Musk, bitcoin ETFs, 3rd Plenum, "patient capital", market rallies- Week in Review #17

Hi folks, the past week has been an important one. Despite the fact that there have been only 2 work days this week in China, I have more to say than what I normally would for a month. In this note, apart from interesting topics such as Musk and bitcoin, I will cover the significance of the coming 3rd Plenum, my previously unpublicized take on China’s abolished presidential term limit, and why I had been always bullish about China’s stock markets even during the worst of the time.

If you know me well, make sure to read this to the end.

(If you are new, for who I am and why I write, please check here. For what unique things I can bring to the table, check here.)

#1 Musk in China

Elon Musk paid a highly televised visit to China this week. Who could have thought, that my rebuttal to Noah Smith that China is NOT killing Tesla, as well as our year-long refuting of the fearmongering over the “China is in an information black-box” narrative, have been proven right with a single event?

Immediately after meeting Premier Li Qiang, it was announced that Tesla passed a key data security process that paved the way for its vehicles to be driving in sensitive areas. (I am a proud Tesla owner myself. In my 5 years of driving a Tesla in China, my car was denied entry to one of the so-called sensitive areas for exactly one time. It’s a nuisance, but not as exaggerated as many people have claimed.)

Hopes are also high that Tesla would be allowed to introduce their FSD functions as well as to transmit data overseas for AI training.

I can’t summarize the significance of this visit better than

Bill Bishop

in one of his latest newsletters:

This is a smart move by PRC policymakers. Instead of punishing Tesla for the TikTok bill they decided to embrace Tesla and Musk harder, use Tesla as an example that foreign firms can work in the upgraded PRC data security regulatory regime, while showing they are “open for business” and binding one of the world’s richest men even more tightly to the PRC. For Musk it is a great way to change the narrative around Tesla that has hit the stock recently, even if Tesla FSD may not be that competitive in China with the other leading PRC EV makers and they still do not have any updated models to recapture the buzz they once had in the PRC market.

There is also certain mirroring between TikTok in the US and Tesla in China. Ostensibly, the TikTok drama was at least partially about data security. If Tesla has a go-ahead for FSD and data transfers in China, there is one less excuse for the American side to ban TikTok.

By now, I have also noticed a special personal bond being formed between Musk and Li Qiang. It was the same Li Qiang, acting as the Party Secretary of Shanghai at the time, who was responsible for getting Musk the China deal he wanted back in 2018, not only avoiding a corporate death spiral but also propelling Tesla to become the global juggernaut it is today. Now, at another time of trouble for Tesla, the duo met again, in Beijing this time. It was a highly symbolic moment.

Left, Musk and Li the Shanghai boss, and Right, Musk and Li the Premier

#2 Date announced for the 3rd Plenum

The Politburo finally announced that the 3rd Plenum of the 20th Party Central Committee (the "20.3 Plenum") which was supposed to be held late last year per tradition, was to be held this July.

The “3rd Plenums”, historically, tend to be the most important plenums, as they tend to be about big reforms. It was the 11.3 Plenum of 1978, hosted by Deng Xiaoping, that launched the Reform and Opening-up Era. It was during the 18.3 Plenum of 2013, Xi’s very first “3rd Plenum” as the General Secretary, that an ambitious and sweeping reform program was launched.

A few months ago, at the 10-year anniversary of 18.3 Plenum, I commented that although its ambitious reform program was commonly perceived to be a major letdown, most people fail to appreciate that ~40% of that program has been achieved, ranging from PLA reform to abolishing the one-child policy. I do think a 40% achievement rate is fine. It’s not spectacular, but it’s fine. Reforming any country is hard. Reforming a country with the size of China is even harder.

Possibly because of this perception of “weak” results of the 18.3 Plenum, this time, even though the Politburo readout specifically emphasized that once again “reform” would be at the center of discussion in the 20.3 Plenum, this part was received by outside observers with silence. Most of the attention has been paid to real estate market policies and whether further stimulus is in store.

As far as I know, only

Zichen Wang

sufficiently highlighted this part. (Zichen talked about the possibility that reform was big on Xi’s agenda as early as March.) Few people really noticed it at the time, and still few people noticed it even now. After all, we live in a time when many people, such as Noah Smith, easily write off Xi as a dogmatic and incapable ideologue.

Given this chasm of understanding between what people have in mind vs what may actually be the case, I think it’s very likely that the actual significance of this Plenum would be a big surprise to many people. Another sweeping reform program may well be why this Plenum had been delayed for so long, possibly in preparation for something quite complicated. After all, Xi “campaigned” to break the presidential term limits on a policy platform, at least implicitly, that he would deliver on bringing China’s economy and society to the next level, which would only be possible through deep and far-reaching reforms.

By the way, abolishing the term limit has always been a risky and controversial gambit. But I never believe it’s just power for power’s sake. I think that anyone who was born and raised in modern China and later made it to the top of China’s unique power structure should be beyond this type of pettiness.

