The real winner of Taiwan elections, Hu Jintao’s son, unilateral visa-free, youth unemployment data resumed, high-dividend stocks and foreign ETF craze - Week in Review #9

Hi everyone! I caught an unspecified flu last week but have recovered now. This flu season in China is very tough, as the whole population has been protected too well from all sorts of pathogens for too many years, our immune systems need a “refresh”. That’s why it has been especially hard for smaller kids in the last few months because their bodies are a “clean slate”. Just imagine for a regular 5-year-old, they had worn a mask for the majority of their lifetime so far. Now they are back in the real world. None of us can escape the law of nature.

So today, I am resuming my regular weekly review of events that I think will have an impact beyond news cycles. (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 The real winner, and the real surprise from Taiwan elections: the rise of Ko Wen-je and TPP

Taiwan election concluded. Contrary to what most of the Western media centered on, which is that the Beijing-phobic DPP won an unprecedented third term (which is nothing surprising), I think the real significance - and the real surprise - is how the third-largest party, Ko Wen-je’s TPP has become so successful.

To be clear, TPP was only founded 4 years ago in 2019. And it is not a party split from KMT or DPP, but rather a spontaneous phenomenon of its own. With this context, it’s simply remarkable that TPP won 26.5% of the presidential votes. But even more significantly, it captured 8 seats in a hung parliament, making TPP the veto power that both DPP and KMT will have to placate in the coming years.

Another interesting fact about TPP is its extraordinary appeal to the young Taiwanese people. Contrary to what outsiders may believe, it’s arguable that TPP may be even more popular than the independence-minded DPP for Taiwan’s youth.

Who holds the youth, holds the future.

Ko Wen-je and TPP, real winner of the Taiwan elections

A phenomenon this dramatic naturally begs the following question: Who is TPP? Who is Ko? Is he pro-independence or pro-unification or neither? What’s the significance of the rise of TPP for the future of Taiwan?

My conclusion first: what TPP represents is a new, apolitical force. As

Mu Chen

of our Baiguan team explains:

Looking into Taiwan’s elections. I have spent the past few months following Taiwan's elections, after accidentally stumbling upon a video on Ko Wen-je, a candidate for Taiwan's top position.

I began writing to provide fact-based information and explanations to bridge the understanding gap. To many, I might not be in a good position to opine on Taiwan. But I want to point out that, as much as the world cares more about Taiwan this year, unfortunately, most of the global media only sees it as a piece in the bigger geopolitical sensational reporting. Taiwan’s election is more than that, but few of these issues were reported. This situation is similar to what I have seen in reporting on other China issues in recent years. Bloomberg just published a piece called "A War Over Taiwan Is a $10 Trillion Risk". Case in point, Taiwan's Election is not just about that. I thought: "Is this all global media care about Taiwan? What about other issues? " While cross-strait relationship occupies the headlines of global media reports on the elections, local independent media are talking about other issues.

Amongst the voters, the influence of "independent-unification" issues has subsided.

As a starter, many Taiwanese are unhappy with DPP's 8 years of full control of the legislative body and executive body in Taiwan. Some survey said over 60% of Taiwanese want DPP to step down from power. There were many key issues about Taiwan’s subpar COVID vaccination development, housing problems, aging population, trade issues, new energy “corruption”, delay in key legislation, income inequality, high inflation, and over-reliance on semiconductor industry etc. The list goes on.

Previous election cycles were mainly ideologically driven. Ideology mainly surrounded unification/independence. But the emergence of these other issues is weakening the dominance of ideological rhetoric. It also leads to the rise of TPP and Ko Wen-je, a more pragmatic party that focuses on practical issues. This phenomenon also trigger some growth in more practical political cultures in Taiwan, at least during this election. This trend is irreversible; TPP is going to have a bigger place in Taiwan's politics regardless of who takes the top seat. This pragmatic culture would continue to grow. The implication on cross-strait relationship? A more pragmatic approach means collaboration and peace, while facing the differences and setting a ceiling on the impact of these differences. There are ample opportunities for cross-strait collaborations, which serve as the foundation for further discussions. These collaboration require pragmatic teams from all sides to take place. I am hopeful.

Another untalked-about point about this election is that, even though Lai has won, it is not possible for him to “declare independence” given this fractured political landscape.

This has to go back to the obscure question of what “declare independence” actually means. It does not mean Lai will simply stand on some stage and just declare independence, then independence is declared. He actually already did it, numerous times. But there is no war happening. So clearly just declaring independence does not really mean “declare independence” in this context.

One real thing that will lead to “declaring independence” is for Taiwan, or the Republic of China, to fundamentally revise its constitution, the Constitution of the Republic of China (link to official government website), which as of now still declares jurisdiction over a vast territory including Mongolia, Tibet, and Xinjiang.

