Wall Street traitors rush into China

You can show a traitor a noose but you can’t stop him from sticking his head in it. For years I have warned prominent Australian investors not to invest in China and watched as they all lost a lot of money. The reason why is not even China’s deteriorating geopolitical circumstances. It is that sovereign risk under the CCP is extreme.

In just the past few years we have seen equity bubbles and busts purely at the behest of Bejing’s fiat. We have seen entire industries explode into being then literally be executed for doing so. We have watched capital flood global markets then be completely withdrawn. We have witnessed currency liberalisation then the capital account slammed shut.

As Cold War 2.0 heats up, this is going to get worse not better. Why? Because all of the above idiocies were the result of internal policy bumbling. Now China has to wrestle with mushrooming developed market hostility as well.

This has already played out in trade and investment. The US trade war is neither fleeting nor political. It is as ferocious under Joseph Biden as it was under Donald Trump.  Indeed, if anything, it has become much more potent as the Biden administration has taken this message to the alliance network. This has already paid dividends as Europe trashed an investment deal that took eight years to negotiate.

Investment is also under pressure from rising nationalism in China as resentment of it builds in the polities of the liberal bloc. This is leading all kinds of firms into a no-win situation in which they face the loss of either business in China or at home if they misstep.

I am of the view that ahead, as well, are investment blockades into China. As China slows into the middle-income trap, and the CCP requires ever more nationalism to cover economic failure, hostility towards Taiwan will intensify. At a certain point in the not very distant future, it is going to become untenable to move any kind of liberal bloc export into China, whether that be commodities, chips or capital.

It is already very difficult to move capital out of China. As links keep breaking with the liberal bloc, this will also get much harder. Not least to prevent a total collapse of the yuan as the economy slows.

Yet none of this seems to register with the Masters of the Universe:

“While China is a strategic market for global banks they can’t afford to miss, reaping handsome profits here is another thing,” said May Zhao, deputy head of research at Zhongtai Financial International Ltd., a Hong Kong-based brokerage. “Winning clients, either from wealth management or investment banking, is challenging in a highly concentrated market gripped by top Chinese brokers.”

For the investment-banking giants, there’s no bigger opportunity than the $54 trillion financial services market in China. The government has gradually allowed firms to take full control of their partnerships with local brokers, while giving them a green light to set up their own asset management companies.

The banks are rushing in. The U.S. firms alone boosted their China exposure to $77.8 billion last year, and are hiring hundreds of staff. Many companies have announced pledges to seek 100% of their joint ventures after China removed the caps in April 2020, and several have had 51% stakes for a few years.

Yet for most, gaining control hasn’t yielded much in the way of earnings, and the foreign ventures remain minnows compared with local players like Citic Securities Co. and Haitong Securities Co. UBS, with the biggest joint venture in China, ranks 89th of more than 120 Chinese brokers in terms of assets, figures from the Securities Association of China show.

“It is very hard — you’re going against Citic, Haitong, all these massive companies that have their own corporate clients,” said Peter Alexander, managing director of Z-Ben Advisors Ltd., a research and data firm in Shanghai. “You’re fighting an uphill battle unless you’re looking to leverage your global clients.”

My advice is very much to miss out on this boom. It is a classic value trap. The market is large. But the profits are dubious and the risks extreme and growing. The CCP is only holding out its hand so it can chop yours off when it suits to bring the pressure to bear on Washington.

I’ll be honest with you. I read Wall St research all day and it is not much better than a chat down the local pub. In fact, it is often worse because it suffers from a serious duration mismatch between careers and firms respective outlooks. This structural problem means individuals can arbitrage the firm’s future for a short-term killing. That is, control fraud is endemic to Wall St.

And it is going to lose in China.

Houses and Holes
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  1. C'est de la folieMEMBER

    None of these guys touting an ‘accept the rise of China’ (or engage with it, or profit from it) cant get away from a fairly straightforward counter argument.

