Avoid China’s stockmarket – here’s what to invest in instead
China’s stockmarket is not a good place for investors to be. But you can't just ignore the world's second-largest economy, says Dominic Frisby. Here, he picks an alternative China play.
I was lucky enough to attend the Students for Liberty conference, LibertyCon 2022, in Prague last weekend.
Oh, my goodness. What a beautiful city is Prague! I’d never been before, but I shall be returning ASAFP.
While there, I heard a talk by Li Schoolland, a Chinese-American businesswoman, who is the director of external relations Asia Pacific for the Acton Institute. She fled China in 1984, having survived Chairman Mao’s Cultural Revolution.
Subscribe to MoneyWeek
Subscribe to MoneyWeek today and get your first six magazine issues absolutely FREE
Sign up to Money Morning
Don't miss the latest investment and personal finances news, market analysis, plus money-saving tips with our free twice-daily newsletter
Don't miss the latest investment and personal finances news, market analysis, plus money-saving tips with our free twice-daily newsletter
She made the case that China, not the US, is the “paper tiger”. What did she mean and what does it imply for investors and the Chinese economy?
China is in trouble
The expression “paper tiger” is used to describe something that appears powerful or threatening, but is in fact weak and vulnerable.
The term was made famous by Mao Zedong, the notorious chairman of the Chinese Communist Party and founder of the People’s Republic of China, in 1957. He said: “All the reputedly powerful reactionaries are merely paper tigers. The reason is that they are divorced from the people.
“Look! Was not Hitler a paper tiger? Was Hitler not overthrown? I also said that the tsar of Russia, the emperor of China and Japanese imperialism were all paper tigers. As we know, they were all overthrown.
“US imperialism has not yet been overthrown and it has the atom bomb. I believe it also will be overthrown. It, too, is a paper tiger”.
There’s rather a lot to unpick there. As time is of the essence, we shall ignore that classic of the Godwin’s Law genre (whoever mentions Hitler first loses the argument), as well as the hypocrisy of criticising authoritarian rulers for being divorced from the people.
Schoolland’s main argument was that today China’s regime is “divorced from the people” and so is a paper tiger. As an authoritarian, corrupt and often incompetent planned economy, it is vulnerable. The events of the past week would seem to bear her out.
“Don’t buy Chinese stocks!” she said. There are so many frauds. Many exist solely to secure funds, with no operating business behind them. Over 60% of China’s market capitalisation is state owned. “If you buy stocks, you are supporting an authoritarian regime.”
Even something like TikTok (ByteDance is the parent company) is “under the regime”. I’ve been unable to verify this: but Schoolland argued that, never mind its use as a surveillance tool, if you read the small print, then once uploaded, your videos effectively become the property of the Chinese state.
Like TikTok, central bank digital currencies (CBDCs) – a field in which China very much has the lead – are a useful surveillance tool. Those tools will now be used on all those athletes who downloaded money apps during the Olympics. As well as to control, they will be used to market stuff. The app will know if you need a loan, say, as well as what type of loan and what your circumstances are, and so will begin marketing financial products to you.
Property is no better as an asset class. Over 30% of the build cost of a property in China is government bribery, she says. I’m not quite sure how you verify that figure, but it doesn’t sound implausible.
Meanwhile, despite all the pictures you might see of amazing buildings in China’s cities, says Schoolland, more than 43 million people still live on less than a dollar a day – although that has come down from more than 100 million in the 2000s.
China is heavily indebted too, which makes it vulnerable. Its debt-to-GDP ratio, Schoolland argues, is greater than the stated 70%. It’s closer, in fact, to 275%.
Shanghai is unravelling with the extended lockdown there. Supply chains are breaking down. There is much discontent and, Schoolland insists, revolution is very much in the air. China needs a new system, not just a new leader, she says.
How to play China’s efforts to revive growth
The evidence of the past few weeks hints that Schoolland may well have a point.
