If there was ever any doubt, this last week has shown just how determined Those in Command are to maintain absolute control over all elements of the system and society, regardless of the implications for growth, innovation and even investment. The hammering of tech firms, most notably Tencent, and the stringent controls on education-related companies, have decimated the market valuations of a wide range of China companies in the past week, and have also raised questions for investors about which sectors will be next in line. It is all a timely reminder that China risk is a real thing. Whatever the business activity, the fundamental factor is not market forces, but the position of the Center. There will be those who point to the tech sector, and say that of course the tech giants in the West need to be reined-in as well, and they are right. And it is also true that Chinese school kids are under far too much pressure from homework and extra-curricular classes. But the key factor here is just control. And it is a control-freak approach which owes as much to traditional Chinese thought as it does to Mr. Lenin.
The Western approach of providing a regulatory framework and then letting greed, creativity and competition be the engines of growth does not make sense to Those in Command, or only for short periods in specific circumstances. The emergence of stock markets in the early 1990s and the P2P explosion are examples. Control, and acceptance by all players of the primacy of those in control, is the top priority. No one, no company, no sector, can be allowed to think of itself arrogantly as being above this requirement. There is no sector, no economic driver that cannot be sacrificed to ensure the maintenance of control. The argument is that control underlies stability and stability is the precondition for prosperity, and that with prosperity comes steady growth. if it means that growth is slower than it would otherwise be, then so be it.
And what impact does this have on private and foreign investment? In the short-term presumably, it will cause many people to pause and ponder. In the medium term, there will be many investors who will jump anyway—China is huge and if you accept China risk and make a good bet on what activities are not going to get whacked, then you stand to make a lot of money. But if you’re basing your investment decisions on logic and market forces alone, then be careful.
Have a great weekend.