Ro'Macro #7 : What happened in China ?
I bet everyone is well aware of the recent crash in China, but maybe not about the reasons it happened and what it says for the future...
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Today we are talking about China, the country has been the world factory for quite some time and it grew at more than 6% per year since 1991, obviously, Covid-19 crisis put a term to that but that could at least normalize in the next few years. The Chinese stock market crashed by a lot in July, we all saw this, but this declining of the Tech and Educational sectors are on since March… that’s not so recent but why everyone realize that only after this violent move and what’s the reasons behind this mess ? Let’s see it now !
Before getting into specific of the crash, we have to talk about China in general, how it’s organized and how the government is working because that’s essential for the rest of this article and for the global understanding of this situation.
1) China’s functioning
Since 1953, China is working with 5 year plans that are evaluated, adjusted and changed every period. For every plan since almost 70 years they have specific goals for which they put most of their focus. Let’s take the objectives of the first ever plan in China :
Concentrate efforts on the construction of 694 large and medium-sized industrial projects, including 156 with the aid of the Soviet Union
Lay out the primary foundations for China's socialist industrialization
Develop agricultural producers’ cooperatives to help in the socialist transformation of the agriculture and handicraft industries
Put capitalist industry and commerce on the track of state capitalism
Facilitate the socialist transformation of private industry and commerce
Here are the results :
The gross value of industrial products in 1957 increased 128.6% from 1952.
In 1957, Soviet Union-assisted Chinese production of steel had risen to 5.35 million metric tons. From 1.35 million metric ton in 1953.
Coal production in 1957 reached 131 million tons, increasing 98% from 1952.
Gross output value from industry and agriculture rose from 30% in 1949 to 56.5% in 1957, while that of heavy industry increased from 26.4% to 48.4%
In 1957, grain production reached 195 billion kilograms and cotton output 32.8 million dan (1 dan = 50 kilograms).
You can see that when the Chinese are focusing on something, they have RESULTS.
Basically that’s how China worked on its development for the past 70 years and seeing the chart of GDP per country in 2019, with China being at the 2nd place, it seems that it’s working pretty well. I already see some of you coming, if you look at GDP per capita, the purchasing power or the HDI its far from being second, I know that but it’s not what we are trying to demonstrate here and you will understand later.
2) Demographics
China’s demographic isn’t looking good, it’s mostly due to the “one child” policy that was put in place for 36 years (1979-2015) that policy literally punished people with more than one child. Couple with one child would be rewarded with money, better housing access, and a “glory certificate”. Charts speaks for themselves on this subjects, just take a look…
The replacement rate is at 2.1, so you need at least 2.1 child per women to replace a generation, actually China’s rate is at 1.7 which means they will not reach that and as of 2030, the population should decline. As you can see on the lower chart for population projection, when you compare with India which has kind of the same profile as China a few years ago (in terms of growth and developments), you can see that population will be radically different. That can have huge impact because an aging population that will need more services, healthcare etc with less workforce who can contributes to finance that is no good news. In 2050 the gap in median age between China and India will be around 12 years which is very important in terms of productivity.
Another thing is education. People were first told not to have children, but now they think themselves they can’t because they can’t afford it. Housing prices are rising in average at 8% since 1999 and from the very beginning of their education, kids are going to private school (paid) after school to keep working. In the cities like Shanghai or Beijing, tuition fees represent a third of the household income and about a half in the rural areas. Which also highlight inequalities in the country. Moreover, when the children are going to universities, if they want to go abroad some agencies that facilitate entry for Chinese students can charge up to 30k USD which is huge in local currency and it’s not affordable for most of the families in China. There is also talks about bribes coming from wealthy families to get their kids in the best universities, nothing we’ve never seen before in all other countries but obviously not good…
3) Crash, what happened
Now that we talked about the context let’s get to exactly what happened. I selected 4 charts (from high left to low right: Pinduoduo, TAL, KWEB, CQQQ). As you can see the crash didn’t happen overnight, the top for each chart is between late february and mid march.
This is from an article of Nikkei Asia:
“Since Alibaba founder Jack Ma criticized his country's government last October at the Bund Summit for what he called excessive regulations, China's tech sector has been hit with a regulatory storm. After authorities canceled the initial public offering of Ma's Ant Group and put the company through a "rectification" process, China's Politburo announced that it would "prevent the disorderly expansion of capital" in a statement clearly directed at Big Tech. Didi Global has been pulled from app stores and raided amid an investigation into its data security and privacy. Alibaba, Tencent Holdings and Baidu have been fined for anti-competitive practices. More lasting, new draft rules for overseeing Big Tech have been published, including for antitrust and personal data protection”
Basically, since jack ma’s criticized the government, they made their life missions’s to make sure Big Tech understand who is is the boss in the country. For the education stock, it’s the reason we explored before, which is demographics. Its very important for the county to have educated people, even more now the population growth is low and will likely be negative in a few years. They need to make education more affordable thus the government turned the education sector almost public in the sens those companies won’t get any money from foreign investors in the future, they won’t be able to raise money, or even make profit !
4) What does it say about the future ?
We never know what the future holds, but I think that China made its point very clear and that’s in line with the 5 year plan they follow dearly, if they have a goal, they will make that possible, in one way or another and there is not really anything that can stop them from that, even being the richest man in the country. By that, I am not saying China is too complicated or extreme to invest in, but there is some rules that we have to keep in mind when investing in this country, it works differently from Europe and US. Obviously China still have a lot of potential to grow, Alibaba will still sell tons of things, and companies will make money, as long as they don’t try the government…
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