There has to be an actual policy program behind it. There has to be something to be achieved for the 3rd, even 4th term. And for a move as controversial as abolishing the term limit, he better have some really good program. This is ultimately my line of reasoning for expecting something big from this year’s Plenum.

Besides reform, there are some other interesting points about this readout. On real estate market and local government debt, the readout says (according to a translation by

Ginger River Review

):

In light of the new changes in the real estate market supply and demand and the new expectations of the people for high-quality housing, policies and measures for digesting existing housing stocks and optimizing new housing should be coordinated and studied urgently, a new model of real estate development should be constructed promptly, and high-quality development of real estate should be promoted. Thorough implementation of local government debt risk resolution plans should be carried out to ensure that high-risk provinces and cities and counties genuinely reduce debt and stabilize development.

On venture capital:

Active development of venture capital and the expansion of patient capital should be promoted.

The choice of the word “patient capital耐心资本” is quite noteworthy. You may remember that I recently wrote a very popular article in China’s blogosphere, pointing out that China’s venture capital industry, as we previously knew, was dead and urgently needed a rebuild. The core problem is indeed the lack of “patient capital”. At the time this term just came off naturally, and I didn’t remember if it was mentioned anywhere before. It was an interesting feeling that the same idea was echoed by the highest level of power in China, however far away that level was from average people like me. (I later translated that big article at Baiguan. You may read it here.)

#3 Bitcoin ETFs launched in Hong Kong

I was in Hong Kong this Monday and Tuesday when a big event happened in that same city. On April 30, Hong Kong launched six spot bitcoin and ether exchange traded funds — becoming the first in Asia to offer retail investors the ability to trade the cryptocurrencies at spot prices. According to CNBC:

Hong Kong is one of the first places in the world to approve an ether ETF. In January, the U.S. Securities and Exchange Commission approved changes to allow the creation of bitcoin ETFs in the U.S., but has yet to approve an ether ETF.

In my “Hong Kong is NOT over” series, I explained the unique position of Hong Kong as this “enclave” for “innovation without consequences”, firewalled from the rest of China. Launching crypto ETFs - while crypto is 100% banned in mainland China - is a clear sign confirming my thesis. This is the “1C2S” formula in action again.

Adding further spice to this event is the interesting fact that all of the funds that are licensed to launch these ETFs - China Asset Management, Bosera Asset Management, and Harvest Global Investments - are all state-owned mainland Chinese institutions.

One should pause and think about the geopolitical dimensions of this event.

Those crypto ETFs are too small to play a significant role in anything. But it’s hard not to draw dots here with the persistent fears about the US threat to cut off China’s financial system from the global grid, which was rumored to be in discussion as early as Blinken’s recent China visit. To fight against such a nightmarish tail-end risk, there have been many disclosed and undisclosed measures on the China side to lessen our dependence on the dollar-based global financial system. Are those crypto ETFs part of the same “weaning” strategy? I do not know for sure. What I am certain of is, that an officially licensed channel to invest in cryptos in the regulatorily “firewalled” city of Hong Kong would make such an endeavor, if any, more feasible.

#4 Public debt monetization in anticipation again

On April 23rd, a leading theoretical research group in China’s Ministry of Finance published an article in People’s Daily, saying that the Ministry “supported the People’s Bank of China to buy and sell government bonds” - a.k.a “debt monetization”, often synonymous with the idea of “quantitative easing”. You may remember that just a few weeks ago, the market surged at the revelation that Xi talked about this policy tool during last year’s CFWC last year.

By now, it has been clear that the regulators have not only been given the green light on debt monetization but are actively communicating and making plans about it. If this policy tool is indeed implemented, it would mark a historic pivot into something that the Western central banks have long used, but that China has long viewed as irresponsible. But even if this pivot happens, I believe the magnitude of it will be far more moderate than in the West.

#5 Hong Kong stock market rallied

All those market-friendly policy moves in the past few months have added up, and the capital market is finally taking the hint. After a strong week last week, this week has seen the Hang Seng index outperforming most of the global stock indices again. All of this has happened despite the fact that the North-South Stock Connect was down on Thursday and Friday due to the mainland market’s Labor Day Holiday, showing that it is foreign investors who are behind the current rally.

Wall Street is quick to change course. Last week, UBS upgraded China and Hong Kong stocks to overweight. On Monday, Goldman Sachs even suggested that FOMO (fear of missing out) has been formed in China. This week, UBS again published some widely circulated research notes fanning the flames.

For those of you who know me well, I have been consistently bullish about China’s capital market in the last year, even though the 2022-2023 period marked the worst period in several decades for China’s capital markets, both onshore and in Hong Kong. Last April, I claimed that KPI reform at SOEs would create a major boost for valuation. This January, I claimed that valuation was simply too cheap to go much down further because any trace of animal spirit had been squeezed out of the stock market, leaving behind only solid, cash-generating, high-yield assets at unprecedented prices. Virtually everyone who meant to leave this market already left, and there was simply nobody left to sell much. The stage was set for a major rebound. The firewood has been sufficiently dry, and all it needs is a spark to ignite the fire.