Supply chains have been disrupted, inflation is biting – especially in food and energy prices, interest rates are being held down, the currency is at its weakest since late 2020, international funds are selling out of Chinese assets, attempts to lure domestic investment into capital markets aren’t working, the stockmarket is down by over 20% this year – and a slowing property market is also eroding wealth.
On top of everything else, the evidence of the last two years is that viruses are beyond government control, and that lockdowns do more damage than good. Nevertheless, President Xi Jinping remains committed to “Covid zero”. Irony of ironies, he blames Covid on the germ warfare of “US imperialism”.
But you can’t just ignore China as an investor; it’s too big. The way to play it, for me, is to be in the business of selling it stuff.
Xi has committed to boosting infrastructure construction to bolster the economy. Planned investment this year amounts to at least $2.3trn, according to Bloomberg. Load up on base metal mining stocks, is my advice.
The People’s Bank of China has declared it “will promote the healthy and stable development of markets and provide a good monetary and financial environment” and that “liquidity will remain reasonably ample”.
We are back to that centrally-planned economy thing again. Oh dear.
But that money has to go somewhere.
Dominic’s film, Adam Smith: Father of the Fringe, about the unlikely influence of the father of economics on the greatest arts festival in the world is now available to watch on YouTube.
Sign up to Money Morning
Our team, led by award winning editors, is dedicated to delivering you the top news, analysis, and guides to help you manage your money, grow your investments and build wealth.
Dominic Frisby (“mercurially witty” – the Spectator) is as far as we know the world’s only financial writer and comedian. He is the author of the popular newsletter the Flying Frisby and is MoneyWeek’s main commentator on gold, commodities, currencies and cryptocurrencies. He has also taken several of his shows to the Edinburgh Festival Fringe.
His books are Daylight Robbery - How Tax Changed our Past and Will Shape our Future; Bitcoin: the Future of Money? and Life After the State - Why We Don't Need Government.
Dominic was educated at St Paul's School, Manchester University and the Webber-Douglas Academy Of Dramatic Art. You can follow him on X @dominicfrisby
-
8 of the best houses for sale with libraries
This week: the best houses for sale with libraries – from a five-storey Georgian townhouse in Bloomsbury, London, to a 15th-century property with a library in a medieval tower in Lozère, France
By Natasha Langan Published
-
Investors pull money from UK equities as government warns of “painful” Budget
The government’s post-election honeymoon period has been short-lived, and investors are shying away from UK equities as a result
By Katie Williams Published
-
Halifax: House price slump continues as prices slide for the sixth consecutive month
UK house prices fell again in September as buyers returned, but the slowdown was not as fast as anticipated, latest Halifax data shows. Where are house prices falling the most?
By Kalpana Fitzpatrick Published
-
Rents hit a record high - but is the opportunity for buy-to-let investors still strong?
UK rent prices have hit a record high with the average hitting over £1,200 a month says Rightmove. Are there still opportunities in buy-to-let?
By Marc Shoffman Published
-
Pension savers turn to gold investments
Investors are racing to buy gold to protect their pensions from a stock market correction and high inflation, experts say
By Ruth Emery Published
-
Where to find the best returns from student accommodation
Student accommodation can be a lucrative investment if you know where to look.
By Marc Shoffman Published
-
Best investing apps
We round up the best investing apps. Looking for an easy-to-use app to help you start investing, keep track of your portfolio or make trades on the go?
By Ruth Emery Last updated
-
The world’s best bargain stocks
Searching for bargain stocks with Alec Cutler of the Orbis Global Balanced Fund, who tells Andrew Van Sickle which sectors are being overlooked.
By Andrew Van Sickle Published
-
Revealed: the cheapest cities to own a home in Britain
New research reveals the cheapest cities to own a home, taking account of mortgage payments, utility bills and council tax
By Ruth Emery Published
-
UK recession: How to protect your portfolio
As the UK recession is confirmed, we look at ways to protect your wealth.
By Henry Sandercock Last updated