Monty Guild | Apr 19, 2015 03:41AM ET
Mainland Chinese stock markets don’t trade on economic fundamentals, or on company fundamentals; they trade on psychology, and that depends fundamentally on government policy. We follow Chinese economics primarily because of its influence on other world markets, not because it allows for intelligent tactical expo- sure to Chinese stocks.
Therefore, when waiting for the right opportunity to add to China stocks, we keep ourselves abreast as well as we can of the tenor and direction of policy. China’s President, Xi Jinping, has become the most powerful Chinese leader since Mao himself. Knowing something about his history, his psychology, his goals, and his concerns is a critical element of any China strategy -- and reveals a great deal about China’s zeitgeist to outside observers.
We wrote about Xi’s family background shortly after he took power in 2012. We were pleased to see much of that background discussed, with a lot of other valuable insights, in a recent article in The New Yorker.
h3 What’s Driving Xi Jinping?/h3Let’s take Xi as the paragon of how contemporary China is navigating the stresses and potential crises of its ongoing development from backwater to global superpower. Here are the themes we see that offer insights into China’s policy direction:
Thus we have a portrait of a ruler who is single-mindedly devoted to one-party rule, to the continued power of the Chinese Communist Party, to the fight against corruption, to resistance against encroaching western political and cultural liberalism, and to economic reform and continued opening to global markets. Those traits may not seem to “add up” to western observers, who expect economic openness and political openness to go hand-in-hand… but this is the reality of China’s leader.
Investment implications: The tenor of Xi Jinping’s rule could be summarized as “authority, economic reform, and anticorruption.” For now, that orientation is dovetailing with the government’s apparent determination to deleverage the property bubble and its related wealth management products, and move investors’ assets into the stock market. The government has the will and the capacity to continue propel- ling the rally. This is bullish for Chinese stocks mentioned elsewhere in this letter.
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