Chinese current affairs in historical and cultural perspective
Article of Jan Longeval – Senior Advisor at Eurinvest Partners
Quo Vadis is Eurinvest Partners’ new Economic and Financial Newsletter, written by our Senior Advisor Jan Longeval. On the basis of in-depth and independent research, it aims to shed light on some of the world’s most important economic , financial and geopolitical themes.
Executive Summary
Starting with its loss in the First Opium War in 1839, China went through what Mao later called the ‘Century of Humiliation’, when Western imperialist powers and Japan forced China to accept the Unequal Treaties, in which it lost, among others, Hong Kong and Macau. When Mao established the People’s Republic of China in 1949 after winning the civil war, for some, this marked the end of the Century of Humiliation. To others, the end only came in 1997 with the handover of Hong Kong or in 1999 with the handover of Macau. But for many others, including Xi Jinping, the Century of Humiliation will only end with the reunification with Taiwan. The Century of Humiliation is deeply engraved in China’s collective memory. Every attempt at foreign interference, like Nancy Pelosi’s foolish visit to Taiwan, raises this memory and increase the probability of the island’s annexation. Investors should keep this scenario in mind. In any scenario, deglobalization is set to go in overdrive because of mounting geopolitical tensions. Western companies heavily exposed to the Chinese economy, such as Apple, are very vulnerable.
After 4 decades of liberalization, Xi Jinping is reversing China’s capitalist tendencies. The CCP has tightened its grip on the private sector and it has destroyed its own (ed-)tech and gaming sector. Xi Jinping does not hide his basic communist ideas. He is an ideologue who tolerates the success of the private sector provided it does not get in the way of communist nirvana. He has installed a totalitarian regime which reverts to repression, censorship, propaganda and manipulation of official statistics. His extreme zero-covid policy, used to enforce total control over the population, has backfired and is leading to the biggest popular revolt since the student protests of 1989. China may be making progress on environmental issues, it has very poor governance, the G in ESG, which is another aspect investors should keep in mind.
China’s huge real estate bubble is deflating, dragging economic growth down for many years to come, along with waning foreign investment. This, together with China’s evaporating labor force, which is set to drop from 900 million to below 300 million people, as well as declining productivity gains, will push China’s economic growth rate to 2-3%, well below consensus forecasts until demographic forces push the growth rate below zero. “Gradually, then suddenly”. China’s growth miracle is over. The effects will send shockwaves through the global economy, reducing structural economic growth, creating a long bear market for commodities and deflation.
Investors in Chinese assets are dancing on a volcano. Given its poor long-term prospects, investing in China should be opportunistic. The US remains the world’s cleanest dirty shirt.
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