Market Thinking

making sense of the narrative

George talks his book..

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In a rare sighting, George Soros appeared in the Financial Times yesterday warning investors about investing in China. (The link is behind a paywall, but it appears in multiple other places, including here). This was interesting for a number of reasons and not limited to the points he raised – many of which we would take issue with – with perhaps the most important being the payoff line; he is effectively using the pages of the FT to lobby the US government to ban investing in Chinese companies. If previous form is any guide, we might reliably assume that Mr Soros has some form of short position in the China ADR space, or else he was burned by either or both of the two particular events he mentions, the collapse in Education stocks at the end of July or the more recent bust of the Evergrande bonds.

So far, so Soros. He is a past master at putting on a position and then throwing leverage and lobbying at it to get governments to capitulate and deliver him a large profit. Perhaps more worrying is that this is but the latest example of the new game played by lobbyists – in this case Soros, but also (and in particular) Climate Activists – of using the proscriptive nature of the ESG framework to force the majority of the world’s pension funds and insurance companies to invest in line with the lobbyist views and not necessarily in line with the best interests of the underlying owners of the pension. This is something that we discussed previously here and here as well as here and remains a meaningful risk for investors in the longer term.

Meanwhile, let’s look at George’s rather dubious pitch. He begins by citing the over-indebted property developer Evergrande as an example of Xi not understanding markets, when actually it is the very fact that, unlike the US authorities, the Chinese government do understand markets and are trying to deflate the property bubble that emerged from the post Financial Crisis burst of liquidity and that this deliberate action is finally bringing about the long-expected collapse in Evergrande. The stock is already down 70% year to date, but far from this being a crisis, this is actually part of a determined policy to remove the concept of ‘too big to fail’ across the Chinese economy and as such is acknowledging the damage that central banks like the Fed can do when they interfere with the workings of markets. Indeed, investors should be aware of the point that the current regime will allow you to become rich, indeed very rich, but you must not jeopardise the stability of the economy and you absolutely must not try to get involved in politics. No surprise that Mr Soros doesn’t like the idea.

In a similar way, Mr Soros, like many commentators, appears to misunderstand the motives behind the crackdown on for-profit tutoring companies. As we explained here in the August monthly, the Chinese regard education as a public good and while they are indeed aware of the need for more children, they see this as a reason for more and better free education, not as a reason to allow US style privatisation of public goods, with only the wealthy getting the best education as well as the ensuing leverage and rentier system that then emerges.

Elsewhere, the article is packed with irony. First is Mr Soros’ claim that Xi doesn’t understand markets. In fact, he understands them all too well, the difference is that he doesn’t see why they should exist solely to enrich people like Mr Soros. This is nothing new, under Jiang Zemin, the CCP saw off an attempt by Soros and others to break the Hong Kong Dollar peg, something to be borne in mind when assessing Mr Soros’ ‘asian guru’ status. Second, he talks about the Chinese government taking a stake and a board seat in (what is actually a subsidiary of) Bytedance, the owner of Tik Tok, as if this was a major issue. In fact as the link in the FT article shows, should anyone have actually clicked on it, the stake was a ‘massive’ 2 million yuan¬†($308,770) for a 1% stake in Beijing ByteDance Technology. And remember ByteDance was forced last year by US Presidential Executive order to effectively sell all its TikTok business in the US, citing national security issues. In a similar way the US have banned corporates and investors from buying a raft of Chinese compares deemed linked to the military – while demanding that US military linked companies should have free access to China. Yes Xi understands how markets work all right.

Next on our irony list is the fact that the ESG indices he refers to – in particular the MSCI ESG leaders Index – have a ‘high’ weighting in Tencent and AliBaba (which he decries) on the basis that ESG indices are basically short energy and long tech and the two ADR stocks are essentially in the top 10 of global tech stocks. In fact, with more sleight of hand, the fact that he claims they are ‘in the top ten’ disguises the fact they are in fact numbers 9 and 10 and combined have half the weight of Alphabet – the company formerly known as google – which since we are talking ESG has some ‘issues’ around share structure and governance as well as, like most big US Tech, being closely linked to the US military Industrial complex. Equally, the swipe at Blackrock, with reference to its ESG aware Emerging markets fund, hugely overstates the importance of its Tencent and AliBaba positions when juxtaposed with references to hundreds of billions of dollars of US pension fund money. The fund is a $7bn market cap and has a combined weighting of the two China stocks of less than 8%, or less than $600m.

The bottom line is that the ‘easy’ mega cap ADR route to Chinese consumers via their big tech names is narrowing for most and disappearing altogether for others, meaning investing in China has to be done differently now. Chinese companies continue to offer attractive returns for investors interested in the old fashioned concepts of cash flow and dividends but to quote George Soros’ title, Investors in China will indeed face a rude awakening if they approach China using the Soros worldview. ‘Too big to fail’ property tycoons will not get bailed out by the central bank and tech companies will not be allowed to develop monopolies and sell consumer data in the way that silicon valley does. Meanwhile, the Financial Sector will not be allowed to take over public goods with cheap money and apply leverage to create a rentier model and nor will distressed selling by ESG driven index trackers in the US have any impact on the ability of chinese companies to raise capital in the future – even if it might make money for George Soros in the near term. Indeed, the notion of picking up key strategic assets at fire-sale prices would appeal to the Chinese, who will have certainly read about the way that Wall Street managed to accumulate the strategic assets of emerging market countries in the past using the very same debt-trap diplomacy that they are currently accusing China of pursuing. Joe Biden announced today that the US is no longer the world’s policeman and neither is America the only source of growth, nor Wall Street the only source of capital. Tempora mutantur.

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