Tencent’s share-price meltdown caught many SA investors off guard. As they scurry around, trying to reorganise their portfolios, they will hopefully realise that this is a reflection of what is happening at the very heart of government in China. The Chinese “economic miracle” that began in 1979 is unwinding rapidly, and China’s rulers don’t know how to confront it. Investors in Chinese stocks need to strap themselves in. This could be a long and bumpy ride.
Deng Xiaoping was the architect of China’s massive leap forward in the late 1970s. Pivotal to the success of Deng’s change was the movement of vast numbers of people from rural to urban China to operate the productive capacity of the emerging industrial giant. But that has largely dried up now. China is facing what is in economics termed the Lewis Turning Point. Put crudely, there are no longer enough people to man the machines in China. This has led to serious wage spirals in parts of the country and provoked the ruling Chinese Communist Party (CCP) into relaxing its one-child policy, adopted by Deng in 1979. It was relaxed to allow couples to have two children from 2016 and then earlier this year it was further relaxed to allow three children per couple. But it is too little too late. Chinese families are much more urbanised and no longer want to have large families.
Many investors see China as being on the verge of a huge consumer spending boom, as it moves away from industrial production for export and into services and consumer spending. But that is not happening. Rapid ageing of the vast population and inadequate social security safety nets, especially in the areas of retirement funding and healthcare, have resulted in the average Chinese person being unwilling to commit to significant discretionary spending. Household consumption as a percentage of GDP is only about 40%, way below the levels of most large economies. In the UK it is about 70% and in the US it is about 75%.
The CCP has run out of road. It is facing a demographic time bomb, as the population ages and is hardly replaced by younger people. Its plan of attempting to rebalance the economy from being export-driven to consumption-led is failing.
Add into the mix an increasingly hostile western world, with Joe Biden adopting an approach to China similar to Donald Trump’s, and it becomes clear why the CCP feels increasingly trapped. And as usual, ruthless dictatorships tend to lash out when they feel trapped. In this case, the target is the Chinese technology sector and particularly those stocks with dual listings in the US. Anyone or anything that poses a threat, real or perceived, to the CCP’s absolute grip on power, will be stamped on.
But this is far from the end of the situation. Already Alibaba founder Jack Ma has been brought into line for expressing dissent against the CCP. The onslaught against the tech giants is likely to continue unabated. President Xi Jinping gave a bellicose speech to mark the 100th anniversary of the CCP in June, warning outsiders against even thinking about bullying, subjugating or enslaving China. He also pledged to augment China’s military capabilities and “reunify” Taiwan with China.
The CCP in recent decades had an unwritten compact with the Chinese people to the effect that, provided their standard of living kept rising via sustained strong economic growth, there would be no insurrections. Now, with the likelihood of growth collapsing in the not-too-distant future, the CCP feels that it needs to change tack and move away from a social contract with its people to just pure control.
As China enters a sustained cold war with the west, Chinese technology companies such as Tencent should come increasingly under the CCP’s control. As this happens, expect to see lower natural creativity and innovation as they buckle under the dead hand of the CCP. So while Chinese technology stocks appear cheap compared with US peers, they may stay that way.
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