The Reality of China Doesn’t Match the Hype

The following interview excerpt comes from

Few western observers know China better than Anne Stevenson-Yang. The American lived in the People’s Republic for more than 25 years. In 2007 she co-founded J Capital, an independent research firm that focuses mainly on Chinese companies and the macro environment.

Ms. Stevenson-Yang…How is the Chinese economy doing in general?

Hard to tell. We have so much less transparency then we used to. We’re kind of back in the early 1980s when the quality of information was just really poor. There’s a big unemployment problem among migrant workers and in the service sector. In major cities, you see a lot of little shops and restaurants that are closed, and we know that perhaps 20% of migrants have not gone back to work. Considering that’s a population of about 280 million, 20% are a lot of people.

Why can’t they go back to work?

Because there are less jobs. Everybody is saying: «Wow, China’s back at 85% of its capacity». But where is everything going if people domestically as well as internationally aren’t buying? We know that export-oriented industries are down, and domestic investment and consumption are down, too. So low skilled labor does not have any place to go. That’s why you had Premier Li Keqiang give this speech suggesting that everybody should just have a stall and sell stuff on the street. I mean, how pathetic is that?

… people have less money and are pretty risk averse. Not that many small businesses have enough cash flow to sustain themselves for three months. A lot of them are closed down and that’s a problem for employment. And, when employment drops then income drops.

Is there … a good Chinese company which is worth an investment?

The problem with investing in China in general is that people are investing in an idea about growth that actually is not true. The companies know that. So they all have to show growth, and the way they show growth is really lame and obvious: I will collect money and I will invest the money in my own growth, so then I show growth. A lot of these scams are super obvious.

How careful do you have to be as an investor to not get conned by fraudulent accounting practices?

With Chinese companies it’s always the same: Just stick out a hand and you will find fraud.

What does this mean for the economic outlook for the rest of the year?

… you are going to see a lot of mortgage defaults. The government can recapitalize the banks and it can give them cash in order to delay collecting loans for three months. But you can’t do that forever. Also, not only is unemployment rising but underemployment as well because an awful lot of companies were asked to keep their staff, and those staff have seen salary cuts… It’s a vicious cycle that’s very hard to get out of.

What are the chances that China’s housing bubble will burst?

… the means by which the bubble will burst is by a significant depreciation of the currency. … because people can’t freely buy Dollars and assets overseas, they just keep on holding Renminbi and pretend that the exchange rate is 7:1. Many things are actually much more expensive in China because of the misvalue of the Renminbi. One time, I was trying to buy a belt, and I just gave up because I didn’t want to spend the equivalent of $75 on exactly the same item I can get at Target for $15.

How stable is the political situation in China?

… the severity of the lockdown has had to have a very significant economic impact and we’re not really seeing it in the reports of Chinese companies. You feel like they are getting along on the fact that nobody can travel there and get information. Politically, Xi has focused a lot on closing down the channels through which the bureaucracy can organize. There’s scattered unrest all the time across China, but it doesn’t have a bridging movement or coherent ideology to it.

What do you think the future of Hong Kong and Taiwan will look like against this backdrop?

It’s very sad about Hong Kong because it’s so small and vulnerable, and the same really is true of Taiwan.

What do you make of China’s strategic effort to build out a cutting-edge semiconductor industry?

…The Chinese national chip program has been going on since the early 1960s and they spend massive amounts of money on it. The reason why it doesn’t catch up are short-term bureaucratic targets. The Chinese science ministry – until it got embarrassed by doing so – used to just post an online list of international technologies that Chinese companies would be awarded for replicating. So you had all these companies replicating western technologies. But their products don’t perform quite as well and they’re already out of date by the time they hit the market. It doesn’t work, and yet they keep doing it. Another feature of the Chinese tech push is always vertical integration to capture more profit within a certain industry – or at least that’s the idea. They build endlessly redundant PCB factories, chip manufacturing plants and so forth and end up with massively redundant capacity.

So you don’t think China will be able to create a world class chip foundry like Taiwan Semiconductor Manufacturing, Intel or Samsung?

That’s not what the Chinese economy does, and it’s not what the Chinese economy is going to do either.

If tensions between Washington and Beijing keep rising, what would that mean for firms like Starbucks or Apple which earn a significant part of their revenue in China?

International corporations are making less money, and they’re more negative on the Chinese environment than five years ago… I don’t know what Apple’s calculus is about staying in the Chinese market, but the days of high growth are over.

And what’s your take on Chinese internet giants like Alibaba, Tencent or Baidu?

I’m waiting for the day that Alibaba or Tencent default on their debt or decide that they are going to delist. Then, American investors all sort of realize that the whole Chinese concern is very much fraud and problematic.

Anne Stevenson-Yang
Anne Stevenson-Yang is a co-founder of J Capital Research and is J Capital’s Research Director. The esteemed firm publishes highly diligenced research reports on publicly traded companies, relying on deep, on-the-ground primary research. Founded late 2010 in China, the company has particular expertise in the Chinese market but looks at overvalued companies throughout the world. Anne was formerly co-founder of a group of online media businesses in China and also founded and operated a CRM software company and a publishing company. Over 25 years in China, Anne has also worked as an industry analyst and trade advocate. She authored the 2013 published Book «China Alone: China’s Emergence and Potential Return to Isolation», arguing that China historically repeats a cycle of expansion and retreat.

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