Wall Street these days is going to great lengths to avoid Chinese stocks. Michael Burry, for one, is bucking the trend, raising tantalizing new questions about whether the herd is getting Asia’s biggest economy wrong after a nearly US$7 trillion stock selloff.
You would expect nothing less from a money manager who rose to fame in Michael Lewis’s 2010 book “The Big Short.” In 2015, actor Christian Bale played Burry in Hollywood’s take on a ragged assortment of players involved in the 2008 subprime crisis.
In that episode, Burry saw the coming meltdown — and the forces, blunders and institutions behind it — more clearly than virtually anyone. Those who invested with his Scion Asset Management in 2000 enjoyed returns of nearly 490% by 2008.
Burry is turning heads anew by betting big on China Inc at a moment when most investors are rushing for the exits. In recent months, Burry’s firm made China’s Alibaba Group its top holding and wagered on JD.com, too.
Filings show Burry’s upped his stake in the e-commerce juggernaut Jack Ma founded by 50% in the year ended December 31. The positions aren’t huge — just under $6 million in each of Alibaba and JD. Yet the trades are bewilderingly at odds with the capital zooming away from China, including a tech sector plagued by regulatory chaos these last few years.
China’s nearly $7 trillion stock rout since 2021 has largely drowned out discussions of contrarian bets or bargain shopping. Burry’s China pivot is the exception, particularly because of the struggles facing both Alibaba and JD, whose shares are down 25% and 53% respectively over the last 12 months.
Along with China’s regulatory risks and slowing economic growth, tech shares face headwinds amid fears about the nation’s property crisis and the exodus of capital out of yuan assets.
Burry’s Scion isn’t alone in thinking Chinese tech, particularly chip companies, is due for a rebound. Barclays and Sanford C Bernstein are nudging clients to look at certain mainland tech names. Bernstein, for example, is spotlighting Naura Technology Group and Hygon Information Technology.
Part of the rationale rests in Huawei Technologies’ success in navigating around US efforts to effectively kill the Chinese telecom company. Might US sanctions aimed at wrecking China’s semiconductor industry catalyze President Xi Jinping’s economy to innovate and move significantly up the value-added ladder?
“We see the US sanctions as a double-edged sword,” says Bernstein analyst Qingyuan Lin. “While they may slow China’s progress in cutting-edge areas, they also compel China to develop its supply chain, pursue self-sufficiency and thrive in segments that benefit from increased domestic substitution.”
Others wonder if the broader Chinese market is being under-appreciated by investors.
“The Chinese stock market is undervalued against cash, Chinese bonds, gold, and other world stock markets — and it is in a state of total panic,” says economist Charles Gave at Gavekal Research. “It has to be the best value proposition in the world.”
Yet whether Chinese tech shares win a broader audience depends on Xi’s success in championing private sector innovation over antiquated state-owned enterprises (SOEs).
This requires Beijing to act faster and more credibly to level playing fields, build stronger capital markets, increase transparency and strengthen corporate governance. And, of course, to end a property crisis that has China in global headlines for all the wrong reasons.
This week, Premier Li Qiang called for “pragmatic and forceful” action aimed at “boosting confidence” in the economy. Official news agency Xinhua quoted Li as advising policymakers to “focus on solving practical issues that concern the masses and enterprises.”
Li’s comments come as Beijing confirms the lowest level of annual foreign direct investment since 1993 — just $33 billion in 2023. The figure, which records monetary flows involving foreign-owned entities in China — was 82% lower than the 2022 tally.
Earlier this month, the People’s Bank of China (PBOC) reduced the reserve requirement ratio for banks by 50 basis points. Xi’s government also telegraphed a $278 billion financial rescue package for the stock market.
Yet Remi Olu-Pitan, a multi-asset fund manager at Schroders, says this “tactical lift” is no replacement for the “structural” changes China needs to rebuild investor confidence.
“The incentive to reduce exposure is pretty powerful and so we think this provides a pause, but we worry any recovery will be an opportunity to de-risk,” she says.
Luca Paolini, chief strategist at Pictet Asset Management, adds that “while Chinese stocks’ relative valuations are at an all-time low, prospects for the asset class are not particularly bright as investors doubt the willingness of Beijing to deliver large-scale support to revive the stock market. What’s more, a turnaround in the property market, which is key for an improvement in sentiment, is not in sight.”
MSCI’s recent decision to delete dozens of Chinese companies from multiple indexes is an added blow, complicating Beijing’s efforts to restore foreign investor confidence. Analysts at UOB Global Economics said in a note that MSCI’s changes posed “further downside risks in China’s stock markets,” including for investors that “may be forced to liquidate.”
The need for reforms is growing as investors look for less volatile destinations for capital, including neighboring Japan. Unfortunately, Beijing seems to be spending more time dusting off playbooks from stock crashes of the past, particularly in 2015.
In the summer of 2015, Chinese shares fell more than 30% in a matter of weeks. At the time, Team Xi loosened rules on leverage, reduced reserve requirements, delayed all initial public offerings, suspended trading in thousands of listed companies and allowed mainlanders to use apartments as collateral to buy shares. Xi’s government rolled out advertising campaigns to buy stocks out of patriotism.
