Sep

1

Isn't it odd that the world's "second biggest economy" won't allow its currency to be used anywhere but on the mainland? Isn't it strange that every one of their financial statements and NBS releases have glaring, ludicrous, laughable misrepresentations in them? Isn't it incredible that they've achieved a $25 Trillion (plus) cumulative trade/investment surplus and no economist or Central Banker has ever asked why there's only $3 Trillion of FOREX on the PBOC balance sheet? As one vulgar observer of the events on Hong Kong is alleged to have shouted: "Hey, Xi….where's all the f&%$ing Western Money we made?"

anonymous writes: 

China's economy is interesting. I've been thinking a lot about it and trying to decide if I want to spend more time researching and analyzing their stocks. Spec listers pointed me to some useful resources last time I posted about this. The need to diversify internationally has increased lately given the trade war and many of the companies appear quite compelling from a valuation and growth perspective.

It's hard to say that China is entirely fake when you live in Vancouver and then feel like you're going to a 3rd world country when you go back to the US (largely due to the lack of Chinese wealth) — which also answers where all the USD went hah. I personally really enjoy the BP energy report which showed that Chinese electricity consumption in 2018 grew about 3.8%, which is closely tied to GDP growth.

At the same time, one notes that the economy has more than quadrupled while FXI (the China large cap ETF) is well below its 2007 peak and headed the wrong direction. FXI is composed of classic companies like Tencent and China Telecom–so hard to argue that it's a 'composition issue'. The bear would argue that all of China's numbers are fake and thus the GDP growth is likely the one that's wrong.

Some interesting statistics on valuation–China Telecom has 147m 4g mobile subs, more than 1.5x as many as T Mobile's entire base, and 220m subs overall. China Tel is worth $36b while T Mobile is worth $65b. It's very unlikely that China Tel is lying about its subscriber count based on network data / just observation around how many people are using data walking around Chinese cities / the ubiquity of mobile payment services there. Sure the Sprint merger is a (likely) catalyst for pricing power but when you add up TMUS and S fcf generation even after the deal it's not amazing. Which just puts into context the potential upside to brave investors (100%+)

The venture capitalists I know investing in Shenzhen which now has as much flow as San Francisco (and btw is a way, way nicer place to live) have seen obscene financial returns (60%+ CAGR) and have had real USD exits. The sentiment is that founders there work 2x as hard, don't virtue signal, and have better technical teams. Notably, they also are focused on making money instead of the bizarre 'mission' fetish used in Silicon Valley to beat down people's demand for compensation ("we are here for the mission not the pay!")

The other point in favor of China is that military research done by independent think tanks suggests that increased naval and air power is very real. This is relevant insofar as markets ultimately reflect ability to secure assets and thus military power.

The rise of SOEs as a percent of GDP and the weakening of the RMB feels like a step in the wrong direction… but lately, I've been increasingly thinking Chinese longs are more interesting than most US consumer companies which were premised on the ability to sell into China

Charles Pennington writes: 

Thank you for that post Alexander — those are really interesting insights and datapoints on Chinese stocks and the Chinese economy. The stocks do seem cheap!

Many of us are always worried that somehow all the money in Chinese companies is going to get embezzled by somebody, and in a way it's a miracle that doesn't happen to US stocks as well. An argument against that fear is dividends–China Telecom (according to Morningstar) has boosted its dividend pretty steadily form $1.10 to $1.60 over the past 5 years. So that proves they're not stealing everything!

A few years ago I was wondering how could BIDU not be a good stock. It's the Chinese Google, and Google itself is locked out of the action, so how could it go wrong? I bought it and ended up selling at a loss for some reason, which turned out to be lucky because it's fallen more than 50% during just the past year. I don't follow it closely. How did they screw up when they're the Chinese Google? And is it a bargain now, or did the business get permanently harmed?


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