Smart Thought Of The Week: Trust

Poor old China. It is in a bit of a mess. Its problems didn’t exactly happen overnight, though. It has been in the making for quite a while. However, some had hoped that the decline of the Middle Kingdom could have ended when the usual handover of power at the top could have ushered in a more pragmatic administration.

But there is little chance of that happening now. Instead, the Chinese Communist Party could doggedly pursue its ideology of socialism with Chinese characteristics, even if it should lead to the detriment of its economy. Problem is, nobody quite knows what this doctrine really is. It appears to be a movable feast. And that alone is adding to the policy confusion that is unsettling the market.

What’s more, the drip, drip, drip of news about interventions to stem the decline in the Chinese property market, to control the depreciation of the Chinese yuan, and arrest the slow death of the Chinese stock market is not helping. If anything, it is adding to the view that the country has simply run out of ideas, if not money. Talk is cheap.

So, where does China go from here? It is undeniable that China can continue to be a lucrative consumer market for companies that have something to sell. That is unlikely to change overnight. What might change, however, are the types of goods and services that Chinese households will want to buy.

Admittedly, China is not in recession. But many households will feel considerably less rich as the wealth effect of rising property prices dissipates. In that sense, Chinese consumers are no different to any other. They will still need to buy the things that they can easily afford or can’t easily do without.

Consequently, China is not, as some might think, un-investable. But pricing power will become more important as the market loses its trust in the present administration to successfully navigate its way out of a self-inflicted malaise that has spread from the housing market to the stock market…. and eventually into the wider economy.

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Disclosure: David Kuo does not own any of the shares mentioned.

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