Economics

It was nearly 40 years ago…

Remember Sid? That was name of the mythical person who was going to be told by the whole newspaper reading/ ITV watching population of the UK to buy British Gas shares. This was the second big privatisation (after BT) in an era of mass privatisation by Mrs Thatcher’s Conservative government. The general idea was to get the public at large into share ownership as a way of making money over the long term (a sound idea, with qualifications, of course) and maybe feel a little bit fonder of capitalism.

It would surprise no-one that a Conservative government in a free market economy would encourage wider share ownership amongst the public.

China wants more micro capitalists

What astonished me was a quotation I heard yesterday from a senior official in the financial system in the world’s largest Communist state with a wholly state controlled economy saying, in essence, that the goverment needed to set up a fund to buy shares in the Chinese stock market, so that valautions were propped up and citizen share holders would feel better off and go back to the desired level of consumption!

Actually, I have learned that this is not the first time that the communist government of China has supported its equity market and on both previous occasions, it all ended in tears. The same could well be likely this time as the government running a fund that owns significant holdings in important companies, even if it not actually nationalisation by the back door, would turn other investors into co-investors with a large, ethics free and powerful shareholder capable of all sorts of undesireable behaviour. Pump and dump immediately comes to mind, even if it might be an accidental process.

Why?

The answer is that if consumption is the cocaine of capitalism, as I frequently say, then it appears it is the crystal meth of state led economic growth. or even Communism. Stalin many have failed to pick up on that.

The Chinese economy has not returned to rapid growth after coming out of the zero Covid lockdown period and that is thought to be partly because the Chinese consumer is nervous. In emerging economies (like where I live) the first asset class people fall in love with is real estate. It is tangible, you maybe want to live in it, and when economies are growing, it goes up in value most of the time. If Marx thought property was theft, then post Marx, let’s all be on the winning side!

However, the Chinese real estate market is currently something of a car crash. A good proportion of bonds (fixed income assets) are linked via the financial sector to the property market, so they look risky too. So it is perhaps logical that the state wants people to move on to owning that harder to understand and more volatile asset class, equity shares. But those pesky overseas institutions are having a big downer on China , because the economic good times have not returned as hoped for! What to do?

Options

Basic economic theory tells us that growth in GDP comes from 3 main sources: consumption, investment and government spending. The last is one to argue about, because if government spending was ‘honest’ it would be funded by taxation and that would be a depressor of growth. Generally, it is funded mainly by borrowing.

Exports and international trade are other factors but I won’t go into that here.

Consumer spending has an obvious sustainability impact. We all over consume because since the 1920’s there has been in place a massive machinery designed to make us feel happy doing just that.

Investment can have varying impacts.

Building a new fast railway line to Manchester has some environmental negatives in the building stage, but likely has considerable positives in reduced car journeys etc. I am no expert on the HS2 project but no doubt a lot of work was done on the sustainability implications of the project.

Investing in low cost housing, green energy, research and innovation facilities and so on adds to economic growth with probable social benefits too, but these are poorly accounted for in the rather crude calculations of economists.

Government spending can be both investment and/or consumption. Unfortunately much of it is poorly managed inefficient consumption and indeed, even in supposedly well regulated developed economies, a percentage of government spending is filtered off by corruption. You could argue that crime is economic activity, but few would encourage a rapid expansion of that sector!

And in China

It is well known that in China they certainly do the goverment spending, both nationally and at regional level, even if it may be disguised through intermediate financial structures. They have massive international debts to prove it!

Investment has been strong too and best of all, it was until recently coming into the country from overseas. That is the ‘gold standard’ primer of growth. But political decisions have scared off some international investors. As I write, Tim Cook of Apple is reported to be in China, so maybe all is not lost, but it needs to be born in mind that Hauwei have taken a serious swipe at Apple’s local market share, so maybe he is more interested in sales than production.

Maybe boosting consumption is the only policy lever left to pull and maybe a sort of reverse Thatchersim is worth trying – the government buying shares, not selling them, to boost the wealth of citizens and make them want to spend freely.

Increased Chinese spending would be good for investors like us, especially if we own funds invested in global brands and luxury goods, or firms that make money from global travel. However, my quick take on the reported proposal is that it is far from well thought out!