Politburo, Moody's, PDD/Temu, stimulus, Kissinger - Week in Review #6

Happy Friday everyone. Here is another issue of Week in Review for your weekend reading, where I personally review the events of the past week about China that I think have lasting impact beyond news cycles. For why I write, please check here. For who I am and what new things I can bring on the table, please check here.

The Profound

#1 Politburo on "Expectation Management"

The Politburo readout on Friday had some novel wording. It mentions, I believe for the first time ever, “(the need) to improve social expectation改善社会预期” and “strengthen publicity work and media guidance in economy加强经济宣传和舆论引导”.

As we at Baiguan mention over and over again, a lack of PR talents and skills are often at the core of many problems in social and economic mismanagement in China. I believe part of this is because historically, Chinese people tend to assign more value to tangible things (factories, machineries, roads, bridges) as opposed to intangible assets (trust, brand, governance). As an example, just ask any SaaS entrepreneur/investor in China about how hard it is to sell software in China, and how much easier to sell if that software is somehow combined with the hardware.

But, we have to recognize that, fundamentally, economy is all about the intangible. It’s all about trust.

I was in Hong Kong this week and had a talk with a head researcher at a big investment bank. I asked her what she believed was one thing that got to change in order to get international investors to believe in China story again. I was expecting to hear about “mitigation of Taiwan risk” or “real estate stabilizing”. Instead, she talked about the problem of trust. One case in point was the abrupt wipe-out of after-school tutoring industry, which made investors “really angry”. Although the policy rationale may be sound, the execution work was just so terrible.

I can feel for her, and I genuinely believe people who were in charge of the clumsy crackdown had no idea how serious this was for destroying trust. In some sense, it’s the same with what I referred to last week when I commented on what is the biggest factor holding back business confidence in China now: a sense of security, free from arbitrary policies and actions.

Still, it is good that the highest level of power finally seems to recognize at least part of this problem. But like everything in China, execution will take a long time and a lot of ups and downs. Exactly how to manage this “social expectation” is subject to the level of skills of actual people on the job, and we are still bound to have a lot of PR missteps in practice. But hey, at least the problem is being recognized, and there is one more reason to cheer for.

The Interesting

#2 Moody's revised outlook for China

Talking about expectation management, of course, Moody's negative outlook for China is the talk of the town for this week.

But I am well aware that large financial institutions tend to only play a catchup role to market sentiments, instead of actually making meaningful, accurate predictions. (Nobody can.) I think it is meaningful to look at these institutions' views as they reflect the prevailing views of the market. But, to think they are better armed to make better predictions for the future than anyone else, is misguided. To the contrary, they tend to mark the inflection point before trends shift gear to the opposite direction.

An extreme but classic example is JP Morgan's last year report that China stocks were “uninvestable”, which was essentially also playing catch-up to a string of market declines since early 2021. That day also marked the starting point of a mini-rally. JP Morgan later said the “uninvestable” comment was an editorial error, likely due to pressures from its investment banking arm. Conflict of interests is also why research work from large institutions can’t be really trusted at face value.

#3 A regular stream of supportive policies and messagings

Chinese government is not, and will not launch a massive, 2009-style stimulus program. Instead, it appears the strategy now is a regular stream of small supportive policies, reform programs and messagings. I talked about some of these actions 2 weeks ago. Now there are more for this week. These include:

#3.1 Xi's 5-day visit to Shanghai and subsequent policy announcements

To have a gist of where Xi visited in Shanghai and what it means, check out this nice digest by

Ginger River Review

. The key words are: Yangtze River Delta integration, reform and opening-up, sci-tech and affordable housing.

In a move that may be related to this visit, on Thursday, the State Council announced a 80-point plan to promote high-level institutional opening-up of Shanghai FTZ. According to SHINE:

A total of 80 measures, covering seven areas, were outlined in the plan including initiatives to facilitate trade in goods and services, promote digital trade and enhance intellectual property rights (IPR) protection, among others.

