China Technology – The Turn Pt. II

Private sector comes in from the cold

• Not only did President Xi turn up but he also made comments which indicate that, while he may not like the private sector very much, he realises that he needs it if China is going to come close to meeting any of his ambitions.
• All that was missing was a picture of President Xi smiling and shaking Jack Ma’s hand which would have been the icing on the cake.
• President Xi led a meeting of the top entrepreneurs in China with many from the private sector including Jack Ma at which he gave the most supportive commentary in over 5 years.
• President Xi expressed in clear terms that it was necessary to remove the obstacles that have been holding up the private sector and promised a level playing field and affordable financing for private companies.
• The commentariat is unanimous in the view that this is a clear sign of a major change of heart at the top of the Chinese government which, at the end of the day, is all that really matters.
• Almost immediately, the Chinese parliament has said that it will review laws that disadvantage the private sector in another signal that President Xi’s apparent change of heart is already having an effect.
• However, this is currently all talk and it won’t be until we see real action that we will know whether this is a genuine change of heart or merely a ploy to restore confidence in China both locally and abroad.
• Given the dire state of domestic consumption, the demographic issues and the real estate crisis, I think it is most likely that this is a genuine signal that China intends to allow its private sector to thrive once again.
• It will be many years before anyone in the Chinese technology sector forgets the 5 years it spent in the wilderness at the hands of a disapproving state and so I think what emerges will be a much more disciplined environment as opposed to the craziness that existed between 2015 and 2019.
• No one is going to forget who really is in charge in China and as long as the private sector can get prosperity moving in the right direction once again, there are better times ahead.
• This is precisely what China needs if it is to come close to fulfilling its ambitions to be a leading technological and geopolitical power and now that President Xi appears to have come around, the market may begin to reflect this once again.
• However, this will do nothing for the decoupling or the ideological struggle that is being fought between China and the West and a stronger China will only make the rivalry more intense.
• Hence, RFM Research and Alavan Independent see no let-up in the Balkanisation of the Internet with global standards becoming a thing of the past.
• This means future technologies like AI, 6G, robotics, autonomous driving and so on will have one standard for China and another standard for the West with everyone in the middle being forced to choose one or the other.
• This means two smaller networks as opposed to one global network meaning lower growth and value creation for everybody in the long-term.
• However, in the meantime, the Chinese technology sector remains extremely cheap and if the Chinese state means what it says, there is a very long way to go in terms of upside in the shares of the technology companies.
• I have held Alibaba for a long time and while I am still not yet in the black, my losses are greatly reduced and I am increasingly confident that I might actually make some money.