[Yes, you hear me right, per Taiwan’s constitution, on paper, all of Mongolia (the country), Tannu Tuva (today’s Tuva Republic of Russia), Tibet and Xinjiang all currently belong - to Taiwan. Welcome to the rabbit hole of post-war Chinese politics, a political minefield you should think twice before getting yourselves into]

Certainly, to declare independence, Taiwan will need to go through a constitutional amendment to change its actual name from the Republic of China to Taiwan and give up all the territories originally claimed by the Republic of China. But to do that, Taiwan will need not only 3/4 of the Legislative Yuan (the parliament) but needs 1/2 of all eligible voters - all eligible ones, not just all voting voters - to say yes.

This is a super difficult high bar. For instance, back in 2022, there was an attempt to amend the constitution to do no more than lowering the voting age from 21 to 18. This proposal did successfully pass the Legislative Yuan, and when it came to the referendum, ~53% of participating voters actually voted yes. But the vote still failed, because that 53% only represented ~5.6 million voters, 4 million short of the votes that were required to go over the “>50% eligible voters” threshold.

In light of all these, it would simply be impossible for Lai to manage to push through a constitutional amendment this big. Remember, despite his winning the presidential election, he only managed to get around 28% of all eligible votes. The biggest voting block is actually the “non-voting voters”, the people who don’t give a damn, and neither the KMT nor TPP supporters will support such an amendment.

Conclusion? Expect peace and stability for the years ahead. This is truly the best electoral outcome China can realistically hope for.

the interesting

#2 Visa-free status for Switzerland and Ireland and its real significance

During Premier Li Qiang’s visit to Europe, he announced that China was going to grant unilateral visa-free treatment for them, on top of the 6 six countries that China previously granted to.

I think an under-discussed significance of this unilateral policy gesture is that, in a way, China is silently and unilaterally enforcing her obligations under the Comprehensive Investment Agreement (CAI) that has been left unsigned between China and the EU due to political obstacles over the last 2 years. Ease of visa requirements is part of the CAI. (This also explains why, the UK, which should be considered in the same breath as France and Germany, has not been granted such status yet since the UK is not part of the CAI deal.)

Expect to see more of these unilateral goodwill gestures coming from China to attract more business and investments from the outside world.

(Very interestingly: Professor Zheng Yongnian, a highly sought-after top scholar who has long advocated for these “unilateral measures”, recently also argued for unilateral opening-up to Taiwan as well. Should we expect this to happen?)

#3 Youth unemployment data resumed

I applaud the National Bureau of Statistics’ decision to re-announce youth unemployment data in an improved format.

I like

Bill Bishop

’s comment, but I don’t exactly agree with him:

The NBS folks are smart; why did it take so many months to come up with this new method?

Here is the thing though: they are not that smart.

I was just talking about it this week in a closed-door meeting with a delegation of foreign diplomats, organized by the CCG: the decision to stop publishing youth unemployment data last year is not a sign of the “China information black box theory” that ill-advised people like Wei LingLing have advocated, but rather a sign of incompetence at China’s bureaucracy, a topic I revisit over and over again.

As

Mu Chen

and I talked about this in a podcast episode at Baiguan:

So … in the Bureau of Statistics. They are really good at statistics, as well as maneuvering through the promotion system or the political system. To get promoted all the way to the top. But PR is not, at least for now, the biggest training that they need the requirement for them to get to the top.

and that,

if the statistics bureaus, they can be more transparent with their methodologies, showing more details of their data, the underlying reasonings, the underlying data from, you know, to explain, wow, explain better the rationale between changes in data. It would be so much better than us here sitting here guessing about, you know, what's the real situation out there. 

But the good thing is, however slow it is, and however inefficient at adaptation this gigantic bureaucracy is, these guys listen to complaints, and they are improving. And we should not confuse sheer stupidity and hopelessness with incompetence.

Similar “improvements” are also seen elsewhere. For the “court paper disclosure” issue I commented about, there are also steadfast proclamations from the People’s Supreme Court to ensure the transparency and quality of court paper disclosures.

Now, everyone is waiting for the final decision from the online game regulator, the NPPA, on exactly what modifications there will be made to the controversial video game regulation. Hopes are high that significant modifications will be made. You may refer to my detailed breakdown of that saga.

#4 Stock markets in free fall despite okay economic data

The capital markets, both Hong Kong and onshore markets are in a free fall this week. Hang Seng index is trading below a 30-year long-term trend and there is no stop in sight. People are even calling for direct equity buying from the Hong Kong Government.

Many commentators are attributing this market fall to the “weak” data coming out of NBS.

I disagree.

The data is okay. 5.2% GDP growth is okay. I particularly like this rundown of consumption data by

David Fishman

of

Crossing the River by Feeling the Stones

. This shows that consumption is healthy, which is also independently supported by our own WeChat and Alipay payment panel data. Yes, the population data disappoints, but it’s nothing surprising. Yes, real estate data is bad, but it’s not surprising either.

