On this day, when many Americans don’t particularly enjoy being American, I thought I would give my frozen caveman take on China. The Chinese data looked decent last week. As always, I’m no “expert.” But it seems to me that people are missing some key things when China is discussed. Whenever I look at Zerohedge or any media outlet, the common themes are: (1) bad loans, (2) capital flight, (3) ghost cities, (4) environmental apocalypse, and (5) human rights violations. Everyone in the media likes to talk about how China is the next big catastrophe waiting to happen. This is obviously possible – I just happen to think the size of this tail is smaller than the market currently seems to think. Why?
At the end of the day, China is STILL one of the two or three most “attractive” people at the party. If you were a multinational company, China has to be on your short list of most appealing countries to invest in. Let’s play a game, where we try and pick another country you would rather invest in than China (among the other largest economies in the world):
Here’s another way to think about it… wouldn’t most of China’s “problems” go away if they announced a bunch of investment “incentives”? Like lower regulatory hurdles, or lower restrictions, or even offering some sort of tax credit? Are you telling me some kind of multi-year (foreign) tax credit on future investment is not going to get rid of “most” of their current “problems”? You would get a stronger economy, less stress on banks, more people in targeted ghost cities, and a stronger yuan. You can throw in some environmental incentives, and there would be less need to make people “disappear.” The thing is, they don’t have to do any of this – because they are one of the most “attractive” people at the party! Things are not so terrible now, and there is no need to give away anything. It’s just there if they need it.Is there any other country that looks noticeably better than China? And even if they go into recession, when you have 1.4 billion up-and-coming consumers, not all of them are going to stop spending. In fact, some of them may go out of their way to spend more just to show that they can. There’s a “saving face” element in Asian culture (gross generalization). Let’s just say, it’s probably not a coincidence the high-end stores do well in Asia. Admittedly, the list of countries is not particularly attractive now. This probably explains why capex, R&D, and productivity are so low globally, despite the central banks’ efforts. But sometimes, relative attractiveness is almost as important as absolute attractiveness.
Let’s look at an extreme scenario. If I am a company and China tells me I don’t have to pay any taxes for the next x years if I invest (or just invest more than I am currently), I’m on the first plane to Beijing. Seems desperate? Maybe. But I don’t care. Access to 1.4 billion rising consumers tells me all I need to know. Japan could make me the same offer, but it’s basically like Jehovah’s Witnesses knocking at my door. No thanks. Go away. It might be harsh, but it’s true.
And let’s not forget China has a ton of money, resources and power to make things happen. Money and power can fix a lot of things. A construction company is having liquidity issues, you say? I say, “Its mine now. So is any past excessive executive compensation. Bondholders get some reasonable share of the asset value, as determined by me. Now that it’s mine, I think we need to build a transcontinental highway.” Admittedly, I’m clueless on what the limits of China’s actual power are. But I’m certain the tools at their disposal are much greater than the tools at our disposal.
That is my frozen caveman perspective. Not all of it may be true. But not all of it is false.
[originally published in the April 18 issue]