STATE CAPITALI$M IS STILL CAPITALI$M
JOE McDONALD
Updated Thu, August 17, 2023
People wait outside a restaurant in Beijing, Tuesday, Aug. 15, 2023. Chinese leader Xi Jinping has called for patience in a speech released as the ruling Communist Party tries to reverse a deepening economic slump and said Western countries are "increasingly in trouble" because of their materialism and "spiritual poverty." (AP Photo/Ng Han Guan)
JOE McDONALD
Updated Thu, August 17, 2023
BEIJING (AP) — Chinese leader Xi Jinping has called for patience in a speech released as the ruling Communist Party tries to reverse a deepening economic slump and said Western countries are “increasingly in trouble” because of their materialism and “spiritual poverty.”
Xi’s speech was published by Qiushi, the party’s top theoretical journal, hours after data Tuesday showed consumer and factory activity weakened further in July despite official promises to support struggling entrepreneurs. The government skipped giving an update on a politically sensitive spike in unemployment among young people.
Xi, the country’s most powerful leader in decades, called for China to “build a socialist ideology with strong cohesion” and to focus on long-term goals of improving education, health care and food supplies for China’s 1.4 billion people instead of only pursuing short-term material wealth.
Since taking power in 2012, Xi has called for restoring the ruling party's role as an economic and social leader and has tightened control over business and society since taking power in 2012. Some changes come at a rising cost as successful Chinese companies are pressured to divert money into political initiatives including processor chip development. The party tightened control over tech industries by launching data security and anti-monopoly crackdowns that wiped out billions of dollars of their stock market value.
“We must maintain historic patience and insist on making steady, step-by-step progress,” Xi said in the speech. Qiushi said it was delivered in February in the southwestern city of Chongqing. It is common for Qiushi journal to publish speeches months after they are delivered.
Economic growth slid to 0.8% in the three months ending in June compared with the previous month, down from 2.2% in January-March. That is equivalent to a 3.2% annual rate, which would be among China’s weakest in decades.
A survey in June found unemployment among urban workers aged 16 to 24 spiked to a record 21.3%. The statistics bureau said this week it would withhold updates while it refined its measurement.
The government is trying to reassure uneasy homebuyers and investors about the deeply indebted real estate industry after one of China's biggest developers, Country Garden, failed to make a payment to bondholders and suspended trading of its bonds. A government spokesperson said Tuesday regulators are getting debt under control and risks are “expected to be gradually resolved.”
Beijing also has expanded anti-spying rules and tightened controls on information, leaving foreign and private companies uncertain about what activities might be allowed.
Xi stressed “common prosperity,” a 1950s party slogan he has revived. He called for narrowing China’s yawning wealth gap between a tiny elite and the poor majority and to “regulate the healthy development of capital” but announced no new initiatives.
“Common prosperity for all people” is an “essential feature of Chinese-style modernization and distinguishes it from Western modernization,” Xi said.
Western-style modernization “pursues the maximization of capital interests instead of serving the interests of the vast majority of people,” Xi said.
“Today, Western countries are increasingly in trouble,” Xi said. “They cannot curb the greedy nature of capital and cannot solve chronic diseases such as materialism and spiritual poverty."
Xi’s speech was published by Qiushi, the party’s top theoretical journal, hours after data Tuesday showed consumer and factory activity weakened further in July despite official promises to support struggling entrepreneurs. The government skipped giving an update on a politically sensitive spike in unemployment among young people.
Xi, the country’s most powerful leader in decades, called for China to “build a socialist ideology with strong cohesion” and to focus on long-term goals of improving education, health care and food supplies for China’s 1.4 billion people instead of only pursuing short-term material wealth.
Since taking power in 2012, Xi has called for restoring the ruling party's role as an economic and social leader and has tightened control over business and society since taking power in 2012. Some changes come at a rising cost as successful Chinese companies are pressured to divert money into political initiatives including processor chip development. The party tightened control over tech industries by launching data security and anti-monopoly crackdowns that wiped out billions of dollars of their stock market value.
“We must maintain historic patience and insist on making steady, step-by-step progress,” Xi said in the speech. Qiushi said it was delivered in February in the southwestern city of Chongqing. It is common for Qiushi journal to publish speeches months after they are delivered.
Economic growth slid to 0.8% in the three months ending in June compared with the previous month, down from 2.2% in January-March. That is equivalent to a 3.2% annual rate, which would be among China’s weakest in decades.
A survey in June found unemployment among urban workers aged 16 to 24 spiked to a record 21.3%. The statistics bureau said this week it would withhold updates while it refined its measurement.
The government is trying to reassure uneasy homebuyers and investors about the deeply indebted real estate industry after one of China's biggest developers, Country Garden, failed to make a payment to bondholders and suspended trading of its bonds. A government spokesperson said Tuesday regulators are getting debt under control and risks are “expected to be gradually resolved.”
Beijing also has expanded anti-spying rules and tightened controls on information, leaving foreign and private companies uncertain about what activities might be allowed.