We should also look at the bright side. No.1, at least the data are being released. (In fact more data has been released, such as the revised youth unemployment.) No. 2, it is quite clear from words and deeds that the Chinese government is firm on the pro-growth and pro-opening trajectory now. This should be reassuring.

So what has happened with the sentiment? I am not so sure but I do think Donald Trump has some kernel of truth here: his very strong caucus win in Iowa is scaring off some of the China investors. A Trump-Lai pairing suddenly became real. It is not unimaginable that beyond tougher China tariffs, Trump will keep playing the Taiwan card when he comes into office - although for China, Taiwan is never a card, which will make it exceedingly difficult for China. This is also maybe why the Hong Kong market fell much more heavily than the Chinese domestic A-share market since the Hong Kong market is where the US dollar funds dominate.

#5 Money piles into high-dividend stocks and craze in foreign ETFs

The sagging capital market manifests itself in two unexpected corners of the market as well.

On the one hand, there has been an irrational craze over “foreign ETFs” in China. This means that ETFs are allowed to invest in overseas markets, but are themselves listed in China’s domestic market so China’s domestic investors can invest. In one Japanese ETF, Chinese investors want to invest so much that it has been traded at ~10% premium over the ETF’s net asset value. This means that someone is knowingly paying 1.1 dollars to buy something that they know for sure is only worth 1 dollar. This seemingly unreasonable choice reflects the willingness of China's domestic investors to diversify away from the sagging local markets. You could imagine that if not for China’s stringent capital control rules, how many more assets would be looking overseas.

Another interesting phenomenon is Chinese investors’ new-found craze for high-dividend stocks. The “high-divs” are one of the few bright spots in the stock markets. Just when China markets are hitting new lows, high-yield names such as China Shenhua (China’s largest coal producer with a whopping dividend yield of 10%) are hitting multi-year highs. The fundamental logic here is the same with chasing foreign ETFs: because other assets are doing so badly, investors are looking for viable alternatives. In this case, if holding a stock can automatically give you a 10% return in cash every year, even if those names tend to operate in unsexy economic backwaters like coal and oil, why not?

However, there is a key difference between these two types of craze: the new-found interest in boring, high-yield names is also a sign of a market that’s bottoming out.

The capital market has many ways to value a stock, ranging from the most conservative, all the way to the most fanciful. In the good old days of Benjamin Graham, it was fashionable to make investment choices with a price-to-book ratio, and hunting stocks trading below their actual asset value. But as money becomes more bountiful, valuations become higher, investors and banks alike start to develop valuation methods that include more of the “dream”, such as price-to-earnings, discounted cash flows, and even price-to-sales.

But rarely does a market price a stock based on dividend yield, which is at the most conservative portion of the spectrum. To illustrate my point: Microsoft is trading at a dividend yield of ~0.8% at the moment. 10-year Treasury yield now is ~4%. If we only price a stock based on dividends, Microsoft’s stock price would need to at least crash down by 80% in order to make its yield reach the same level as the 10-year Treasury.

This is where we are in the China market right now.

Prices have gone so low, to the point that yields at many stocks have been super attractive. Yes, many foreign investors have fled. Yes, there are still many so-called China risks around. But irrespective of all these, many of the China stocks have become hard, solid assets. They are literally back to the original meaning of an “asset”: something that can return more value/cash in the future.

So from this point on, it is really hard to imagine how far down it can go even further.

the under-reported

#6 Hu Haifeng, son of ex-President Hu Jintao, was promoted to vice-minister role

This week, Hu Haifeng, aged 51, became one of the youngest deputy ministers of China. He would be promoted from a regional posting to be a deputy minister at the Ministry of Civil Affairs. It’s not one of the “power ministries”, but making a career advancement from prefecture rank to vice-minister rank is a crucial step in the career of a Chinese party cadre.

Hu Haifeng

What’s interesting about this is that this is a direct rebuttal to the idea that somehow the elder Hu was forcefully removed and publicly shamed during the 2022 Party Congress, a dramatic episode spawning countless conspiracy theories that I am sure many of you have clearly remembered.

I also have my theory for that episode, which is very simple: it’s just, sadly, a case of dementia. Instead of trying to shame Hu, Xi simply doesn’t want Hu to make a fool of himself in front of the world. Despite the dramatic imagery, there is no point, nor is there a benefit of shaming an ex-president.

But the tendency to believe in such kind of narrative is also illuminating. As

David

of

Market Diary

commented below my Noah Smith article:

Biggest distinction are those who view China as a regular country, or those who have those fanciful priors like Noah. Unfortunately, the latter is the more engaging worldview for clicks and us vs them.

And a regular country I believe China to be. And I think Hu Haifeng’s early promotion to vice minister can quell this debate for good.