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Economics, markets and politics

I am always amused when people make comments like; you were wrong the German banks never went bankrupt after the Greek debacle.  Although technically, they are right, the German banks were able to liquidate valuable assets and the EU provided a massive cushion for banks by socializing the bond losses.  Despite the sale of assets and government support the value of German banks halved since 2009.  It's far worse if the benchmark is 2007...

This commmentary is because of an article in yesterday's FT about "foreign investors" going back into China's stock market.  This was given as a reason to be positive about China's economic prospects.  My read is that several hedge funds saw a positive value following the massive correction in the market (Shanghai main index is down 60%, and the average p/e is at 10).  

That was sloppy reporting by the FT (there's more and more of that I find).  The Chinese financial market is in a difficult position; it is an expression of the country's private market economy, but since 1/3rd of the companies listed are real estate adjacent, that problem will have to be addressed first.  

I am not a China bull, especially for foreign capital.  I don't like the risk profile for non-Chinese investors.  But it would be wrong to say that China is facing a terminal decline right now.  BYD continues to do very well, it is now the world's largest electric car manufacturer (by units).  Tesla has higher sales numbers and lots of profits, but in China, this is less important.  Still, BYD is a real success story, and its vehicles (mostly buses) are starting to appear all over the world, including in the UK.  It is also important to note that BYD is the car company that most resembles Tesla -- fully integrated.

As an investor, it is foolish to only consider economic factors in making an investment decision.  Politics often reshapes the game.  A few months ago, some rather important PLA officers "disappeared". Over the past two months, the purge has deepened, and now several dozen high-ranking PLA officers have been removed from their posts.

These purges are based on political factors that we know nothing about (we just know the obvious outcome).  China delayed its Plenium by nearly 3 months -- this is the meeting of all senior bureaucrats to determine how to achieve the goals set by the Congress.  Rumours are that there are no easy fixes and that even delaying the real estate correction is probably impossible.

When nearly 60% of my ex-firm's very wealthy Chinese clients have already activated their "get out of here" plans, you know that things are serious.  What I was told is that the children and the wives have already left the country and have established residence elsewhere.  

As an investor, I have to take all these risks into consideration.  Rebalancing my portfolio is necessary because political risk has risen again (as if the Ukraine war was not enough).  This morning I spent an hour on the phone with my investment manager, following my instructions.  

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