China Tech – Covid Infinity

Exit from Covid agony becomes clear.

• Hidden deep in the new regulations lies the key that will allow China to back away from its disastrous Covid Zero policy and at the same time prevent the reputation of the CCP from taking another hit both at home and overseas.
• This will allow the economy to recover quickly which, combined with the ability to cut interest rates to get the economy going again, greatly improves the outlook for the Chinese technology sector next year in my opinion.
• For months, the CCP has been trapped between its headline Covid Zero policy and the requirement to get the economy going again in order to deliver on the central promise that it makes to the Chinese people in return for their loyalty.
• This has come to a head in recent weeks after a deadly apartment fire and as Chinese citizens were watching the World Cup in Qatar and seeing thousands of fans all jammed into the stands having a good time without a mask in sight and wondering why their lives are subject to so many restrictions.
• It looks like that this was the final straw for many Chinese citizens who just want to get back to their daily lives and rare protests against the policy and the CCP broke out across many cities.
• My partner, Alastair Newton who co-authors with me our Clash of the Titans (China vs USA) research series (see here) opines that the one thing the CCP fears above all else is social unrest which is why we have seen the sudden recent changes to the policy.
• The risk of relaxing Covid Zero is a massive spike in cases in a largely immune-naïve population which would cause the CCP to take a further hit to its reputation, but the CCP has crafted an elegant solution to this problem.
• For many months, China has been running a green pass system where anyone with a red or yellow QR code would instantly be denied access to all of the facilities required for modern life.
• The green QR code typically has a validity of 48 hours meaning that almost everyone in China had to take a PCR test every 2 days.
• This meant that almost every case of Covid was spotted and the unlucky patient carted off to some form of quarantine.
• However, on top of allowing mild patients to isolate at home which is completely ineffective, the new regulations almost entirely scrap the green pass system.
• This is very unusual because, in most countries that used something of this nature, this was one of the last restrictions to be relaxed but in China, this is one of the first to go.
• I think that this is a very clever move because while this system was in place, everyone was testing every 2 days meaning that almost all of the cases were being found.
• However, with the green pass gone, everyone will stop testing meaning that nobody will ever know how many cases there are meaning that a massive spike in cases will not be recognized in any form of data.
• Furthermore, my research indicates that Chinese vaccines are not as bad as everyone seems to think.
• They are certainly less effective than the mRNA-based vaccines in use everywhere else in the world but crucially, they are quite good at preventing hospitalisation and death.
• For a vaccine, this is all that really matters in my opinion and on this basis, I suspect that there is now going to be a massive wave of Covid but not a massive wave of death and overwhelmed hospitals.
• With no data to prove otherwise, the CCP will be able to legitimately claim that it ended Covid Zero at precisely the right time with minimal negative consequences.
• The cherry on the cake will be the fact that with less testing the official case count will start declining giving the CCP further ammunition to claim that its policies have worked.
• This will allow a rapid relaxation of the other restrictions preventing the economy from recovering and it looks like 2023 is the year that the economy turns.
• This is exactly what the technology sector needs as the regulatory clampdown is now largely in the rearview mirror, with the weak economy and geopolitical tensions mostly responsible for keeping sentiment at rock bottom.
• The geopolitical issue is clearly not going away but for the parts of the sector that are less affected by this (consumer electronics, e-commerce, ride-hailing, deliveries and so on), all they really need for a big rally is an economic turnaround.
• I think that there is now a fairly clear path to this outcome and hopefully by Q2 next year, China tech should be back to some form of stable growth.
• The sector still trades on very low multiples meaning that it could be one of the best technology performers of 2023.
• I continue to hold Alibaba in the belief that my patience will finally pay off.