Why could I stand my ground, even though 95%+ of people I know lost faith? Let me do some recap for my reasoning here.

The reason the stock markets in China have been so bad from mid-2021 onwards is that, for 3 full years, there has been at least a quadruple storm of

• A string of ill-implementation of otherwise well-intentioned policies (education, video games), making the investment community question the overall soundness of governance in China

• A markedly heightened perceived geopolitical risk after the Ukraine War, which makes foreign investors recoil at the idea of investing in China, fearing a repeat of the painful capital loss experienced in the Russian market.

• A heavy-handed Covid policy, eventually doomed to fail, that significantly dampened the sentiments of consumers and businesses;

• The self-detonated real estate implosion that shut down a main engine for China’s growth, adding an even bigger blow to domestic sentiment.

For almost 3 decades, any one or two events similar to the above happened at any given point. But never had not only all three, but all four of those extraordinary events happened at the same time.

Yet, none of those four are permanent in nature. None of those can’t be healed by time. Covid has been over for 1.5 years now. Policy implementation problems have been recognized. The evolution from the 2021 education bloodbath to the quick cancellation of the video game regulation is a testimony to this growth. The real estate mess, still tough, would eventually be sorted out. Geopolitics would still be the hardest problem to crack, and there will be always this irrational fear about a coming Taiwan invasion, but it could be simply resolved by a no-invasion scenario by 2027. Hopes also run high that the two great powers would find a way to compete in a managed, contained environment.

At the same time, running a data company, I know fully well about the on-the-ground economic realities. Yes, the spectacular growth story of the past 2 decades was no more. But in its place, it is not economic collapse, not even economic stagnation, but moderate and even healthier growth than before. (

Amber Zhang

of my team just had an amazing article on this topic drawing from our data as well as her personal observations.)

Therefore, it is just growth at a lower rate, but growth nonetheless, while the extreme pessimism prevalent in every corner of China’s capital market just now had priced in a total breakdown. The gaping hole between reality on the ground and perception (due to 4 non-permanent events) was too large to ignore.

Despite this rally, looking around, I see most people are still skeptical about the sustainability of it. This is great for bulls, meaning there is still sufficient runway for further rallies. This is one cardinal truth about a stock rally: only if there are enough people skeptical about the sustainability of a rally, can a rally be sustainable. Skepticists today only serve the fuel to be added to the fire of tomorrow.

Honorable Mentions

#6 Extreme weather and tragedies in southern China

I was in Southern China most of this week, first in Hong Kong to meet investors, then to Guangzhou to have my first visit to the legendary Canton Fair, and then to the seaside city of Zhuhai just for the holiday.

Fortunately, I didn’t encounter much bad weather. But unfortunately for many people here, the weather had been extreme. First, there was a tornado in Guangzhou, killing 5. On Tuesday, a Cathay Pacific airplane tried several times to land in Hong Kong. The bump was so hard, that people started to scream and vomit. According to SCMP:

“There were two failed landing attempts. The first time it glided to 2,000 metres [6,561 feet], I felt like I was about to die. All the passengers on board the flight started to scream while children were crying wildly,” she said.

“Amid the bumpy and shaky ride was the resonating sound of vomiting. The whole aircraft was filled with the smell of vomit.”

In the gut-wrenching video that a passenger shot during this ordeal, I heard people screaming out of extreme fear, but I also heard people encouraging each other, fighting their own fears, by chanting “Acting Strong, Captain! 机长加油!” together. Is that what people in a group will do apart from cowering in fear when faced with the possibility of death?

And then there was this extremely deadly tragedy on the highway of Meizhou, a mountainous region of the wealthy Guangdong Province. At about 2 am on Wednesday, after heavy rainfall, a section of the highway broke down. It happened at late night, it was too late for many drivers to notice a part of the road was no more. Vehicle after vehicle was almost “gobbled up” by this huge hole in the ground, at high speed, and then quickly disappeared from view. The time was sufficiently late, the hour was sufficiently dark, and the road was sufficiently sparse, that the same deadly plunge was repeated over and over again, with the next victim clueless about the previous ones. It was a horrible way to die.

Many vehicles were consumed by fire. In the hellish landscape left behind, only piles of black chars of destroyed cars could be seen. In the end, at least 48 lives were lost, with more whose DNA to be tested.

The tragedy was so huge that both Xi and Premier Li issued some serious public statements. It’s possible that road quality issues might be involved, but we will not know until the conclusion of a full investigation.

Still, one should not easily discount the factor that extreme weather has played in this. I have no solid evidence or data to back this up, but it does seem to me that extreme weather has become more and more common in my life. Whatever debates you may have about the cause of those extreme weather, at least public opinions in China have been well-conditioned to accept that human activities lie at its root. These extreme weather events will only serve to create even more impetus for this country’s persistent push into a renewable energy era.