"Quant quake", anti-populism censorship, education regulation, CNY data, Hunan - Week in Review #12

Hi folks, I have been quite busy with work (post-holiday syndrome) so I only got to send out this week’s review on Saturday, not the typical Friday. Let’s jump into this week’s content right away. (For who I am and why I write, please check here. For what unique things I can bring to the table, check here.)

the profound

#1 Chinese New Year data

The Chinese New Year (CNY) consumer data is reasonably okay.

For travel spending, volume was up, way up, at +19% compared with pre-covid 2019 data. Although total spending also went up, spending per head declined, as much as 9.5% according to Goldman Sachs.

I think the spending per head decline is to be expected, reflecting a broader “consumption downgrade” over the last few years. What exceeds some people’s expectations is the strong volume growth, showing that even though Chinese people are getting “poorer” on average, and less confident about spending a lot of money, it doesn’t stop people from spending as far as they are able to. Many more people and families are out there, enjoying their lives.

Besides, “consumption downgrade” is also a debatable narrative. It’s almost indistinguishable from another big trend that’s taking place: reverse migration from high-spending, high-tier cities to lower tiers. Baiguan had a great post exactly on this topic, showing that people are moving away from Shanghai and Shenzhen to more low-tier cities. I also touched on this trend when I talked about “re-urbanization” last week. Over the last few days, many data points that I have seen, ranging from foot traffic data to mobile map app usage data, to real estate data, to offline catering data - all suggest reverse migration is happening.

Is a “consumption downgrade” resulting from reverse migration really a “consumption downgrade”? From whatever angle you take, I actually think it’s a positive, rather than negative trend. This is the trend that will help elevate China’s per capita GDP in inland provinces to a higher level. It’s also one of the factors that will mitigate the “Japanification” risks for China: China has vast under-developed hinterlands, while Japan is mainly Tokyo + some other towns, so there is a lack of destinations for over-capacity to flow to. That’s why I nominate this as the most profound story of last week.

The interesting

#2 “Quant Quake”

What happened? In a nutshell: the nascent Chinese quant community crowded to a single strategy over the last 2 years: betting on an overperformance of mini-cap stocks relative to the broader market, with leverage. However as the state funds (the “National Team”) came in to boost the stock market by concentrating on larger-cap stocks, this quant strategy failed. In the stampede to unwind those positions, the quants created further havoc and compromised the National Team’s efforts to boost the market, leading authorities to resort to extraordinary measures such as stopping those funds from executing sell orders.

I saw this funny analogy on WeChat by some unknown commentator, which perfectly summarizes the essence and the drama of this story:

虽然都在同一个屋子里翻垃圾，但大家没人说自己在干啥，黑暗森林吗，大概就相安无事。后来保安收拾屋子随手一开灯，大家面面相觑原来你也在这里，缘分啊，一起跑吧。保安一看这还得了，院子里还乱糟糟呢，就反手把门一锁，你们玩去吧，哥不在乎。反而踹门踹很的那个，被一棒子捶回去了，哭的梨花带雨。

Although everyone [Robert: referring to the quants] is rummaging through trash [referring to mini-cap stocks] in the same room, nobody is telling anyone else what they are doing. It’s a dark forest, and nobody knows each other exists and is at peace with each other. Later, the guard came into the room and turned on the light. Everyone looked around and suddenly found each other. “Oh, you are here as well! What a coincidence! Let’s get the f**k out!” The guard is pissed. The room is in a mess and you guys wanna get out? No way! He locked the door. The one that banged hardest on the door was kicked to the ground, crying like hell.

I understand such a dramatic, heavy-handed approach toward the market can be easily discounted as over-regulation. And there is no lack of debates within China. This widely shared article on WeChat (in Chinese) detailed the trauma of a quant trader on his inability to execute sell orders. Some people are openly questioning whether such a brute crackdown on quantitative strategies would backfire and further dampen market confidence.

However, I do think it’s more complicated than that.

