Wednesday, November 08, 2023

The New China Playbook


If you have been a subscriber to The Economist, you will have noticed how biased their reporting is in China. Almost all the news features are negative, and you will think China can be quite a dystopia. 

So, how does one read something that can counterbalance the negative articles in the Economist?

The New China Playbook by Keyu Jin fits the bill. The author was aligned with the Communist Youth League of China and educated in the US, and she has primarily painted a positive picture of the country. 

The book is very broad, and I want to point out two interesting points I learned from the book. 

The first point is the notion of "six wallets". In China, women will generally not marry guys who do not own their homes, so this can create rampant speculation and home values at high multiples of the annual income of citizens. All this being said, home ownership remains high thanks to the "six wallets" available to married couples. Thanks to the one-child policy, a married couple would not just have each other's finances to fund home ownership but also the wallets of their parents. If you and your spouse are only children of parents who are only children, then you may have access to as much as "ten wallets".

The second regards the idea of shadow banking. I've always thought shadowing banking is a loan shark activity that is highly illegal. But as it turns out, shadow banking is enabled by commercial banks and local enterprises that issue a new savings instrument called wealth management products, which can be moved off their balance sheets. Worse, to avoid a lost decade as in Japan, China announced a fiscal splurge where shadow banking became an essential source of funding for local governments. Details are complicated and involve a Local Government Financing Vehicle or LGFV.

As enlightening as the book is, readers need to remind themselves that the author, despite stellar Western credentials, seems to remain a card-carrying Communist, so she will put a positive spin on China. But her very factual description of the financial system in China does not give me any good feelings about the future of China at all. I would not like to partner with the mainland Chinese who share a common bloodline with me as they seem to be expert players of whatever loopholes and regulations the government throws at them.  Communists do not seems to understand the spirit of the law.

But, overall, combined with negative press from magazines like The Economist, this book is a welcome mix that can show investors a different perspective of China. 

I hope that similar books will be written for India and Japan to fill an investor's shelves.


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