Blinken, market rebounds, 9 Guidelines - Week in review #16
This is going to be a brief note. It has been a hectic week so I don't get much time to write. I will focus on 2 most notable events.
#1 Blinken came, with a rumored “ultimatum”, but capital markets seem to have shrugged it off
Anthony Blinken came to China, supposedly with an ultimatum demanding China to cut off material support to Russia. Mid-week, there was a report from WSJ that the US is contemplating cutting Chinese banks off the international payment system, which, if true, would amount to a financial nuclear bomb.
Two things here surprised me. First, assuming it’s the US side feeding this type of information to the media outlets, it seems to me that somehow the US believes that by publicizing the threat, China will actually be fearful enough to comply. I think it’s likely to backfire. It’s one thing to wield a weapon behind closed doors, but another to make it public knowledge, leaving decision-makers in China limited choices.
The second thing is, if this kind of news came in a year ago, I would imagine financial markets in China would collapse again. But no, they actually performed really strongly. The Hong Kong stock market, an offshore stock market that is supposedly the most susceptible to geopolitical uncertainties, actually just had a blockbuster week. As of now, the Hang Seng index returned more than 11% for the week, just while US stock market advances have stalled. Despite an exceedingly gloomy January, the Hang Seng is now within a 1% difference away from catching up with the Nasdaq this year, while Tencent, a cornerstone stock of the Hong Kong market, just broke out of a trading band, getting close to the highest point in 2 years.
What does this mean? Why the capital markets don’t seem to be afraid anymore? One possible reason is that the valuations have been so depressed for so long, and the more skittish investors - the non-believers - have already left the scene, there are simply not many people willing to sell left in the game anymore.
Whatever the reason, it seems certain that geopolitical strife is somehow less of a concern now, which may give Team China a stronger hand when meeting Blinken.
#2 The “Nine Guidelines”
Talking about the capital market, one shouldn’t underestimate the significance of the “Nine Guidelines for Capital Markets” announced 2 weeks ago.
, a teammate of Baiguan and a seasoned stock market investor, wrote an excellent piece on this topic. The main thesis of Aaron is that this guideline has far-reaching consequences, but it may not be relevant for short-term stock market returns.Despite the reform, the market was also quite anxious about policy implementation. This short essay I read on WeChat summed up the mood so well. It also pointed to a core problem capital market investors have about China: extreme policy pivoting and expectation management
The overall approach of ths new policy is correct, accelerating the survival of the fittest and changing the situation where bad money drives out good.
A major reason for the long-standing issue of "Once loosened, it becomes chaotic; once controlled, it perishes一放就乱，一管就死" is the lack of communication.
What is the consistent goal, policy direction, and principle? Why are these actions being taken, and how long will they continue?
It might be said that exploration is just like this: making small iterative adjustments and correcting mistakes when they are made. This too is an attitude.
As long as this thought process is clear, market players will also respond: never overdo things, always leave room for change.
This avoids the extremes of 2013 with rampant speculation in small-cap stocks and acquisitions; the bizarre narratives of 2016; and crowding into all sorts of Moutai-sized mega stocks and IPOs of 2018.
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The same goes for quant funds, which can be exaggerated in its pace of growth [but once there is a problem there is a heavy crackdown].
Stabilizing expectations and maintaining consistent communication are very important for the A-share market.
Lastly, for those of you who have not done it yet, next Monday, April 29, I will do an “Ask Me Anything” live webinar for paid subscribers of Baiguan. This is a unique opportunity for you to grill me with whatever questions about China for however long you want.
Today is the last day for signup. You may sign up here. We will start sending out webinar links tomorrow.
We are still debating between two timeslots, but most likely it will be 9 pm, my time on Monday. I am ready to make myself a sleepless night just for you.
Regarding the reason for Blinken's "ultimatum", I also found it strange. However, recently reading what Li Daokui said in his book "China Demystified" about the particularities of China's diplomatic stance caused me to think a little about the strangeness of America's diplomatic tactics, and made me understand this kind of behaviour a little better.
Li says that China's main approach is a "respected-centred policy" rather than a classically realist or values-based policy. The basic gist of this is the idea that China government's primary goal is to get the respect it feels it deserves as a large and important country- thus if you are respectful/polite in public, then in private there will be some latitude for compromise behind the scenes and your diplomacy will be received much better. The logic underlying this stance is that of the "China dream", giving internal stakeholders in China the signal that the century of humiliation is over. The reception of Janet Yellen in China recently is a good example of this- her demands were actually quite unhelpful, but her general actions came across as polite and respectful and thus she was well received.
Thinking about it, I realised that America's diplomatic tactic is almost the complete opposite of this. I don't have a snappy name for this diplomatic stance, but it can basically be summarized as "allow me to disrespect and bully you in public, so that the world understands exactly who's in charge, and maybe I can compromise a little in private". The underlying logic of this stance actually mirrors that of the Chinese approach, i.e. that it's for the benefit of America's internal (stakeholders, lobbyists, politicos, donors) rather than for that of the country on the receiving end. Because American politicians rely on support from lobbyists and big donors for their re-election, and because these stakeholders believe deeply and draw material benefits from America's continued dominance and belligerence over the world, the main priority in the mind of any American politician in interacting with a foreign counterpart is "what words will make me look most tough and uncompromising in this situation?". A good example of this is way back in 2021, with the fallout from the Soleimani assassination- Trump called up Iran and privately begged them to let him fire off a few missiles on an empty patch of Iranian soil, just to show the world who's in charge.
"一放就乱，一管就死" what a great saying!
More than a year ago China came up with a peace-plan, contents of which don't seem to have been published by the usual suspects outside China, while the comments to the widely unknown contents of the plan derided it as useless.
Anyway, it was not relevant, as neither side in the war was ready and willing to talk.
I became curious, when Russian FM Lavrov recently seemed to have signalled readiness for talks on base of this plan. I searched and found the contents of the plan on the Xinhua website. By and large the contents are diplomatic in nature, establishing principles which are uncontroversial to anyone on the planet, while either party in the war could read into it whatever they want to see written there. I don't think, that an EU Commission peace plan should have looked substantially differently.
On the assumption, that Lavrov may actually have been serious, a very long shot, there should be a chance for immediate ceasefire and talks, since the more recalcitrant partner shows interest. And thereby it does not matter, who the mediator is, as long as the killing stops. Both, Ukraine and Russia need and want China's favour, so why not let China be the mediator?
Ignoring such an opportunity and increasing tensions instead would be rather controversial.