Wall Street is doing everything it can to avoid Chinese stocks these days. Michael Barry is one such example, bucking the trend and raising new and interesting questions about whether Asia's biggest economy is being misunderstood after a nearly $7 trillion stock plunge.
Everyone has high expectations from the money manager made famous by Michael Lewis' 2010 book, The Big Short. In 2015, actor Christian Bale played Barry in Hollywood, playing the various players involved in the 2008 subprime crisis.
In that episode, Barry saw the coming meltdown and the forces, failures, and institutions behind it more clearly than virtually anyone else. Those who invested in his Scion Asset Management in 2000, by 2008 he enjoyed returns of nearly 490%.
At a time when most investors are rushing to exit, Mr. Barry is back in the spotlight by making a big bet on China Inc. In recent months, Barry's firm has made China's Alibaba Group its largest holding and also bet on JD.com.
Bally's increased its stake in the company, founded by e-commerce giant Jack Ma, by 50% in the year ended Dec. 31, according to filings. The positions are not very large, at just under $6 million each for Alibaba and Jingdong. But the deals are bewilderingly contradictory as capital moves away from China, including in the technology sector, which has been hit by regulatory turmoil in recent years.
China's nearly $7 trillion stock market decline since 2021 has largely drowned out any discussion of contrarian bets and bargain shopping. Barry's pivot to China is an exception, especially as Alibaba and Jingdong have struggled, with their stock prices down 25% and 53%, respectively, over the past 12 months.
Tech stocks are facing headwinds amid regulatory risks and slowing economic growth in China, as well as concerns about the country's wealth crisis and capital flight from renminbi assets.
Barry's Scion is not alone in thinking that Chinese technology companies, especially semiconductor companies, will make a comeback. Barclays and Sanford C. Bernstein are urging clients to focus on certain mainland technology companies. For example, Bernstein spotlights Nowra Technology Group and Hygon Information Technology.
That's partly due to Huawei's success in circumventing U.S. efforts to effectively crush Chinese telecom companies. Could US sanctions aimed at crippling China's semiconductor industry be the catalyst for President Xi Jinping to innovate his economy and move higher up the value-added ladder?
“We see U.S. sanctions as a double-edged sword,” said Bernstein analyst Qingyuan Lin. “While they may slow China's progress in cutting-edge areas, they will also force China to develop supply chains, seek self-sufficiency, and thrive in areas that benefit from increased domestic substitutes. ”
Some wonder if the broader Chinese market is being undervalued by investors.
“The Chinese stock market is undervalued relative to cash, Chinese bonds, gold and the rest of the world stock market, and we're in a state of complete panic,” said Charles Gabe, an economist at Gabekal Research. “It has to be the best value proposition in the world.”
But whether Chinese tech stocks can find a broader audience will depend on Xi Jinping's success championing private sector innovation rather than outdated state-owned enterprises (SOEs).
Therefore, the Chinese government needs to act faster and more decisively to level the playing field, build stronger capital markets, increase transparency, and strengthen corporate governance. And, of course, to end the real estate crisis in which China is making global headlines for all the wrong reasons.
Premier Li Qiang this week called for “real and strong” action aimed at “improving confidence” in the economy. State news agency Xinhua reported that Li advised policymakers to “focus on solving practical problems that concern the public and businesses.”
Li's comments came as the Chinese government confirmed annual foreign direct investment was at its lowest level since 1993, at just $33 billion in 2023. The figure, which tracks the flow of funds involving foreign companies in China, was 82% lower than the 2022 tally.
Earlier this month, the People's Bank of China (Central Bank) cut banks' reserve requirements by 50 basis points. The Xi administration also cabled a $278 billion financial rescue package to the stock market.
But Schroders multi-asset fund manager Remi Orpitan says this “tactical hike” is no substitute for the “structural” changes China needs to restore investor confidence.
“We think this provides pause because the incentives to reduce exposure are so strong, but we are concerned that the recovery could be an opportunity to reduce risk,” she says.
Luca Paolini, chief strategist at Pictet Asset Management, said: “The relative valuation of Chinese stocks is at an all-time low, but investors are doubting the willingness to provide significant support for Chinese stocks. “The outlook for this asset class is not very bright,” he added. Revive the stock market. Furthermore, there is no improvement in sight in the real estate market, which is the key to improving sentiment. ”
MSCI's recent decision to remove dozens of Chinese companies from several indexes is a further blow, complicating Beijing's efforts to restore foreign investor confidence. Analysts at UOB Global Economics said in a note that the MSCI changes pose “further downside risks to the Chinese stock market,” including investors who “may be forced to liquidate.”
The need for reform is growing as investors look for more volatile destinations for their capital, including in neighboring Japan. Unfortunately, the Chinese government seems to be spending more time trying to remove the effects of past stock market crashes, especially the 2015 stock market crash.
In the summer of 2015, Chinese stocks fell more than 30% in a few weeks. At the time, the Xi team relaxed rules on leverage, lowered reserve requirements, postponed all initial public offerings, suspended trading for thousands of listed companies, and allowed mainlanders to buy stocks using their apartments as collateral. I made it. The Xi administration launched an advertising campaign to buy stocks out of patriotism.