    At the very core the leadership of China (and of all autocracies) is about retaining control of China (or wherever they are being autocratic).  That dynamic (those autocrats and their people) is one which all other peoples and nations are inherently excluded from (be they foreign agents, exploiters, spies, military or terrorist threats, unfair corporate rivals etc) or tightly controlled in how they can engage (see Apple, Google selling themselves out in China, see the way big oil prostrated itself for Russia, and the way big FMCG companies bend over backwards in both naitons to get a foothold).  That engagement needs to take place within an overtly state supporting legal system (Neither China nor Russia have the same legal understanding of ‘rights’ as applicable to individuals or entities when balanced against the state as would be found anywhere in the Anglosphere, or EU).  Because of the dynamic between the state and the autocracy in those nations there is a very heavy hand of the state – particularly security – to go with that law.

    Now supporters of those states have a valid point when they say capacity to handle the dynamics between the state and the governed or access to legal outcomes in the Anglosphere or EU goes first and foremost to those with capital backing to support them.  It does for sure.  They are also right insofar as access to capital buys outcomes within those polities which can be detrimental to individuals.  But those without capital backing are far more llikely to get outcomes to support their circumstances in those legal and political systems than their counterparts in (eg) China, where the entire point of the autocracy is to reempphasise the point that it is the State which controls outcomes, and that those wishing to change outcomes need to engage with the State (the autocracy) on its terms – which invariably mean seeking political outcomes through a range of vested pecuniary interests, and through processes which are invariably very tightly controlled by those interests as the mechanisms of the State (where any critique of the management of those processes becomes a critique of the State and can be rebuffed on those grounds regardless of any ‘merit’.

    Ultimately comes a point (when balancing one against the other) where a decision between being a possible/probable corporate peon in the Western world needs to be balanced against being a State controlled peon in an Autocracy (China for starters).  Even if the ‘West’ seems to have declined in terms of its ability to enable ‘freedom’ and enable capacity to influence interactions with capitalised players in the legal system, and has lost economic vibrancy through the wholesale trashing of manufacturing and outsourcing of this to jurisdictions where labour rights and outcomes are lesser, it still retains something of all of these.  The comparison then becomes one of would an individual have similar scope to address and gain outcomes against autocratic entities (companies, bureaucracies for starters) in an Autocracy.

    That of course is before one gets to the possibility that although the media has been welll and truly reamed across the developed world, in most parts of the world (but not Australia) there is still enough of a functioning media to consider being able to bring attention to issues and influence the polity (and then the judiciary) this way.

    The real questions arising from these people always come back to why we have trashed the strength of the state, and particularly public interest regulatory and monitoring systems, and embedded a power to corporate and capital interests under the guise that through these being ‘efficient’ we as public will get a better outcome from them.  But not much in that questioning would suggest that better outcomes are being gained for most in an autocratic system, other than pose the question of why our elites and political and corporate leaders want to craft a (near) monopoly power akin to their State counterparts in autocracies for those with capital – which would ultimately lead back to the only way to bring about constructive change would be to have a ’revolution’  (accompanied by all sorts of ugliness).

    It isnt really about China, it is about a whole expectation of government and scope for change.  We (the Western world) seem to be deliberately trying to become more sclerotic.  But those touting more engagement with China and acceptance of their approaches to, not just business but life per se, are touting an eternal stuggle against decay itself – because no growth or progress is ever going to be enough and it will always be too much for those controlling the here and now.

    Now theres a lunchtime rant!

    • Yep. Given they seem to ignore our free trade agreement, international trade rules and maritime boarders, amongst other things, good luck trusting them with $$$$$$ in thier borders

  2. CITIC has some very nice offices in Beijing. And I was always impressed with how smart all my students were over many years of training in all the different departments I was employed to assist, including a couple of very senior people. I certainly wouldn’t want to try and eat their lunch. I loved working with them, they were lovely people and very engaged students.

  3. surfbeach2536

    As the old saying goes possession is 9 tenths of the law so if push comes to shove the west will lose their assets in China and at the same time China will lose it’s assets in the west. (probably a waste of time buying back the ports if they would be ceded to us anyway) At some point you would expect the CCP will see that this is a lose/lose scenario and perhaps common sense will prevail however a robust defence strategy is paramount in helping educate our adversaries.

    One thing is certain, having old relics in power who aspire to leave there mark on history is certainly wasting the worlds resources