The right way to be bearish on China

Xi is getting the economy he wanted

The recent underperformance of Chinese equities has drawn considerable attention as a symptom of China’s underlying economic malaise. The China permabulls have been out suggesting that this is the mother of all buying opportunities. You can make that case from a narrow valuation perspective, but that would be to ignore both China’s cyclical and structural problems. Chinese stocks were meant to be a secular growth story and yet have been outperformed by Japanese equities, the posterchild secular stagnation story. The prospect of the Japanification of the Chinese economy has long been discussed given they share some structural headwinds, such as an outright decline in population, but that is something of a distraction from the extent to which what is now happening in the Chinese economy has been a policy choice as opposed to a policy mistake. Policy mistakes can be fixed, as Abenomics demonstrated. Policy choices more readily lend themselves to doubling-down on bad outcomes.