China Technology – Walk not Talk

The time for talk is over.

• The outlook for 2025 is for another very bleak year where China falls even further behind the West, meaning that to turn things around, the Chinese state will have to do far more than just talk stimulus and investment.
• China retail sales for November 2024 were significantly worse than expected growing 3% YoY which was lower than even the most conservative analyst estimate.
• Industrial output was a bit better at 5.4% YoY, but the sudden jump has been attributed to front-loading ahead of any potential new tariffs that are set by the incoming administration which takes office in January.
• The net result is that China’s economy remains moribund largely as a result of the state of deep depression that has engulfed the country where no one is willing to invest for growth, take risks or start a new business.
• The attempts to stimulate the economy to date have largely resulted in a short-term rally in the stock market followed by a bout of selling as investors take the opportunity to offload their holdings at slightly better prices.
• This is why the news that the CCP has shifted its priority for 2025 to domestic consumption has done almost nothing to lift the stock market’s valuation or sentiment.
• This means that talk is not enough and that the Chinese state needs to act to increase liquidity in the Chinese economy as well as restore confidence in the private sector.
• I think that it is the confidence in the private sector that is going to cause the most difficulty because this has not been the focus of the CCP over the last few years.
• Ever since Jack Ma publicly criticised the Chinese Banks (and by implication, the Chinese state), the CCP has been reminding everyone that business in China is conducted with the permission of the state.
• This permission can be withdrawn or amended at any time without warning which greatly increases the risk of conducting business or creating start-ups in the private sector.
• The result has been that entrepreneurs have started their businesses elsewhere and investment in venture capital from domestic and international sources has collapsed.
• Many Chinese VCs spend most of their time chasing start-ups to buy back the shares that they issued as opposed to seeking new investment opportunities.
• The collapse in the real estate sector where many Chinese citizens have been holding their savings has served to make a bad situation even worse.
• Even bold bargain hunters who travel to China looking for opportunities come back deeply depressed and quickly turn their attention to other things.
• This is what underpins RFM and Alavan Independent’s view that the Chinese state has done far more to undermine its own technological development than the US State Department could ever hope to achieve.
• This means that the Chinese state cannot simply state that it intends to prioritise domestic consumption in 2025, it will have to step up and inject a lot more cash into the system than it has to date.
• I suspect that actions such as this will only go so far and that to really get its technology and innovation ambitions back on track, it will have to give the private sector more freedom in which to operate.
• This will be easier said than done, but I suspect there is only a certain amount of economic pain that the CCP is willing to endure before it changes its priorities.
• At that time, there will be a substantial rally in the Chinese stock market where real buyers return but it could be a very long wait.
• Until then, the Chinese stock market and technology sector in particular will remain a classic value trap.