For one thing, the “quant quake” has shown that compared with quants in the West, the nascent Chinese quant community is a very young and homogenous space, with almost everyone crowding into a single strategy. Is this really beneficial for the market mechanism? Don’t the authorities have a moral obligation to mitigate the systemic risk posed by this crowded strategy? I doubt it.

Also, the very idea of a “quant” is that you are relying on machines and algorithms to make trading decisions. Machines have no feelings. During such an extraordinary time, when not only tens of millions of households’ wealth but the economic sentiment of the entire nation is at stake, isn’t it justifiable for human pilots to take over once in a while?

Interestingly, the WeChat article above has still survived censorship to this day, after almost 2 full weeks. This is quite telling. It shows that this event has not yet been politicized and that it’s not really a broader “War on Quant”, but more like a contingent strategy to deal with problems of the day. In truth, a temporary ban on selling stocks is much less heavy-handed than criminal penalties and even making arrests, which was what people feared when the state security apparatus sounded harsh on financial security back in November. It’s good that authorities are not unnecessarily dialing up the fear index here.

the under-reported

#3 Anti-populism censorship

Talking about censorship, I have observed a new form of censorship lately. I will call it “anti-populism censorship”. Let me give you two recent examples.

There is a KOL named “Operation Warhorse战马行动”. His specialty is “patriotic” video stunts. In the video that ruined him in the end, he went to a shopping mall in Nanjing (my birthplace, of the “Nanjing Massacre” fame), found a red circle in its New Year decoration, and thus blamed the shopping mall for worshipping Japanese imperialism. Yep, you hear me correctly. It’s as far-fetched as it sounds. This created a social media storm, and the shopping mall quickly came out, apologized, and pulled down the decorations.

But any sane person knows this is just ridiculous! This smacks of cultural revolution-era tactics and can send down a big chill for businesses, just at a time when business confidence is in a huge deficit. What is surprising is that this time, instead of sitting back, state media stood on the side of businesses and jumped in to criticize Operation Warhorse as a “fake patriot”. His social media accounts were also banned.

The “red sun” in Operation Warhorse’ video vs reality. Do you think this is worshipping of Japanese sun?

This is quite remarkable. Historically, given the strong patriotism in China, it is always politically risky to criticize apparently patriotic moves, even if they are “fake”.

The other example is about this guy called “Ironhead Brother铁头哥”, another KOL that I have followed for some time. Ironhead Brother specializes in Dajia打假, or “cracking down on fraudulent merchants”. A typical short video is his loud expose of fraudulent practices at the seafood market in Hainan. You may have a sense of his style through the video below:

Perhaps his most famous antic, with even international ramifications, is his rant at one learning center of New Oriental Education (EDU) last year. He claimed that EDU was “illegally” organizing high school courses and made a huge scene about it. In response, EDU’s stock price tanked and EDU took offline almost all of its high school programs. (I knew this for a fact because my firm, BigOne Lab, has been tracking enrolment numbers of EDU and its competitor TAL for a while now. We saw a data blackout on high school programs immediately after the incident.)

To many people, especially the vast number of “traditionalists” in my “Duo-China” Model, Ironhead Brother is a hero. To me though, he is a cleverly packaged con-man, preying on small businesses and populist sentiment. But populism sells, and in a year he amassed over 5 million followers and it was rapidly growing.

Is this type of vigilante action justifiable? Isn’t it right to expose the wrongdoings of businesses every now and then? I think some of his work, including the one in that seafood market, is quite justifiable. But there is a fine line between whether you really want to make the world a better place, and just preying on others for a living, which I think is exactly what Ironhead Brother is doing.

I commented before that doing business in China is like driving on the highway: if you look closely enough you will get a ticket. Sometimes, the rules are so draconian, that almost every business is non-compliant in some area. Most of the time though, rules are so vague, that a huge amount of human discretion can lead it to go either way.