To accelerate the opening up of the service trade in the FTZ, the plan called for efforts to further open up key sectors such as finance and telecommunications, make cross-border investment and financing easier, support multinationals to set up capital management centers in China, and improve the service quality of the telecommunications sector.

It is unusual for Xi to visit a city for full 5 days. I am betting a lot more are being discussed than what has been announced, and that more policy announcements are up and coming.

#3.2 Financial regulators' interviews and articles

China’s head of central bank, head regulator of securities, head regulator of banking sector collectively communicated to the public what essentially were their to-do lists after the Central Financial Work Conference (CFWC).

I think the most notable comments came from Mr. Pan Gongsheng, head of central bank, who effectively gave assurances that the central bank would act as support of last resort for systemic risks related to real estate and local government debt:

The People's Bank of China will, together with relevant departments, guide financial institutions to prudently resolve the risks of local government debt in accordance with the principles of legal compliance and equal consultation. We will strictly control the increase in debt, improve long-term mechanisms for preventing debt risks, and provide emergency liquidity support to regions with relatively heavy debt burdens when necessary.

Strategically, we firmly adhere to the positioning that houses are for living in, not for speculation. Tactically, we aim to weaken the risk level of the real estate market, prevent the spillover of risks from the real estate market, treat all types of real estate enterprises equally, and meet their reasonable financing needs. [Robert: very interesting dichotomy between strategy vs tactics] We strive to maintain the stable operation of the real estate market. We provide medium- to long-term low-cost funding support for the construction of affordable housing and other major projects [Robert: affordable housing, again], improve the financial policy system for housing leasing, and accelerate the development of a new model for real estate development.

#3.3 New investment possibilities for Social Security Fund (SSF)

In another effort to boost capital markets, Ministry of Finance announced a public consultation for revising rules on what the trillion-RMB SSF can invest in. This time it explicitly mentions exchange-trade funds (ETF), REITs and venture capital.

The Underreported

#4 The real significance of PDD's 2023Q3 financial results

Last week, Pinduoduo announced market-beating results for 2023Q3. Stock surged subsequently to the point where for the first time in history, Pinduoduo’s market capitalization surpassed that of Alibaba. Even Jack Ma resurfaced to comment on this event in internal chat groups.

I think this part of the story is only symbolic, but the real story is about Temu, Pinduoduo’s international business arm. Pinduoduo’s strong results and clean earnings beat clearly suggest one thing: that Temu is not only fast growing, running at cost level not as high as the market assumed.

I don’t think the market fully grasps this point yet, and how scary it could be for incumbent players around the world. As we talked a few weeks ago with Bob Chen, what Temu is doing is essentially exporting deflation from China to the inflationary world. The fact that it can capitalize on this historic transition well cannot be under-estimated.

And I think it is understandable that the market has not fully realized this point. Because, after all, a key aspect of PDD’s company style is its ultra-secrecy culture. The earning announcements have very few details. Their management is famous for sharing next to nothing during earnings call. They are also very effective at anti-scraping technologies to guard against prying eyes of outside onlookers (including us, BigOne Lab).

The reason behind this culture of secrecy is simple. They are always the David in a market where a Goliath already dominated. Before, their Goliath was Alibaba. Now the Goliath is Amazon. So it is a deliberate choice that real results of Temu have been always obscured from disclosure in their earnings. (You can probably only have a glimpse through indirect data, such as hiring data)

So, Mr. Bezos and Amazon shareholders, time to ask this big question: Are you ready for this David?

Honourable mentions:

#5 Death of Henry Kissinger

Henry Kissinger is such a man whose passing-away deserves a spot on a newsletter of my style.

I know Mr. Kissinger was a controversial figure in the U.S. But I would say this thing: The world needs adventurers, dreamers and people who have the courage to both think and act. It took certain kind of courage for a man to take a politically risky gambit to meet a foe, alone, under a president who was supposedly “not a crook”. A lot of things could go wrong under those circumstances. It also took certain kind of courage for a 100-year-old man to travel across Pacific Ocean, in another politically risky gesture, only a few months before his death.

I will remember him for these instances of courage.

Now both of these two guys have rested in peace.