China Tech – The doldrums pt. III

Rumblings get louder.

• A rotten set of results from Xiaomi, cutbacks by Oppo, a weak domestic currency and a massive government debt problem are all pointing in a direction that Chinese officialdom would like to distract us from.
• Xiaomi reported an 18.9% YoY decline in revenues that it put down to “uncertainty in the global economy” but it is clear that by far its biggest problem is the failure of the Chinese economy to roar back to life.
• Oppo is having similar problems and has recently cut back on the development of its own silicon in order save costs due to “economic uncertainty”.
• At the same time, the Chinese currency is coming under significant pressure and the internal debt problem is worsening.
• There are estimates that total Chinese government debt is $23tn or 127% of GDP putting it on par with the USA, the UK and a number of other developed nations.
• Furthermore, all of these countries are trying to finance these debt mountains with fiscal budgets that remain stubbornly in deficit.
• This is one reason why inflation is here to stay as the only realistic way that developed nations can get out from underneath these mountains is to inflate them, away.
• From a government perspective, this is by far the best option as inflation is, in reality, a tax and one that is not blamed on the state but on the retailers.
• Although official figures out of China do not show this yet, the real data from private companies reporting earnings and anecdotes from the street show that the economy is not showing any real signs of a post-Covid bounce like everyone else did.
• The other problem is that international investors have no interest in investing in China at the moment even though some of the companies are ridiculously cheap with dividend yields of 10% or more and single-digit PER ratios.
• This is due to the worsening geopolitical climate and China’s desire to ensure that almost all data that exists on its economy and its companies do not leave its shores.
• This is what the recent crackdown on consultants and due diligence suppliers has all been about with the result being that research on China is now very difficult.
• This means that anyone wishing to manufacture something in China is virtually unable to do the supply chain due diligence that is required meaning that they will increasingly look elsewhere.
• There are many countries in Southeast Asia and India that will be more than happy to welcome these customers to their shores.
• The problem is that it is impossible to tell how much economic pain China is willing to endure before it decides that some of its policy decisions have done more harm than good.
• One would expect not very much, as it is pretty clear that the Soviet Union collapsed because its economy was so weak that it could not support the spending for the Cold War, but there is no way of knowing.
• The net result for Chinese Tech is that it is very cheap but without a re-prioritisation of the economy over national security, it is going to remain cheap making it a classic value trap.
• I suspect that only a genuine about-face on the economy will prompt the return of international investors, and so it might be a long wait.
• I still own Alibaba and with no immediate plans to retire, I can afford to wait.