists when dealing with China. So that's one challenge. But amidst all of this, if then you're thinking of, let's say, the Payments platforms where everything is basically integrated within WeChat or Alipay. WeChat being owned by Tencent, Alipay being owned by Alibaba. Again, I don't think it's as simple as just buying those companies and waiting for the cycle to turn up because AI is still a threat. The risk of disruption to platform businesses is just as real there as it is in the West. I don't see a really clear play to de-risk Things like AI disruption, the risk of restrictions, regulation coming from the state. And ultimately what happens, from what I've read, is that when the state opens the economy up to, I don't know, foreign tourism or whatever, a particular industry, let's say it goes all in on electrification, what happens is that there's a flood of competition, new entrants, which erodes the margins. It's a race to zero. in that industry. So if you otherwise just buy a focus, let's say a sector or thematic ETF, on average margins are being competed away for the industry. So it's almost self-defeating. I'm fascinated by the opportunity that exists in that country. And I genuinely believe that when the cycle turns, you should expect to see the usual recovery. And I, I'm not sure that it's that far off when looking again at things like The China credit impulse, to keep it simple. But in terms of the sequencing of how this plays out, this economist said that the stimulus that they've rolled out has basically been too slow and too modest. And this is the key bit: significant— so the necessary required stimulus— is unlikely unless conditions deteriorate significantly, as long as the AI boom persists. So herein lies the complexity, guys. Until or unless the AI debt bubble bursts, China assets, REIT stocks, property, they're going to remain under pressure. They're already 10% off the highs. If you look at the Shanghai Composite, I do think they're in the process of catching down to the China Credit Impulse Index. We've seen the Fed hike last week. Presumably they continue to hike or at least hold till either the consumer is completely tapped out. Does raising interest rates really bring the price of oil down outside of conflict? Slows borrowing, credit creation, and therefore slows business investment and output and activity in the economy. Then the demand for oil falls, and then the price should come down. But this is a supply shock, guys, because of war when it comes to energy. So maybe the Fed hikes and holds until the debt bubble bursts in AI. Could be another year away, but that bus is what would, citing the economists here, clear the way for not only a big reset in share prices globally and certainly in the tech sector, but it would clear the way for China to really prime the pump. And that's when you'd see the Credit Impulse Index swing up and presumably asset prices do the same. Now, it may be the case that things get materially weaker in China to a point where They do resort to stimulus or credit creation sooner and independent of a bust of the AI bubble. But in the absence of that bust, you're then still looking at the likes of Tencent, Alibaba, name your platform, and thinking, hmm, I'm long stuff that could in the near term be categorized as something that you don't want to be in. If the tech bubble bursts and tech is sold to the floor like it's Y2K again, that's on one hand. But coming out of that, if anything, that reduces the competition, the competitive threat, which is what the challenge is to otherwise long those names for the long term. So if anything, we almost— as perverse as it sounds— we almost want the really bad scenario to play out because that actually clears the way. The tech bubble bursting will be the best scenario for China. It would clear the way for stimulus. It's already in a relatively weak position before that. Rates are very, very low compared to the US. We get a huge surge in credit creation. Tech is already down and it would get pummeled along with everything else. But at the same time that you get the cyclical upswing, you've got these secular tailwinds. Remember, also owing to the substitution of labor with automation. So I don't know that it's a case of just buying Trip.com, saying how lovely China is, and that it's only a matter of time before, you know, the rest of the Western world catches on and they all want to take holidays there, because there's just so much else going on here. Just to close here, there's a saying that crisis brings both danger and opportunity. If you look at the symbols in Chinese But apparently that's mistranslated. It's not always the case with the second symbol that it necessarily means opportunity. What it literally translates to is danger, but a dangerous turning point, rather than a guarantee of there being an opportunity there. And it might not be the case, subject to my forthcoming trip and further research to try and figure this out, That there is a guaranteed opportunity somewhere within it. So I'll leave it there. If you enjoyed this video, subscribe to the channel for more. I will be out on the road, as I say, for the next 2 or 3 weeks without access to Western apps and being able to upload videos from there as usual. So I'll see you all in the next one. Bye!