Category: lenS & thoughtS

Enron – not alone

Recently finished the book The Smartest Guy In The Room.

Shockingly, you could find many of Enron’s problems in other industries in China during the go-go era (property):

1/ focus on doing projects/deals with early monetization. less focus on the real economics over the entire horizon

2/ lots of off balance sheet financing

3/ weak audit; can’t put a check on mgmt

4/ mgmt takes more early profits out, with potential conflict of interests in the form of SPV, etc.

It’s also similar in WeWork!

The same playbook. Remember that Adam Neumann owns some buildings WeWork leases.

Random thought on China’s role in US debt

Historically, China was a big buyer and still a big holder of US gov debt, which to some extent led to the ultra-low interest rate environment.

Nowadays, China is still helping keep the US interest rate low, indirectly. I think by not providing good return opportunities, China is forcing money to go to other places, indirectly providing more money (with low return alternative) in the global market for the US gov.

It’s not just impacting foreign capital interested in China, but Chinese money as well.

Alternatively, if China has attractive opportunities all over the place, it will compete for global money one way or another.

One thing US is envying.. inflation

China Oct CPI is out, core CPI excl. food and energy, there was 0% increase month over month, and only 0.2% increase year over year.

Almost all kinds of food price dropped MoM, with pork dipping 3.7% MoM (+14.2% yoy).

Including food and energy, Oct CPI dropped 0.3% MoM and increased 0.3% YoY.

In Sep, the core CPI YoY increase was at 0.1% while MoM is -0.1%.

 

Thoughts?

a) Powell would love US CPI / PCE look more like China’s… not exactly the same, otherwise that might indicate a problem with demand..

b) The end of Sep & early Oct China’s stock market rally didn’t move the needle / has limited impact so dar. Day to day consumption still looks weak.

c) Rental price dropping 0.1% MoM and 0.3% YoY.

 

If RMB depreciates

One thing that might happen after additional US tariff is a weaker RMB, which can make Chinese export more appealing.

This may diver export from US to other counties, which gives pressure to producers globally.

What to do if you have rmb?

– buy houses in China

especially given that rmb borrowing rate is low, and housing prices have declined for 3 years, if you have confidence in chinese macro, buying a property in good locations is not a bad choice.

– buy overseas companies that are making money overseas

then the earnings power is not priced in rmb, and the value of the company should be rather uncorrelated to rmb.

 

Xiaomi’s strength

Besides Xiaomi’s scale, supply chain capability, IoT strategy, etc., I think the most underestimated strength comes from its competitors.

For all those merchants or companies who are “bullying” consumers, they will find themselves outcompeted by Xiaomi’s products – simply better, cheaper.

Xiaomi is not copying. Xiaomi doesn’t enter a new category if it thinks the product is good enough. Xiaomi usually executes with better efficiency, offers more value, or adds some differentiation.

Another noticeable change for Xiaomi in recent years is its brand value. It used to be more associated with low to mid income consumers as its products offer value.

However, as its car business picking up, people find its brand attractiveness quickly expand into the premium segment. Those who won’t buy Xiaomi phone can buy SU7 or SU7 Ultra etc. – this greatly expanding Xiaomi’s consumer base.

It’s like Walmart + Sam’s Club in terms of capturing more consumers.

Xiaomi could be China’s Tesla.

A “crowd” that works

What’s a good “crowd”?

How do people know they can trust themselves collectively?

Democracy in the US won’t work if the mass can’t think/vote reasonably or behave as “adults”.

If we just use words like “respect” each other – well it’s a good quality but not enough.

I think of some key elements:

a) a crowd needs to be able to deduce correctly – like 1+2=3. Given “1” and “2”, they know those two add up to 3.

b) a crowd needs to be able to double check the facts – like they can verify “1” is “1”, so that misinformation won’t cause much harm.

c) a crowd needs to be able to correct itself. If somehow 1+2 = 10 is the mainstream idea, the crowd can find out they were wrong and make it 1+2=3 in a timely manner.

d) in many more cases, it’s not a deterministic problem. There is no one correct answer, but probably a rang of answers like 1.5-2.5. In this case, people who say 2 don’t need to correct people who say it’s 1.5 or 2.5. Or there is no right or wrong, but just a preference between 1-10. In that case, people needs to recognize the fact that there is a distribution, and a “10” shouldn’t kick a “1” out of the crowd, or vice versa.

 

China is back with good policies. What’s next?

China’s stock market is back. Everyone know.

China rolled out policies to help its stock market & economy. This makes sense.

What are the missing parts?

Some might say geopolitical tension is still an unsolved issue.

I won’t disagree. But I feel it’s not as extreme as before.

Some may say a deeper structural reform.

Fair; but in short term this might not change.

What I think is missing (and China can start to think in short term) is how China can better participate & even organize global affairs & how the world economy can grow better with a stronger China.

Historically, China didn’t excel on this. During times when its economy was leading the world, it didn’t take much care of the world. It could give stuff to nearby countries; it could invent and other can learn; however, it didn’t actively “organize the world”.

A strong economy that can’t lead is a loss to the world, I think.

How to lead? How to make other countries live better as China is a bigger part of global GDP? Not by giving free money but in a healthy, organic way.

That’s the question I haven’t seen much discussion.

Random thought on one-child policy

China implemented one-child policy from 1980 to 2015 (36 years).

This might be the largest social experiment that has ever been done globally.

Only-child policy is rare. Only China has done this.

The impact could be negligible for some families, as they would have had only one child anyway.

But collectively, this has significant impact – e.g. it reduced the population: two ppl turned into one people.

One consequence that many might have ignored – half of the families may “lose” their “last name”.

In China, children usually keep their father’s name. So families with only one girl as their child would “suffer” from this one-child policy.

This might be in China vs. say in the US, as Chinese last names are shared among different families but last names in the US are often unique. If there were one-child policy in the US, ultimately, half of the last names would disappear!

What a loss of culture.

Uninvestable? Part of the game

Sure people can argue they were seeing many absurd things in China over the past couple of years, but in the grand scheme of things, this may also be considered a part of the game.

Just like in some countries, there are various forms of “cost of doing business”.. including developed countries. They are different. So one often needs time to study, and may feel unacceptable.

China is the same; maybe a bit more special – unpredictability of rules is a cost of doing business. Maybe somewhere else, the cost of doing business is “written” in the rules so you know the “cost” before you play. Here, it’s like a higher level of “costs” – changing rules is part of the game & thus this “cost” is hard to calculate/predict. If you can’t calculate costs, and you don’t know the probability, you can’t calculate your return.

However, when you recognize that unpredictability is part of the “game”, then it can become “investable” from time to time.

The “best” player might be able to predict when is investable and when is not.

It’s also okay to be a bit behind. The key is to protect yourself when it’s “uninvestable”, and be reasonably participating when it’s “investable”.

Focus on those periods. You may temporarily forget other “costs”. But you can only pretend that you forget, with a reminder/timer. You have to remember this cost on a deeper level.

The safest period is right after the most dangerous period.

Normally, I prefer not to play poker with Chinese, as they often too good at playing with people.

This doesn’t mean I can’t play. It’s just too energy-consuming.