Taking a longer-term view, Standard Bank economist Jeremy Stevens said: “A similar intervention in 2015 missed the mark.” He added: “We remember that in August 2015, Chinese stocks suffered their steepest four-day decline since 1996 amid concerns that the government would be forced to withdraw its market support strategy. You deserve it,” he added.
China's deepening real estate crisis and the severity of deflationary pressures suggest that simple stimulus measures will be even less effective this time around. “China's economic growth is expected to remain sluggish in the future without last year's supportive effects, and policymakers will set growth targets and policy focuses at the National People's Congress in March,” Stevens said. The market will be watching closely to see if it does.”
Another problem is increasing US efforts to curb China's development as a high-tech powerhouse. One such example was the trade war that Donald Trump waged during his presidential term from 2017 to 2021. Since then, more targeted regulations prioritized by U.S. President Joe Biden, a strategic ban on China's access to chips and other critical technologies, have caused more pain.
Indeed, Huawei offers a roadmap for Chinese companies to get around Washington's difficulties. Barry doesn't say much, but he is confident that Joseph Tsai, Alibaba's co-founder and chairman, will be able to craft a strategy to grow Alibaba's global market share through today's regulatory and geopolitical noise. They are likely to believe that they can do it.
But now, as many Washington lawmakers see it, China's electric vehicle industry is under attack as a chip-enabled surveillance machine. As the Nov. 5 U.S. presidential election approaches, pressure will mount on Trump's Republican Party and Biden's Democratic Party to throw more sand into the wheels of Chinese companies.
Perhaps the next wave of regulations will seek to thwart China's ambitions in the field of artificial intelligence (AI). Already, fears of coercive regulation and the Communist Party's own priorities over technological development are clouding China's AI future.
The Financial Times reported that Biden's trade team is warning the Xi administration against “dumping” goods as the problem of overcapacity worsens.
The paper quotes Jay Shambaugh, the US Under Secretary of the Treasury for International Affairs, as saying, “China's industrial support policies and macro policies that focus on supply rather than considering where demand comes from… “We are concerned that both are heading towards a situation of overcapacity.” Products made in China will eventually hit the global market. ”
In particular, President Biden's White House is concerned that China's deflationary pressures are hurting advanced manufacturing industries such as electric vehicles, lithium-ion batteries and solar panels. Shambaugh told the FT: “The rest of the world will react, but they're not reacting in a new anti-China way, they're reacting to China's policies. Noda.”
Meanwhile, Barclays analysts have doubts about China's ambitious goal of achieving 70% semiconductor self-sufficiency by 2025. Barclays says the initiative is still “at the beginning of a very long journey”.
Indeed, the tens of billions of dollars the Chinese government is investing in local production is paying off as mainland producers move up the value curve, the bank's analysts say. However, this depends on whether the Xi team steps up its reforms.
China is certainly accelerating the pace of its economic transformation from smokestack industries and real estate to services and technology. However, analysts at UBS Global Wealth Management said: “The slow transition to these new drivers means that policy support is also needed to ease growing pains.'' “There is,” he claims.
As they point out, “all of this raises the policy bar to stabilize the economy, requiring unconventional demand-targeted policies to restore confidence.” is thinking.
“That's easier said than done,” said Peiqiang Liu, an economist at Fidelity Investments. She says the right mix of aid and reforms is “crucial” to stabilize China's outlook. As Liu says, “This cyclical recovery is intertwined with the structural headwinds facing China.”
Still, Liu added, “The reason why China is not rolling out a bazooka stimulus package at this point is, in my opinion, because of some constraints that China is currently facing.”
These include a legacy of a decade's worth of debt accumulated to support growth. “Total primary debt has reached almost 300% of GDP. This will cause China to rethink its growth model as a debt-driven model does not seem sustainable going forward,” she says. .
Some observers are less concerned about China's path forward, in part because of global demand for Chinese goods. “We remain optimistic about the long-term growth of China's exports as a way to offset losses from real estate,” said Qi Wang, CEO of Megatrust Investment.
“The numbers may tell the whole story,” he says. “In 2020, China's share of global exports reached 17%, a record not only for China but for any country in history. Despite global economic instability, China continues to dominate the world in exports.
The intrigue thickens even further when China considers the changing outlook for U.S. bond yields. Bruce Kasman, JPMorgan's global head of economics, said inflation is proving to be less temporary than global investors and U.S. Federal Reserve officials had expected.
“While it is premature to place too much weight on the noisy January data, there are risks that core inflation and labor market conditions both shift in a hawkish direction that could surprise the Fed in the first half of 2024,” Kassman said. “There is,” he said. “This impasse is expected to delay the start of the developed world mitigation cycle until mid-year and dampen enthusiasm about the overall size of the upcoming mitigation cycle.”
All of this means that Berry's enthusiasm for Chinese technology is as complex as it is fascinating. Suffice it to say, students who learned about his exploits in “The Big Short” are pulling out their popcorn to see if this story has a happy ending.
Follow William Pesek (@WilliamPesek) on X (formerly Twitter).
