Summary: Today, I had the opportunity to talk with CNBC Fast Money anchor Melissa Lee about what we can expect from Biden/Xi meetings taking place today in San Francisco. You can watch a short video of the conversation by clicking here or clicking on the graphic below.
“Thank you, San Francisco. I’ll Be Here All Week”
The APEC meetings taking place in San Francisco this week are all about the show, not about the dough. Policies and agreements are not made at televised events—they are crafted quietly in advance by loyal staffers to be pulled out of a hat by their bosses at press conferences.
This show is a particularly good one because it has two big stars—Joe Biden and Xi Jinping—and because it is win-win. Both guys are going to get what they need. Biden will get to be a senior statesman for his audience—the voters in next year’s election. And Xi will get to show the folks back home that he is a world-class statesman, that he is fighting to reverse the export restrictions that are hurting Chinese tech companies, and that he is working to convince the CEOs of big American companies, with dinner speeches like the one he is giving tonight (he’ll be here all week), that China is a safe place to invest.
It also won’t hurt that the investors he will be talking to are in a good mood. Yesterday’s CPI report came in at 0% for the month of October, 3.2% for the past year, and just 1.5% excluding Owner’s Equivalent Rent (OER), the 26% of the index that pretends to measure what it would cost you to rent the house that you already own from yourself. As I argued in my last post, OER makes bio sense at all and should be removed from the index. Together with today’s PPI report (-0.5% for October and 1.3% for the past year) and the recent inflation reports from China (October CPI -0.2%, PPI -2.6%, both from a year earlier), this should be enough to get Chairman Powell to put down his mic and back away slowly from the podium.
The big question, as Tim asked on the video, is whether this means China is open for business again. The short answer is bǔ shì, which in Mandarin means “no”; just ask Jack Ma. The long answer is that total autocracies, where one person has supreme control over all decisions, are too dangerous for long-term investors.
If we have learned one thing in the past 11 years, it is that Xi Jinping is obsessed with personal control. The result is unstable policies, as we have seen when Xi took down the tech companies, or from his destructive Zero Covid policies and the new national security law. When many people are making decisions, the average of all their decisions is less volatile—in statistics it is called the Central Limit Theorem, which most people know as the Law of Large Numbers. Unfortunately, there is no parallel Law of Small Numbers to help an investor feel comfortable. Investors find comfort in institutions because they slow down change. To a first approximation, there is only one institution in China today, and that institution is Xi Jinping.
The final question on the show was, “when will all of this be priced into the market enough to make China an attractive investment?” My answer is that it depends on who you are. If you are a short-term trader, you may be clever and fast enough to get in when prices rise on good news, as I expect to happen this week, and out with a profit. If you are a long-term, fundamental investor like me, however, there is no price that would make it a good idea because there is no way to control the fundamental risk. This is true for both long-term equity investors—think Warren Buffett—and long-term direct FDI investors, like the CEOs paying $2000 per plate to have dinner with Xi Jinping tonight ($40,000 if you want to sit at his table.) For both types of long-term investors, there are plenty of less risky opportunities available in safer places.
That doesn’t mean I am giving up on China, I have great respect and admiration for Chinese people, Chinese culture, and Chinese history, as evidenced by the time I have committed to China over the past 20 years. I believe that China will become less autocratic and more predictable again one day. (As evidence that many people in China feel the same way, I would give the extraordinary public show of mourning when my friend Li Keqiang died last month.) When that day comes, I will once again be an enthusiastic supporter of Chinese investments.
The views and opinions expressed in this article are those of Dr. John Rutledge. Assumptions made in the analysis are not reflective of the position of any entity other than Dr. Rutledge’s. The information contained in this document does not constitute a solicitation, offer or recommendation to purchase or sell any particular security or investment product, or to engage in any particular strategy or in any transaction. You should not rely on any information contained herein in making a decision with respect to an investment. You should not construe the contents of this document as legal, business or tax advice and should consult with your own attorney, business advisor and tax advisor as to the legal, business, tax and related matters related hereto.