Xi stressed “common prosperity,” a 1950s party slogan he has revived. He called for narrowing China’s yawning wealth gap between a tiny elite and the poor majority and to “regulate the healthy development of capital” but announced no new initiatives.
“Common prosperity for all people” is an “essential feature of Chinese-style modernization and distinguishes it from Western modernization,” Xi said.
Western-style modernization “pursues the maximization of capital interests instead of serving the interests of the vast majority of people,” Xi said.
“Today, Western countries are increasingly in trouble,” Xi said. “They cannot curb the greedy nature of capital and cannot solve chronic diseases such as materialism and spiritual poverty."
People wait outside a restaurant in Beijing, Tuesday, Aug. 15, 2023. Chinese leader Xi Jinping has called for patience in a speech released as the ruling Communist Party tries to reverse a deepening economic slump and said Western countries are "increasingly in trouble" because of their materialism and "spiritual poverty." (AP Photo/Ng Han Guan)
Analysis-China's crackdowns rewrite investors' private sector playbook
An electronic board shows stock indexes at the Lujiazui financial district in Shanghai
By Samuel Shen and Summer Zhen
An electronic board shows stock indexes at the Lujiazui financial district in Shanghai
By Samuel Shen and Summer Zhen
Thu, August 17, 2023
SHANGHAI/HONGKONG (Reuters) - Buy the state, sell the capitalist - that's how global investors are trying to play China's latest anti-graft crackdowns as they see private enterprise increasingly sidelined in Beijing's quest for "common prosperity".
China's recent sweep of the medical sector came as a shock to many investors who had thought the end of Beijing's three-year regulatory purge of the property and tech sectors meant there would be no more industry-wide crackdowns as policymakers prioritised economic recovery.
Several government bodies in July launched a year-long anti-corruption campaign into the medical system, making clear that China's drive to deliver affordable housing, education and healthcare to its masses was more important.
That forced many investors to quickly draw parallels with last year's crusade against private tutoring and a long-running one against tycoon Jack Ma's consumer finance firm Ant Group.
The one unanimous conclusion they came to was that Beijing wants a greater state presence in these sectors.
"The underlying principle is that healthcare is kind of like a social service that should principally be in state hands," said Arthur Kroeber, partner and head of research at Gavekal in New York. Kroeber says the crackdowns are about "defining what the state does, what the private sector does, and creating a more limited sandbox for the private sector to play in."
"This links to the idea of common prosperity because it's the state's job to guarantee a level of provision of basic services, whether it's education or healthcare, so it's important for the state to have a role," he said.
That has left investors now picking the state over the private sector.
While the CSI Medical Services Index is down 4.4% this month and 20% so far this year, investors have snapped up shares of state-owned medicine producers such as Beijing Tongrentang Co, which is up 14% this month.
Similarly, the expectation that state-backed property firms will gain better access to funding and bigger market share has seen investors dump private developers' stocks and rush into state-owned developers such as Yuexiu Property and Poly Developments.
Zhang Kexing, general manager of Beijing Gelei Asset Management, expects healthcare companies with strong branding will benefit, as will firms in traditional Chinese medicine, which has political support, such as Beijing Tongrentang.
NATIONAL SERVICE
While President Xi Jinping has made graft busting a priority since 2012, the Chinese Communist Party's (CCP) two-year-old "common prosperity" campaign that targets financial services, private education and healthcare has accelerated that push.
The CCP's July Politburo meeting reinforced the message, with the top policymaking body pledging to put a floor under the property sector, help indebted local governments heal and boost consumer demand.
Investors now believe Xi will be relentless in his social and economic agenda, much of which draws on Mao Zedong's Marxist and socialist thinking.
Thomas Masi, a partner and equity portfolio manager at Boston-based GW&K Investment Management, spoke to heads of several Chinese firms that he reckoned were at the fore of innovation in healthcare.
"Basically the message they were getting from the government was that they should be doing some of this innovation for national service, as opposed to for profitability only. That was a lightbulb for us," said Masi, who was once bullish on healthcare.
"We basically understood...we were not necessarily going to be paid as shareholders."
Xi himself has often said that private companies should be "rich and loving," be "patriotic" and share the fruits of their growth with employees more equitably.
Nuno Fernandes, also a partner and portfolio manager at GW&K, says it is important for investors in China to recognise the power of the state to override private interests, which means companies will need to "make a profit out of whatever circumstances and situation they are given."
That is why Fernandes has slashed his portfolio holdings in Chinese drugmakers.
Huang Yan, general manager of private fund manager Shanghai QiuYang Capital Co, said Beijing will crack down on any sector seen as increasing people's economic burden.
"Whether it's healthcare or tutoring, a crackdown will befall any sector as long as the campaign benefits the majority of people at the cost of the minority," Huang said.
Huang points to inflated liquor prices as an example.
"Using pricey spirit to lubricate business at the banquet increases companies' cost which could be used in better ways. It's possible for this sector to be targeted," he says.
