The China Crisis? For years, investors profited from China despite its corruption, but they are now acknowledging the increasing risks as the country moves away from capitalism. By Stephen Soukup
https://amgreatness.com/2024/10/12/the-china-crisis/
It is largely axiomatic in the investment world that “to be early is to be wrong.” It doesn’t matter what you know, in other words, or how right you may be in understanding conditions or a developing situation. If the rest of the world isn’t ready to accept your case, if it isn’t “there” yet, then you won’t make any money. Indeed, you may lose quite a bit as you wait for everyone else to catch up to you.
Under this specific investment-driven definition, then, I have been wrong about China for the last 25 years or so—repeatedly and spectacularly wrong.
My boss and I once got ourselves into scalding hot water with our employer at a large financial services firm for questioning the sanity and propriety of the hottest investment deal on Wall Street, the initial public offering of PetroChina, the listed arm of the Chinese National Petroleum Company. I once left a job—at a different large financial service firm—in part because the firm’s investment bankers were censoring what we could and could not say about the Chinese government. For some reason, they found it difficult to cut deals with the Butchers of Beijing when their own firm’s analysts were back stateside, calling their partners “the Butchers of Beijing.” Funny how that works.
In a real, fundamental, political, and moral sense, I was right about China. I was right that the CCP cannot be trusted, that it is a brutal, neo-fascist regime. I was right that the defenders of the “global order” had it backward, that allowing China to play in the free world’s sandbox would not make its government freer and more amenable to classical economics and politics. All it would do would befoul the sandbox, make it grotesque and largely unusable. I was right that the CCP would lie, cheat, and steal to advance its agenda and achieve its goals. In short, I was right about everything—everything that is, except the short-term investment possibilities.
It’s not that you would have lost money listening to what I said about the Chinese government and its general untrustworthiness. But you would have missed out on making a ton of it investing in China, investing in the types of deals hyped by Larry Fink—CEO of BlackRock, the largest asset management company in the world—and by Ray Dalio—founder and co-CEO of Bridgewater Associates, the largest hedge fund in the world. These two were early and aggressive adopters of the China investment story. They saw that there was money to be made in China, despite its overwhelming and manifest corruption, and they put some skin in the game. They saw what I couldn’t see, namely that if you’re willing to look the other way on a little genocide, cultural genocide, and gendercide, among other abominations, you can get rich. And they did get rich, as did a good number of their clients and investors.
It is telling, therefore, that over the past couple of weeks, both of these men—the CEOs of the largest asset management company and the largest hedge fund in the world, respectively—have publicly declared that it’s probably about time to pack up and bug out of China.
Not quite two weeks ago, Fink appeared on a panel at a conference in Berlin and suggested that it is time for Western firms to “re-assess” their relationship with China. “We have businesses in China,” he said. “I’m sure everybody here has some businesses in China. We all have to re-evaluate that, like we have to re-evaluate a risk in liquidity traps, a risk in everything.”
A week later, at the Greenwich Economic Forum (in Greenwich, Connecticut), Dalio said that investing in China is “tricky” these days because the country is moving away from capitalism. “There’s something big going on that they had a debt crisis and they also had a capitalism crisis. Are they … favorable to capitalism as we knew it before? I do not believe they are in the same way.”
To be clear, I have never been what you would call a fan of either Larry Fink or Ray Dalio. I hammered Fink for abandoning China for all the wrong reasons just a week ago, and I have used these pages to air my disagreements with Dalio and his rather overexcited pronouncements. I have long questioned both men’s moral sense with respect to investing in China, among other matters. Indeed, Fink is one of the more prominent and notorious villains in my book, The Dictatorship of Woke Capital.
That said, both men have proven themselves exceptionally good at one thing: making money. And if they’re both stating publicly—and almost simultaneously—that there is something rotten in the state of China, then you can rest assured that there is something rotten there, something beyond the usual CCP rottenness.
If Fink and Dalio are right, then this raises a whole host of issues, not just for investors but for Western politicians as well.
Over the years, I have come to believe that the Chinese regime is far more stable than some naive Western analysts might hope and infinitely more stable than were the old Soviet and Soviet-aligned regimes. That is not, however, to say that the CCP is invulnerable. The eminent foreign policy scholar Ted Robert Gurr famously theorized that men tend to revolt not when conditions are most dire or at their low point, but when things have been good for a long time and then suddenly take a turn for the worse—or, at least when the people feel they’ve taken a turn for the worse. His Perceived Relative Deprivation theory is consistent both with history and with other depictions of revolutionary conditions, including Alexis de Tocqueville’s observations about the French Revolution.
Additionally—and more ominously—regimes that are struggling and are fearful of losing support at home often resort to greater internal repression and/or foreign adventurism. With Chinese financial executives resigning en masse, we may be seeing early signs of the former. And with Chinese naval forces “slowly but surely” building up their presence near Taiwan, we may be seeing early signs of the latter.
Whatever the case, none of this should surprise anyone. All of it has been obvious for more than 25 years. I’m just glad that Larry Fink and Ray Dalio have finally caught up to me.
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