A remarkable variety of investors cling to the concept that China – irrespective of how bad the headlines coming out of the East – is inevitably on the rise and that it’s destined to eclipse America and the West.
Those folks should pay closer attention to the stock market.
In 2023, Chinese stocks prolonged a three-year bear run while world stocks otherwise rose 22%.
What few fathom, while fearing that China will eclipse the West, is that stocks have been predicting China’s descent for a lot longer.
It didn’t at all times seem like this. Starting about 1980, Chinese Leader Deng Xiaoping and successors evolved a series of market-oriented reforms called “Socialism with Chinese Characteristics.”
They cracked the door to capitalism — permitting privatization, the profit motive and innovation.
Animal spirits that had been bottled up by communism under Mao escaped — uncorking the “Chinese Miracle.” Ever-growing waves of capitalism enriched China, whose total exports soared from under $200 billion in 1999 to over $1 trillion in 2007.
Stocks, too. From 2000’s end through 2010, the MSCI China rose 276% in dollars, burying the remaining of the MSCI All-Country’s 36% return.
Western ivory tower know-it-alls wrongly envisioned that as technocratic expertise. Then President Xi Jinping’s ascent to power began, bottling up those spirits, ringfencing Chinese capitalism little by little.
Did you recognize that, since 2010, Chinese stocks, with voting machine volatility, have ultimately gone nowhere? Since 2012, or 2014, ’16, or ’18 – including dividends — there was no net return. Adjusted for inflation, Chinese stocks are down roughly 40% in 14 years. That’s at the same time as stocks excluding China returned 200%.
This isn’t like US stocks’ occasional, back-to-back sharp bear markets that temporarily check long-term growth from first market peak to second market trough like 2000 to 2009. This just grinds on — like Japan, whose stocks in 1990 began foretelling the top of its Sixties-Nineteen Eighties global ascent. Stocks “know” China’s problems aren’t temporary. They worsen the longer Xi increasingly, dictatorially strangles capitalism.
Some say China is affordable, but in the long run, stock prices don’t lie. Xi has steadily erected a recent Great Wall, thwarting capitalism’s magic with greater than 100 recent regulations choking basic industry, communications, finance, media, real estate, and tech. He has hobbled innovation, stifled growth – all to create, in his words, a, “recent modern socialistic power.”
By edict, China’s overseas corporate money now repatriates home to buttress domestic decline. Meanwhile, private personal capital covertly flees. In seven years, China went from being a top-five investor in America to a third-tier player behind Norway and Qatar.
Now, China flails and fails at buoying stocks through direct government purchases and short-sale restrictions.
These never help. Capitalism helps.
Official data say China grew 5% in 2023, nailing governmental targets. Markets know higher. Were that even near true, global firms’ Chinese sales could be up. They’re not. Most firms – amongst them Apple, Volkswagen, Procter & Gamble, L’Oreal – have been reporting declining sales in China.
In sum, there’s no middle ground for the Middle Kingdom: Unless it reverses course, re-embracing capitalism’s magic, China’s golden goose is cooked. That goes for its military might, too. (Military capability at all times follows economic vibrancy.)
Trust stocks’ long-term truth-telling. China’s imagined ascent isn’t to be feared – in any respect.
Ken Fisher is the founder and executive chairman of Fisher Investments, a four-time Recent York Times bestselling writer, and regular columnist in 21 countries globally.