Here are some of my recent views. These are just some random thoughts. I hadn’t pondered much previously because I didn't see any clear direction or opportunities in the Chinese market (non-short-term and non-speculative):
About Recent Talks of Deflation on We-Media
Last week, there were discussions suggesting that the Chinese economy might be sliding into deflation. The main reason being the more-than-expected drop in CPI and PPI in March (released by the Statistics Bureau on April 11) - CPI increased by 0.7%, a decrease of 0.3% from the previous month, while the PPI fell by 2.5% year-on-year, widening the decline by 1.1% compared to last month. This is especially surprising given the current massive money supply in the market.
- It will take at least half to a full year to determine if China is truly entering deflation. If it does, it will signify a monumental shift in history. Such a trend would be more significant than the issues in the real estate sector, and once set, is hard to reverse. Japan's lost decades (30 or 40 years) are a result of prolonged deflation.
- The Chinese economy is currently in a resting phase – not particularly good nor bad. There are three main reasons:
- It's a transition period. The market needs time to adjust. Once it resolves past issues, confidence will return, and money will flow back to the real economy (manufacturing etc.). This differs significantly from Japan's real estate bubble burst. But whether confidence will be back depends on leadership capabilities (or more, game theory between party leaders).
- Last year was filled with black swan events, leading to numerous policies to stabilize the market, like various subsidies. This resulted in a disrupted production rhythm. A clear example is the abundance of automobile subsidies, which led businesses to misunderstand real market demand (manufacturers overproduced too much), and then have a lot of unsold cars stacked in stock after the subsidies ended, forcing the price to drop.
- Local government debts, an old problem, keep getting rescheduled and readjusted. With historically high M2 money supply and persistent deflation, it's evident that the government is addressing local economic issues (debt issues). Is there a better way to increase the liquidity and address this mess using the excuse of deflation? The reason that China’s CPI is not high is that there are such serious economic problems that act as blackholes to have absorbed the execessive liquidity, and such increase in liquidity won’t be shown in national book account.
- The dual decline in CPI and PPI doesn't necessarily imply deflation. It could also signify a necessary phase in this year's economic transformation, given the recent GDP growth acceleration (many investment banks have just upgraded their GDP growth forecasts for China, e.g., JPMorgan from 6% to 6.4%).
- This trend might persist for some time, as I haven’t seen any imminent significant events. Yet, another paramount focus is the internationalization of the Renminbi (RMB). Look at Macron's recent China visit, which included a special trip to Guangzhou, as well as President Xi's Middle East visit, with Russia promoting RMB settlements.
- A hallmark of China's economic development has always been its focus on stability. The measures taken over the past 20 years and in 2021, especially regarding the Evergrande situation, were some of the most aggressive. Soon after the Evergrande issue came, officers’ attitude got softer, and they even started to provide loans for real estate companies.
Conclusion: Continuous observation is necessary. In the short term, the A-shares market seems stable, needing time to flatten out the risks.
About the Uncertainty of OpenAI Technology
This topic is fascinating. Historically, the market often severely overestimates new technological innovations in the short term but vastly underestimates them in the long run (e.g., the AI sector last month).
The focus should be on unexplored possibilities rather than using new tech to solve existing problems. I don't know what the future will be like, but consider the invention of cars versus horse carriages. We shouldn't just focus on job losses for coachmen but recognize the emergence of industries like logistics, computers, and machinery.
For the A-shares market, it's an opportunity. The Chinese government wouldn't permit something like ChatGPT without strict content control, which also serves to protect domestic companies like Baidu.
However, if the global community harnesses the productivity gains from advanced AI models, it might adversely impact the domestic market, favoring larger firms while hurting smaller companies and weaker stocks (long short strategy - well, since 2020 I’ve been promoting the idea that only state-owned or large listed companies could be better, and until now, this idea is still in line with what happened).
About China’s Unique Valuation System
This was actually proposed last year and was also discussed over the past few months. Here's my understanding:
- One of the major macro issues is the problematic land finance system (selling land to finance local government), which has resulted in significant deficits. Based on some data, from January to September of the previous year, land sales income was 3.85 trillion yuan, and it dropped 30% compared to the year before. The promotion of China's unique valuation system can generate significant funds.
- The "Chinese Unique Valuation System" implies a revaluation of unique assets in China, primarily state-owned enterprises (SOEs). In 2021, SOEs contributed approximately 17% to the fiscal revenue. SOE assets, second only to state-owned land, amount to over 300 trillion yuan. The goal is to enhance efficiency, especially during the period that the masses don’t have consumption capability. A mere 1% increase in total asset return rate would generate an additional 3 trillion yuan, making the aforementioned deficit less daunting.
- I believe it's challenging to raise the average by 1% in the short term. However, with a few years of revitalizing state assets, it's feasible.
- Currently, the PE ratio of the CSI 300 index is around 11 times, with a dividend yield of approximately 2.2%. The S&P 500 has a PE ratio above 20, with a dividend yield below 2%. Overall, A-shares are valued more attractively than the S&P 500, especially state-owned enterprises with PE ratios below 10 – historically low.
Conclusion:
This is again a good sign for state owned companies, especially the dominant ones with monopolistic statuses. Large-cap firms, companies with high ROEs, and stable value-preserving sectors will also be benefited.