This is especially true for that EDU example. Was it really “illegal” to conduct high school courses, which is outside of the K9 compulsory education period? In fact, the “2021 double-reduction massacre” was very vague about this issue, to the point that it could be understood both ways (until now, which I will explain in Section #4 below). Shutting down other people’s businesses because of “infringement” of this kind is, to be honest, not the right thing to do at all. It is just preying on the weak for whatever personal motives.

铁头哥 made a scene at a branch of EDU in 2023

If Ironhead Brother was allowed to make a bigger noise, it could become a powerful force to scare away more businesses and investors, at a time when China was in dire need of strong business confidence. So I bet government censorship wanted to do something about it for quite some time.

But censorship is not as easy as you imagine. If not treated well, it could trigger stronger backlash too. Censorship is especially tricky for populist content. It is easy to censor lofty but destabilizing ideas of the high intelligentsia, but how do you censor content tailored to the taste of 90% of the masses, that on the surface really has this genuine, Robinhood feel to it? They have to wait for an opportunity.

And that opportunity just presented itself some days ago. In a livestream, an over-confident Ironhead Brother openly declared that he just slept with some prostitutes last night. Prostitution is illegal in China. Some of his fans complained. And in an instant, all of his major social media accounts were deleted in concert, as if someone had been waiting in the dark for this to happen. Later, it was revealed by some media outlets that Ironhead Brother once served a few years of jail time for running casinos and “restricting freedom of movement of other people”. He just got out of prison not long ago. This CON-man is a former “CONvict” after all.

Is it over? Not at all. Since his main accounts were deleted, many new accounts, supported by his fans, have popped up again and produced a wave of viral videos. It really shows that censorship is not as easy as you imagine even in China’s context, especially when it comes to content that the “traditionalists” love to watch.

At the end of Part 2 of my “China Schizophrenia” series, I asked you for at least 100 votes to tell me whether you would like me to commit to Part 3, in which I will talk about how my Duo-China model can explain things like censorship. I got exactly 100 votes. Thank you!

While now I am committed to Part 3, it may take a long time for me to think it through and flesh it out. Meanwhile, consider this section as the prequel to Part 3. My main thesis is here: censorship in China can’t be understood as a system of control along any single ideological vector, but as an expedient tool that sets out to realize the goals and the priorities of the time.

After all, the Party is this “grand balancer” in my “Duo-China model”. Anyone, liberalist or traditionalist, who jeopardizes that balance is subject to silencing. And, because right now, the main imbalance is the lack of business confidence, to reset the balance, the system looks to ultra-populism as its main target.

#4 New after-school education regulation

Talking about the education industry, right before CNY, the Ministry of Education (MOE) announced a draft regulation piece on managing after-school services (AST). It’s widely interpreted as a positive policy move, clarifying some vague points since the 2021 “double-reduction” policy. For instance, MOE specifies for the first time that for-profit AST can be provided to K10-K12 high schoolers (damn you, Ironhead Brother!) It also specifies that non-curriculum AST is a “healthy supplement” to curriculum education at school.

The new policy clarification, broadly in line with the overall pro-business policy direction, pushed stock prices of industry leaders EDU and TAL to new highs.

the honorable mention

#5 Hunan

Talking about boosting business confidence, Hunan Province made some headlines immediately after CNY for hosting a “big discussion on emancipating mind”, using the same phrasing as the historically crucial discussions in the post-Mao period. While I agree with

Bill Bishop

's assessment that this event is not as significant as the phrase may suggest, the fact that Hunan dares to use this word at all is quite telling for the character of this province.

You may notice from my last post that I have been a big fan of Hunan, a place with the right amount of daredevil spirit in it. If you look at history, nobody shaped modern China as much as the Hunanese. It was Hunanese Zeng Guofan’s self-funded army that helped the flagging Qing court to put down the Taiping Rebellion. It was Mao Zedong, a Hunanese through and through, working with a whole bunch of other Hunanese, who founded the CCP and PRC. When I visited Whampoa Military Academy last week, I was also surprised to find that Hunanese made up a third of all graduates!

This is a remarkable place that shouldn’t evade your attention. I will write more about it later.

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