But Beijing may ignore other sectors such as infrastructure, where such excess is less visible, he said.
Kumar Pandit, portfolio manager at Somerset Capital Management's Emerging Markets Dividend Growth Fund in London, is not cutting his China exposure but has an "added layer of scrutiny" around sectors Beijing deems important to common prosperity.
While the probability of wider crackdowns is low, he said making decisions remains challenging.
"It is difficult to say with certainty whether the crackdown will spill into other sectors," Pandit said.
(Additional reporting by Jason Xue in Shanghai and Ankur Banerjee in Singapore; Writing by Vidya Ranganathan; Editing by Sam Holmes)
SHANGHAI/HONGKONG (Reuters) - Buy the state, sell the capitalist - that's how global investors are trying to play China's latest anti-graft crackdowns as they see private enterprise increasingly sidelined in Beijing's quest for "common prosperity".
China's recent sweep of the medical sector came as a shock to many investors who had thought the end of Beijing's three-year regulatory purge of the property and tech sectors meant there would be no more industry-wide crackdowns as policymakers prioritised economic recovery.
Several government bodies in July launched a year-long anti-corruption campaign into the medical system, making clear that China's drive to deliver affordable housing, education and healthcare to its masses was more important.
That forced many investors to quickly draw parallels with last year's crusade against private tutoring and a long-running one against tycoon Jack Ma's consumer finance firm Ant Group.
The one unanimous conclusion they came to was that Beijing wants a greater state presence in these sectors.
"The underlying principle is that healthcare is kind of like a social service that should principally be in state hands," said Arthur Kroeber, partner and head of research at Gavekal in New York. Kroeber says the crackdowns are about "defining what the state does, what the private sector does, and creating a more limited sandbox for the private sector to play in."
"This links to the idea of common prosperity because it's the state's job to guarantee a level of provision of basic services, whether it's education or healthcare, so it's important for the state to have a role," he said.
That has left investors now picking the state over the private sector.
While the CSI Medical Services Index is down 4.4% this month and 20% so far this year, investors have snapped up shares of state-owned medicine producers such as Beijing Tongrentang Co, which is up 14% this month.
Similarly, the expectation that state-backed property firms will gain better access to funding and bigger market share has seen investors dump private developers' stocks and rush into state-owned developers such as Yuexiu Property and Poly Developments.
Zhang Kexing, general manager of Beijing Gelei Asset Management, expects healthcare companies with strong branding will benefit, as will firms in traditional Chinese medicine, which has political support, such as Beijing Tongrentang.
NATIONAL SERVICE
While President Xi Jinping has made graft busting a priority since 2012, the Chinese Communist Party's (CCP) two-year-old "common prosperity" campaign that targets financial services, private education and healthcare has accelerated that push.
The CCP's July Politburo meeting reinforced the message, with the top policymaking body pledging to put a floor under the property sector, help indebted local governments heal and boost consumer demand.
Investors now believe Xi will be relentless in his social and economic agenda, much of which draws on Mao Zedong's Marxist and socialist thinking.
Thomas Masi, a partner and equity portfolio manager at Boston-based GW&K Investment Management, spoke to heads of several Chinese firms that he reckoned were at the fore of innovation in healthcare.
"Basically the message they were getting from the government was that they should be doing some of this innovation for national service, as opposed to for profitability only. That was a lightbulb for us," said Masi, who was once bullish on healthcare.
"We basically understood...we were not necessarily going to be paid as shareholders."
Xi himself has often said that private companies should be "rich and loving," be "patriotic" and share the fruits of their growth with employees more equitably.
Nuno Fernandes, also a partner and portfolio manager at GW&K, says it is important for investors in China to recognise the power of the state to override private interests, which means companies will need to "make a profit out of whatever circumstances and situation they are given."
That is why Fernandes has slashed his portfolio holdings in Chinese drugmakers.
Huang Yan, general manager of private fund manager Shanghai QiuYang Capital Co, said Beijing will crack down on any sector seen as increasing people's economic burden.
"Whether it's healthcare or tutoring, a crackdown will befall any sector as long as the campaign benefits the majority of people at the cost of the minority," Huang said.
Huang points to inflated liquor prices as an example.
"Using pricey spirit to lubricate business at the banquet increases companies' cost which could be used in better ways. It's possible for this sector to be targeted," he says.
But Beijing may ignore other sectors such as infrastructure, where such excess is less visible, he said.
Kumar Pandit, portfolio manager at Somerset Capital Management's Emerging Markets Dividend Growth Fund in London, is not cutting his China exposure but has an "added layer of scrutiny" around sectors Beijing deems important to common prosperity.
While the probability of wider crackdowns is low, he said making decisions remains challenging.
"It is difficult to say with certainty whether the crackdown will spill into other sectors," Pandit said.
(Additional reporting by Jason Xue in Shanghai and Ankur Banerjee in Singapore; Writing by Vidya Ranganathan; Editing by Sam Holmes)
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