“In order to become the master, the politician poses as the servant.”
– Charles De Gaulle
One of the more interesting additions to portfolios, looking at various reports for the third quarter just ended, is that of Alibaba, the largest e-commerce company in China. Over the last year, the company has been in the news any number of times. There have been huge fines imposed on it by the Chinese government. The founder, Jack Ma, after giving a rather provoking speech in 2020, dropped out of view for a time, although he has now resurfaced. Over the last twelve months, the share price has declined by more than 47%.
Given the large price decline, many well-known value investors have purchased the stock, and in many instances now, doubled down on their original investment. This includes such notables as Charlie Munger, Dodge and Cox, First Pacific Advisors, and Tweedy Browne, among others. The expressed rationale for investing often seems to focus on the discount to business value being too great, resulting in a large, embedded margin of safety. The implied rationale seems to be, “I missed investing in Amazon, which never got cheap again. I misunderstood what Jeff Bezos was doing. This is the next Amazon with a much larger market to exploit. I am not going to miss this one.”
Churchill once said of Russia that it was “a riddle wrapped within an enigma.” I don’t know what descriptive one would apply to China other than that it is a civilization and culture of more than a thousand years. There are considerable differences between that culture and its values and those of the West. In that regard, Jack Ma’s speech of last November caused China’s internet to go from under-regulated to the most strictly regulated in the world. The reaction in the West has been to view this all through the window of a conspiracy, one that would hinder the technology leaders and investors.
A different conclusion would require a study of the policy papers and discussions underlying such regulatory moves. Since they are not in English, one would have to read them in Chinese to appreciate the thoughts behind the content. The analogy, I think, is, yes, Virginia, you really do have to read the entire annual report cover to cover, especially the footnotes as well as the entire 10K.
This brings us to the key question of whether China is or is not investable. The rather astute commentators at Oceanlink Management Ltd. that I have the greatest respect for pointed out that the Chinese government was trying to avoid the problems that have occurred here in the United States. We have four internet monopolies in this country that dominate our lives and control much of the political debate and process to such an extent that there is little hope of any way to rein them in.
To understand the actions concerning Jack Ma and his opinions on financial regulation that he expressed in his speech, you must ask when should it be acceptable for a CEO to criticize a nation’s economists and regulators in real-time out of his frustration that his company was not being exempted from regulatory oversight? Can you see that happening in a Congressional hearing? After all, that is why we have platoons of lobbyists on K Street in Washington, DC.
One can understand this better by looking at it from this perspective. In the West, the individual’s sway over economic and political decisions is paramount. Individual freedom leads to the greater good as defined by societal advancement. Alternatively, China culturally harbors an inbred mistrust of human nature, and the state’s role is to protect individuals from their own weaknesses and failings.
Which brings us to the question of timing. You will have noticed in recent years that in the United States, recessions have been repressed. Rather than allow the regular purging of the economy that used to occur, the election cycle and its potential winners and losers dictate Western (and U.S.) policy. Policy success is measured in, at most, years. China’s politicians (if that is the right phrase) think in terms of decades. China is prepared to let its investments pay off over the long term. And to borrow from Keynes, as facts and circumstances change, so do the appropriate policies.
What determines whether China is investable or not? It comes down to a willingness and desire to understand their system on their terms. And that will require a willingness to put boots on the ground. Cultural and linguistic understanding cannot be picked up from afar. And one needs to get to the source materials in their original form. And there is, of course, the all-important matter of personal relationships.
For those who are looking for suitable investment managers, I would point out that Dodge and Cox, among others, has opened an office in China (Shanghai) and brought into its firm native Chinese speakers. Consultants I respect in this country have also in the last year or so tilted their recommendations toward managers who likewise have people on the ground in China. Flying in for a two-week visit (today Beijing, the next day Shanghai, etc.) is no longer going to cut it.
For those interested in learning more about the question of risk versus return in China, I would refer you to an article published in the October 24, 2021 issue of “The Wire China” entitled The China Bull – Ray Dalio, authored by Brent Crane.