Why Would Anyone Invest In China Right Now?

You might not want to hold the Direxion 3x China Bear (YANG) for a year or more, but over the next few months, with “zero Covid” lockdowns and geopolitics as they are, why would anyone risk capital in China right now? Shorting China was a great idea.

“A year ago, we questioned the market’s trust in China and six months ago we felt these ‘sparkling markets’ concealed a host of risks. But we never expected the avalanche of wide-ranging problems we’ve seen since then,” says Charles Robertson, global chief economist for Renaissance Capital.

The Shanghai lockdowns are supposedly winding down, but investors should not get their hopes up. Beijing is threatening similar lockdowns.

Supply chains will be a mess for months, thanks to the Port of Shanghai being closed as China flexes in a show to the West that it is the “indispensable nation”. Assuming the U.S. is serious about divorcing, then what we have in Shanghai is the CCP ripping out the wiring and plumbing before she leaves.

Political sentiment around China has never been worse, even as President Biden tosses around the idea of removing tariffs on some China goods. This would go against more than 70% of voters who responded to a Morning Consult poll last month saying they wanted Washington to keep Trump-era trade tariffs on Made in China goods.

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For TS Lombard’s chief economist, Charles Dumas, China is going to “hammer global growth” and global stocks will suffer for longer than the impatient CNBC-types would hope for.

Between its nutty Covid religion, its weak real estate giants and the deglobalization trend hitting the U.S., in particular, China is closer to a hard landing now than it was in 2011 when every anti-China pundit in America was predicting the fast fall of China, any day.

(Eleven years later…)

“The Evergrande debt crisis ‘blows the whistle’ on the chief driving force in China’s economy since 2008-09’s financial crisis,” Dumas says. “China’s continued rapid growth has since depended on real-estate and construction activity, with escalating domestic debt. In effect, the savings glut involved in gross savings remaining a stratospheric 45-50% of GDP ceased to be laid off in U.S. and Club-Med/British-Isles capital imports and was reflected in domestic Chinese capex, especially in real estate.”

When it comes to the deglobalization threat to China’s growth, TS Lombard’s Larry Brainard and Dumas wrote in September 2018 that Trump’s tariffs started the ‘decoupling’ of the two most powerful economies in the world. This has been exacerbated now by the pandemic — born and raised in China — and bipartisan political support for being tough on China.

TS Lombard analysts Dario Perkins and Grace Fan, respectively, detailed in recent reports the impact of supply hold-ups owing to Covid-19 and the likely anti-China sentiment that will result from that in the U.S.

Washington is actively talking about an over-reliance on China, and Congress is worried. At one point, they might make it harder for U.S. companies to do business there.

The lockdowns have halted production at factories in Shanghai. Even Tesla’s assembly line was closed.

Shanghai exporters are calling clients and asking for delivery extensions. Some are getting them. These are long, decade-old relationships in many instances. But as lockdowns remain a real problem for China, customers are increasingly sourcing from elsewhere in Asia and Mexico.

China’s export growth has now sunk to winter 2020 lows thanks to lockdowns, the world’s most disastrous policy.

The Covid-led disruptions to manufacturing and logistics affect both supply and demand sides of the China economy, says Jing Wang, the chief China economist for Nomura Securities. “The net effect of this could be inflationary for consumer goods, especially in the near term, as lockdowns, factory closures and travel bans lead to a shortage of food and goods and increase logistics costs in China’s urban areas,” she says.

Should lockdowns continue in Shanghai and risk starting in Beijing, then consumption and investment demand in China will become depressed. Household income will fall, savings will shrink, and political unrest will heat up.

Buy signals will depend on the unreliable news about Shanghai Covid cases. Investors will be back to trading on case rates, if anyone believes them.

For years, Johns Hopkins University’s Covid tracker showed that only seven people in a city of more than 24 million had died of Covid. Now that number is closer to 200.

Shanghai’s falling case counts might change the mood for YANG investors.

Some investor emails to clients said there were “no new cases” on Wednesday. Others said that there were cases.

For the market, the Peoples Bank of China added liquidity to the financial system yesterday — probably buying stocks and bonds to prop up the market.

Shorting China runs the risk of betting against the central bank. That’s never a good idea.

Plus, no one shorting China today is arriving early to the party. No one knows how much lower this can go. The MSCI China is down 26% year-to-date, similar to the Nasdaq, and underperforming the MSCI Emerging Markets Index. The pre-market hours looked good for China early Thursday.

But if China wants to keep locking down, its central bank buying stocks and bonds will be the only thing keeping China interesting and keeping Direxion’s 3x China Bear from a 50% gain before the summer.