Long read: China will have no choice but to become more repressive, more closed, colder

China is today clearly front and center of geopolitics, global supply chain and financial markets and the interplay between the three. To that extent, we continue to look for insights from those who know better. Here’s an interview with Anne Stevenson-Yang, who has published her new book “Wild Ride: A Short History of the Opening and Closing of the Chinese Economy”.

“Anne first moved to Beijing in 1985. In more than 25 years of living and working in China, she founded companies in publishing, software and online media. Today, she runs J Capital Research USA”

She begins by saying she isn’t surprised by the unravelling of China and likens that to the Japanese experience:

“For decades, people have been both enthusiastic about China’s growth and anxious about its competition. It always made me roll my eyes, having lived through the 1980s when Japan was viewed in a similar light. Back then, everyone was worried about Japan’s rapid rise, fearing that it would soon surpass the US as the world’s largest economy. Japanese investors were buying up iconic American assets like movie studios and the Rockefeller Center in New York. However, Japan’s investment-driven economy eventually collapsed, and I believe China’s situation is similar, but on steroids.”

She points to two pivotal moments that drove the U-Turn in China’s policy to become more closed having opened its doors to the world in the 80s:

“There were two pivotal moments, and they both revolved around the Communist Party, maintaining control even as the economy and society became more complex and diverse. The first one, of course, was the 1989 Tiananmen Square protests and massacre. During the 1980s, China experienced a surge in new companies and businesses, leading to rapid growth and complexity. The bureaucracy struggled to keep pace, resulting in a relaxation of regulations by necessity. As a result, individuals and groups began to assert their newfound autonomy and exercise their rights in unprecedented ways…. as people began to demand a greater share of the economy, protests erupted into large-scale public demonstrations. The Communist Party, perceiving this as a threat, responded with force, violently suppressing the protests by shooting people and running them over in the streets with tanks. In the aftermath, the central government reorganized the bureaucracy and economy to consolidate its power, ensuring greater central control over key aspects such as personnel appointments and local governance. This marked a significant shift towards a more authoritarian approach, aimed at preventing similar challenges to their authority in the future.

[And the second?] The Olympics, followed very quickly by the global financial crisis. The Olympics was an effort to look good to the foreign countries. One might have thought that it should have been sort of a big domestic party, a good time for everybody. But it wasn’t. It was something to display to the outside, and the repression domestically grew even more intense. And then, the global financial crisis sent shockwaves through China’s leadership, who feared financial pressure could lead to collapse. In response, they embarked on a massive domestic spending spree. But even though it felt good at the time because there was so much money flowing around, it ultimately created a lot more problems.”

Problems of over investment in infrastructure and real estate and the resulting debt. But what can China do to get out of this?

“The central government, if they were to remain in charge, has two choices: One, just print money and pay back all the debt. But that would create tremendous inflation and it would push down the value of Renminbi to at least 1:10 to the dollar. They’re very reluctant to do that for a number of reasons. For instance, they would impoverish themselves because leaders still have a lot of Renminbi assets, like stocks and property. Furthermore, it would make it very difficult to import products in China. Also, it would crush the confidence of Chinese consumers who have grown accustomed to traveling the world and feeling proud of their country’s strength and status.

The other option is to allow China to go into recession for quite a long period of time. So neither of those options is acceptable. I think ultimately, they’re going to choose to pour money on the economy because it’s the only thing left. And then, China will have no choice but to become more repressive, more closed, colder. That’s already happening.”

Why will printing money result in repression or become more closed?
“Because pouring money on the economy and pushing down the value of the renminbi means that you have less direct foreign investment, less portfolio investment, less interest by foreigners in China. Furthermore, this would diminish confidence among Chinese consumers. The value of Chinese assets would decline, so they would feel differently about all their properties they bought. This would result in a lot of dissatisfaction. So in order to maintain its grip on power, the government has to raise more suspicion about national security, close the borders, and enforce repressive measures.”

China aside, Anne also happens to be an investor specialising in short selling. Here are her favourite short ideas now:

“On the short side, I’m always looking at frauds. What’s rampant these days is companies engaging in so-called «AI washing»: companies that promote themselves as AI companies, but really aren’t. You also have companies that are promoting Ozempic knockoffs, companies that claim to have great uranium deposits or gold deposits. It’s basically as Mark Twain, I believe, put it: A gold mine is a hole in the ground with a liar at the top. That also fits with a lot of biotech companies, EV companies, and clean technology companies. Those are the bubbliest sectors right now.”

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