Taking a longer-term perspective, says economist Jeremy Stevens at Standard Bank, “similar interventions in 2015 did not achieve their goals.” He adds that “it’s worth remembering that in August 2015, Chinese stocks suffered their most drastic four-day downturn since 1996 amid fears that the government might have to retract its market support strategies.”
The severity of China’s deepening property crisis and deflationary pressures suggest that mere stimulus will be even less effective this time. “China’s economic growth,” Stevens says, “is expected to continue sliding without last year’s supportive base effects, and markets will watch carefully as policymakers set a growth target and policy focus at the National People’s Congress in March.”
Another problem is intensifying US efforts to curb China’s development as a tech superpower. The trade war that Donald Trump launched during his 2017-2021 presidency was one thing. The more targeted curbs that US President Joe Biden prioritized since then – strategic bans on China’s access to chips and other vital tech – have caused much greater pain.
Granted, Huawei offers a roadmap for China Inc to steer around Washington’s speedbumps. Though Burry isn’t saying much, it’s quite likely he believes Joseph Tsai, Alibaba’s co-founder and chairman, can strategize beyond today’s regulatory and geopolitical noise to grow Alibaba’s global market share.
But now, China’s electric vehicle industry is under assault as chip-loaded surveillance machines, as many Washington lawmakers see it. As the November 5 US election approaches, Trump’s Republicans and Biden’s Democrats will be under increasing pressure to toss more sand in China Inc’s gears.
Odds are, the next wave of curbs will seek to hobble China’s ambitions in the artificial intelligence (AI) space. Already, the specter of heavy-handed regulation – and the Communist Party putting its own priorities ahead of tech development – are clouding China’s AI future.
The Financial Times reports that Biden’s trade team is warning Xi’s government against “dumping” goods as its overcapacity troubles worsen.
It quotes Jay Shambaugh, US Treasury undersecretary for international affairs, as saying “we are worried that Chinese industrial support policies and macro policies that are more focused on supply rather than thinking about where the demand will come from are both careening towards a situation where overcapacity in China is going to wind up hitting world markets.”
In particular, Biden’s White House worries about China’s deflationary pressures damaging advanced manufacturing sectors like electric vehicles, lithium-ion batteries and solar panels. As Shambaugh told the FT, “the rest of the world is going to respond, and they’re not doing it in a new anti-China way, they’re responding to Chinese policy.”
Analysts at Barclays, meanwhile, are doubtful about China’s ambitious goal of reaching 70% self-sufficiency in semiconductors by 2025. The endeavor is still “at the start of a very long journey,” Barclays says.
To be sure, the tens of billions of dollars Beijing is investing in local production is bearing fruit with mainland producers moving up the value curve, the bank’s analysts say. This, though, depends on Team Xi stepping up reforms.
China has indeed been stepping up the pace on transforming its economy away from smokestack industries and property toward services and technology. Yet, argue analysts at UBS Global Wealth Management, “the time required to transition to these new drivers means that they too need policy support to smooth growing pains.”
As they point out, “these all raise the policy bar to steady the economy, in our view, and call for unconventional demand-targeted policies to revive confidence.”
That’s easier said than done, notes economist Peiqian Liu at Fidelity Investments. Getting the support/reform mix right, she says, is “critical” to stabilizing China’s outlook. As Liu puts it, “the cyclical rebound this time is intertwined with structural headwinds that China is facing.”
Yet, Liu adds, “the reason behind why China is not rolling out bazooka stimulus at this point of time, in my view, is because of some constraints that China is currently facing.”
These include the legacy of a decade’s worth of debt accumulation to prop up growth. “The headline total debt is almost amounting to 300% of GDP,” she says, “which leads China to rethink its growth model as its debt-driven model does not look sustainable going forward.”
Some observers are less concerned about China’s trajectory thanks partly to global demand for its goods. “I remain optimistic about the long-term growth in Chinese exports, as a way to offset the loss from real estate,” says Qi Wang, CEO of MegaTrust Investment.
“The numbers may speak for themselves,” he says. “China’s share of global exports reached 17% in 2020, which is a record for not only China but also any other countries in history. Since then, China continues to dominate the world in exports, despite the US sanctions, geopolitical risks, supply chain shocks and an unstable global economy.”
The plot thickens when China considers the shifting outlook for US bond yields. Inflation isn’t proving to be as transient as global investors and US Federal Reserve officials alike expected, notes Bruce Kasman, global head of economics at JPMorgan.
“While it’s premature to place significant weight on noisy January data, risks have shifted in the direction that core inflation and labor market conditions both surprise the Fed in a hawkish direction in the first half of 2024,” Kasman says. “This stall has been expected to delay the start of the developed world easing cycle to midyear and curb enthusiasm about the overall magnitude of the easing cycle ahead.”
All of which means that Burry’s enthusiasm for Chinese tech is as complicated as it is tantalizing. Suffice to say, students of his exploits in “The Big Short” have their popcorn out to see if this story has a happy ending.
Follow William Pesek on X, formerly Twitter, at @WilliamPesek