Xi Jinping continues to secure power, for an unprecedented third term as China’s leader (instead of the usual two-term limit). Chinese stocks are crashing on this news, down 10%.
My thoughts:
1. People got the outcome right but the cause wrong. Sure enough, China is struggling as many predicted, but it’s not due to Covid policy. The assumption by Richard Hanania, Thiel and others was that China’s ‘zero Covid’ policy would cripple its economy, but, rather, blame political instability, Biden’s chip crackdown, the 2022 recession and bear market, worldwide hyperinflation, and other problems, not Covid.
As shown below, Chinese equities did well during and after Covid, only to fall starting in August 2021 for reasons unrelated to Covid:
Chinese equites are largely tracking US equities.
Despite having among the strictest lockdowns in 2020, China’s economy and stock market recovered among the fastest in the world. This does not necessary prove the lockdowns worked, it just shows how other factors play a bigger role in the economy than Covid. China is so big, 1.4 billion people and many huge cities, that it has enough redundancy to not be affected too much economically by lockdowns. Same for the US in this regard.
2. Whereas the US media is inclined to hype or over-exaggerate domestic political problems that are of a superficial nature, it’s the opposite in emerging markets, in which the state-run/regulated media downplays or ignores far worse structural problems, whether in Russia, China, Brazil, Iran, or Turkey. Americans are losing their minds over relatively low-stakes issues, compared to overseas, where things are far worse. China’s crisis confirms that whatever problems the US has, it’s worse elsewhere, such as wokeness/CRT, corruption, worse stock market returns, higher inflation, more corruption, more crime, more instability, etc. Same for the UK, which is having worse problems, such as high inflation and energy shortages. UK Prime Minister Liz Truss resigned after just 40 days, because she screwed things up so badly and was unqualified.
3. This is why emerging/foreign markets are worse investments compared to US equities, as I have said for years. More risk, more uncertainty, less upside. It’s hard to beat the S&P 500, Dow, and Nasdaq as far as investments go. Unless China goes into a major recession, which I still think is unlikely, Xi Jinping securing power does not affect the propensity of Chinese consumers to buy American goods.
4. It also shows the superiority of America’s political system, compared to systems which are more centralized or inflexible. Even though America’s government is possibly more inefficient, it has more redundancy. And importantly, allows the private sector to thrive and have a high degree of autonomy, which is necessary for having a strong economy. The problem with a government that is too powerful is it increases the possibly to instability and economic and social collapse. Over the past 2 centuries, history consistently shows that governments which are too powerful tend to be short-lived or end badly. China and UAE are possibly exceptions to this, but investors generally see centralization as a negative.