China: More Than A Change In Economic Time - Go Long

by: Enzio von Pfeil
  1. Short Europe. Just a couple of days ago we released a scathing piece about why you should short Europe: her politicians are refusing to enact fundamental reforms, instead relying on that Draghi "I'll do 'anything that it takes' " re-tread. He knows as well as you and I do that the Economic Clock - the business cycle - has been asphyxiated in Europe's regulatory swamps, so monetary policy is akin to chasing an elephant with a pop-gun.
  2. Different vote-getters. Put laconically: in Europe, politicians get elected by braying "If you elect me, you WON'T need to work" (while in China, unelected officials stay in power precisely by promising their constituents "If you don't usurp me, you WILL get to work")
  3. Long China. In statistical analysis, we are taught that the key determinant of a time series is its trend; the cyclical factor comes second. And my "long" recommendation is based on the "the trend is my friend." Beijing is doing the right things.
  4. Economic Clock measures. First, you all are reading that the Central Bank keeps easing, something which we, too, got right some months ago. And of late, you have been reading that her fiscal spending has grown by about 25% year-on-year. Thus, in the jargon of our Economic Clock, Beijing is changing the country's Economic Time from an "excess demand for money / excess supply of goods" to an "excess supply of money/ with a view to creating an excess demand for goods" later on. So much for the trade-school, i.e. cyclical stuff.
  5. Structural measures. Of crucial importance is that Pres. Xi is relying on more than mere cyclical tinkering. (Match this with the structural escapism of the EU President Jose Manuel Barroso cum the Brussels-cabal!) Robert Zoellick wrote a trenchant op ed in yesterday's Financial Times (FT), p. 7, in which he outlines how Pres. Xi is consolidating his powers precisely in order to push-through fundamental reforms. A) Pres. Xi is consolidating his own power:"...he dominates the Politburo Standing Committee, and chairs the Central Military Commission, a new National Security Committee and High Level Leading Party groups guiding economic reform." He is consolidating his powers very much in order to achieve b) fundamental structural reforms which fundamentally create the framework within which the economy (and thus Economic Clock) can operate properly). Such fundamental structural reforms consist mainly of " reforms; a reallocation of responsibilities for revenues and expenditures between Beijing and the provinces; liberalization of the hukou household registration system that links people to land and location; establishing rights and markets in rural land; urbanization; new social safety nets, and expanding financial markets." Being Chinese, i.e. pragmatic, he wants to lace his reforms with "lessons about regulation learnt from mistakes in the west.:" (Maybe he should hire Barroso to see what NOT to do?)
  6. Diametrically-opposed vote-getters. In closing, we re-loop back to point two above: especially in Europe, you get elected by promising NO work; in China, you get to stay in power precisely by PROMISING work!
  7. Investment implication. Where would you rather bank your retirement money on?

Disclosure: None.