Here’s why most ‘experts’ are dead wrong about China — and what stocks can teach them

Business

By Ken Fisher

A remarkable number of investors cling to the idea that China – no matter how bad the headlines coming out of the East – is inevitably on the rise and that it’s destined to eclipse America and the West.

Those folks should pay closer attention to the stock market.

In 2023, Chinese stocks extended a three-year bear run while world stocks otherwise rose 22%.

What few fathom, while fearing that China will eclipse the West, is that stocks have been predicting China’s descent for far longer.

It didn’t always look like this. Starting about 1980, Chinese Leader Deng Xiaoping and successors evolved a series of market-oriented reforms called “Socialism with Chinese Characteristics.”

They cracked the door to capitalism — permitting privatization, the profit motive and innovation. 

Animal spirits that had been bottled up by communism under Mao escaped — uncorking the “Chinese Miracle.” Ever-growing waves of capitalism enriched China, whose total exports soared from under $200 billion in 1999 to over $1 trillion in 2007.

Stocks, too. From 2000’s end through 2010, the MSCI China rose 276% in dollars, burying the rest of the MSCI All-Country’s 36% return. 

Western ivory tower know-it-alls wrongly envisioned that as technocratic expertise. Then President Xi Jinping’s ascent to power began, bottling up those spirits, ringfencing Chinese capitalism bit by bit. 

Did you know that, since 2010, Chinese stocks, with voting machine volatility, have ultimately gone nowhere? Since 2012, or 2014, ’16, or ’18 – including dividends — there has been no net return. Adjusted for inflation, Chinese stocks are down approximately 40% in 14 years. That’s even as stocks excluding China returned 200%.

This isn’t like US stocks’ occasional, back-to-back sharp bear markets that temporarily check long-term growth from first market peak to second market trough like 2000 to 2009.  This just grinds on — like Japan, whose stocks in 1990 began foretelling the end of its 1960s-1980s global ascent. Stocks “know” China’s problems aren’t temporary. They worsen the longer Xi increasingly, dictatorially strangles capitalism.

Some say China is cheap, but in the long term, stock prices don’t lie. Xi has steadily erected a new Great Wall, thwarting capitalism’s magic with more than 100 new regulations choking basic industry, communications, finance, media, real estate, and tech. He has hobbled innovation, stifled growth – all to create, in his words, a, “new modern socialistic power.” 

By edict, China’s overseas corporate cash now repatriates home to buttress domestic decline. Meanwhile, private personal capital covertly flees. In seven years, China went from being a top-five investor in America to a third-tier player behind Norway and Qatar.

Now, China flails and fails at buoying stocks through direct government purchases and short-sale restrictions. 

These never help. Capitalism helps. 

Official data say China grew 5% in 2023, nailing governmental targets. Markets know better. Were that even close to true, global firms’ Chinese sales would be up. They’re not. Most firms – among them Apple, Volkswagen, Procter & Gamble,  L’Oreal –  have been reporting declining sales in China.

In sum, there’s no middle ground for the Middle Kingdom: Unless it reverses course, re-embracing capitalism’s magic, China’s golden goose is cooked. That goes for its military might, too. (Military capability always follows economic vibrancy.) 

Trust stocks’ long-term truth-telling. China’s imagined ascent isn’t to be feared – at all.

Ken Fisher is the founder and executive chairman of Fisher Investments, a four-time New York Times bestselling author, and regular columnist in 21 countries globally.