It's Not Too Late to Bail on China

Written by Jason Simpkins
Posted October 1, 2021

Look, I'm going to be honest...

I've got a real axe to grind with China.

Not the Chinese people, to be clear. I'm sure they're lovely.

But the central government in Beijing — Xi Jinping and all the other autocrats.

Call me old-school, but I don't like communism.

I hate the censorship, the surveillance, the intolerance, and the complete lack of freedom.

I hate the hawkish mentality, the sense of entitlement, and the military parades. (It reeks of "little-guy" energy.)

So it always bothered me, to an extent, that for the past few decades China has gotten so much glowing press from the media and investment analysts.

The phrase "economic miracle," for example, or when analysts flippantly assert that China is actually pretty capitalist these days.

It's not.

China isn't smarter or stronger than the rest of the world, either. It's just highly effective at spewing out propaganda.

And of course, it's really good at cheating.

China isn't playing chess so much as it's cheating the game.

Any advances it's made in technological development have come on the back of trade secrets and intellectual property pioneered by, and stolen from, Western entities.

The massive pile of cash and debt it's accrued is blood money, squeezed out of human rights violations and slave labor.

And the eye-grabbing growth figures it uses to make headlines are exaggerated at best, and a mirage at worst.

So why does the investing community continue to play along?

That's what I've wondered for the past decade and a half.

But mercifully, it looks like that's starting to change.

Over the past year or so, China's mask has begun to slip.

For one thing, it played a part in spreading a plague around the world — an act it continues to shirk any bit of responsibility for.

It's grown more belligerent.

For years, I've been warning about China's hostility in the South China Sea, where it's muscling its neighbors out of their own territorial rights. Not only that, but it's built up artificial islands in the region and militarized them with military bases, air strips, and ports.

Last year, as the world grappled with the pandemic, the country reabsorbed Hong Kong, snuffing out the independence it once pledged to honor.

Next up is Taiwan.

We all know it. That's what all of this has been building toward.

Domestically, it's gotten more controlling.

It also embarked on a broad cultural reconfiguration. The state has issued dozens of new edicts prohibiting children from playing video games and eliminating private education. It banned American Idol-style competitions and a huge swath of children's shows and cartoons. Foreign games and apps have been pulled from stores.

"Misbehaving celebrities" have been blacklisted by broadcast authorities, including one of China's wealthiest actresses, Zhao Wei, who had her movies, television series, and news mentions scrubbed from the internet as if she never existed. And one edict expressly banned "sissy, effeminate men" and demanded wider promotions of masculinity.

All of this is an effort to combat the capitalist moral decay and Western values threatening young minds, and to put nationalism and loyalty front and center.

Similarly, there's been a sharp increase in economic regulations. In recent months, Beijing has banned cryptocurrency and cracked down on foreign listings.

And from November to August, Chinese regulators took more than 50 punitive actions against their own corporations under the guise of antitrust, financial stability, data security, and social equality, according to a roundup conducted by Goldman Sachs Group.

In Macau, the world's largest gambling hub, efforts are already underway to regulate illegal lending and cash transfers related to gambling. And a few weeks ago, the region's secretary for economy and finance, Lei Wai Nong, said the government would begin a more thorough review of the casino industry. It aims to increase oversight in areas such as licensing, employee welfare, and daily supervision. The number of casino inspectors will be increased from 192 to 459.

And now all of this is taking place amid the specter of a massive collapse in the real estate market.

For the past week, markets have been fixated on Evergrande. The country's second-largest property developer is the poster boy of China's real estate bubble.

The company amassed more than $300 billion in debt, splurging not just on real estate, but dipping its toes into mineral water, electric cars, pig farming, and even its own soccer team.

But now the ride is coming to an end, and the company can't pay its bills.

It missed a key $83.5 million coupon payment last week, a $47.5 million bond interest payment Wednesday, and it still has payments due each month in October, November, and December.

Evergrande's collapse could have serious ramifications for China and its overinflated real estate market, but I think we'll be spared a massive global contagion on par with the collapse of Lehman Bros.

Still, it's waking investors up to the investment risk inherent to China. The country's data is murky, its regulations impulsive, and its foundation shaky.

I've just enumerated all of those risks. And I think it's pretty obvious that the time to bail on China was yesterday.

Nevertheless, there's still time if you haven't already.

Fight on,

Jason Simpkins Signature

Jason Simpkins

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Jason Simpkins is Assistant Managing Editor of the Outsider Club and Investment Director of Wall Street's Proving Ground, a financial advisory focused on security companies and defense contractors. For more on Jason, check out his editor's page. 

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