Mainland Chinese stock markets don’t trade on economic fundamentals, or on company fundamentals; they trade on psychology, and that depends fundamentally on government policy. We follow Chinese economics primarily because of its influence on other world markets, not because it allows for intelligent tactical expo- sure to Chinese stocks.
Therefore, when waiting for the right opportunity to add to China stocks, we keep ourselves abreast as well as we can of the tenor and direction of policy. China’s President, Xi Jinping, has become the most powerful Chinese leader since Mao himself. Knowing something about his history, his psychology, his goals, and his concerns is a critical element of any China strategy -- and reveals a great deal about China’s zeitgeist to outside observers.
We wrote about Xi’s family background shortly after he took power in 2012. We were pleased to see much of that background discussed, with a lot of other valuable insights, in a recent article in The New Yorker.
What’s Driving Xi Jinping?
Let’s take Xi as the paragon of how contemporary China is navigating the stresses and potential crises of its ongoing development from backwater to global superpower. Here are the themes we see that offer insights into China’s policy direction:
- His fight against corruption is real. As we have noted on many occasions, the fight against corruption is primarily driven by concern that public anger will ultimately lead to political instability. He has also used the anti-corruption fight to cement his own power.
- His central fear is the collapse of Party power. Xi has studied the collapse of the Soviet Union carefully. He is a reformer, but has a deep streak of ascetic devotion to the institution of the Party, and does not want to see Russia’s “tragedy” repeated with the fall of Party rule in China.
- He does not share “western values.” Russia’s Vladimir Putin likes to profess disdain for western liberal-democratic values, but Xi’s rejection seems deeper and more heartfelt. He laments the inroads of western “cultural decay” and sees them as linked to the influence of western ideals such as multiparty democracy, freedom of expression, and the “open society.” He longs for the rebirth of an idealistic, morally superior ruling elite. In short, we could describe him as an aristocrat in the most classical meaning of that term -- and including a powerful sense of noblesse oblige as one of its main traits. He represents the “princelings” -- the children and heirs of modern China’s revolutionary founders.
- He is a realist. He has suffered under political repression himself during the Cultural Revolution, and saw his father imprisoned and rehabilitated several times. He also saw his father’s sometimes intemperate dedication to reforms get him into trouble, and has adopted a much more patient, gradualist approach to reforms. “Hide your strength, bide your time” has been his motto.
- He is an absolutist. He believes that the way towards economic reforms is through strong central power… and that the erosion of strong central power would lead to chaos and collapse. There is no room for “the loyal opposition.” The official media have taken to calling him “Big Uncle Xi,” a moniker with ominous overtones to those who have read the works of George Orwell.
- As much as it may contradict the foregoing, he views economic opening as a critical key to China’s navigation of its historical development. This conviction he clearly learned from his father, who laid the foundations for the economic miracle of Shenzhen -- even if the younger Xi’s own experience and intellectual development is leading him to approach its implementation in a very different way.
Thus we have a portrait of a ruler who is single-mindedly devoted to one-party rule, to the continued power of the Chinese Communist Party, to the fight against corruption, to resistance against encroaching western political and cultural liberalism, and to economic reform and continued opening to global markets. Those traits may not seem to “add up” to western observers, who expect economic openness and political openness to go hand-in-hand… but this is the reality of China’s leader.
Investment implications: The tenor of Xi Jinping’s rule could be summarized as “authority, economic reform, and anticorruption.” For now, that orientation is dovetailing with the government’s apparent determination to deleverage the property bubble and its related wealth management products, and move investors’ assets into the stock market. The government has the will and the capacity to continue propel- ling the rally. This is bullish for Chinese stocks mentioned elsewhere in this letter.