Many investors drawn by China’s bright prospects are now in pain

• President has often suggested Communist Party should return to its true beliefs under Mao

Abraham Lincoln said in the famous Lincoln-Douglas debates just before the terrible bloodbath known as the American Civil War that “a house divided against itself cannot stand. I believe this government cannot endure, permanently half slave and half free”.

China is now in a similar position. It cannot remain half capitalist and half communist. The one country, two systems arrangement in Hong Kong has in effect collapsed now that a free press and trial by jury have gone. Fund managers and news organisations have fled Hong Kong for the relatively benign political climate of Singapore.

The good news for the world is that unlike Lincoln, Chinese President Xi Jinping will not have to witness 750,000 deaths to get his way and impose one system on his country.

In the financial media we assume capitalism will be more popular than communism, but is that true? The more Xi moves away from the market, the more popular he seems to get. China does not need the market to become an economic superpower. With 1.4-billion people and a strong work ethic, it is by no means a given that it will fall to the dysfunctional levels of North Korea, even if it nationalises all the tech giants without compensation.

At least we should still have the opportunity to invest in companies across the straits in Taiwan for a while longer. Semiconductor giant TSMC will still be in many global equity portfolios.

And Xi has seen how cracking down on the technology billionaires in China increases his popularity — in much the same way as Russia’s Vladimir Putin stirred up popular support by cracking down on oligarchs.

I have often disagreed with China bulls such as Ninety One’s Michael Power, who believe the Middle Kingdom will eventually overtake the US, making it an exciting investment destination. The way regulators derailed the Ant Group listing in November 2020 echoed the capricious way the Nigerian regulator imposes fines on MTN.

Alibaba, Ant’s parent company, was fined $2.75bn and forced to cancel the Ant listing. Ant has been a remarkably successful internetbased financial services group.

Capitec CEO Gerrie Fourie said in a recent webinar that if you want to see the future, go to China. This was an ominous echo of the statement by US journalist Lincoln Steffens about Stalin’s Soviet Union: “I have seen the future and it works.”

Many retail investors might now consider the cancellation of the Ant listing to be a blessing in disguise. According to Reuters, they bid $3-trillion for Ant shares, equivalent to the UK’s annual economic output. I know the land of my birth might have already seen its best years, but surely it is worth more than one company?

What really brought it home for SA investors is the clampdown on Tencent, the dominant investment in the Naspers/Prosus camp. This past Monday, Naspers lost R70bn of market value. Tencent was ordered to stop acquiring exclusive music-licensing rights, making the economic case for its Tencent Music streaming service far weaker.

The Chinese government also wants online educational services to be nonprofit, which is surely a perfectly logical position for a communist government to take. Why is anybody surprised? Xi has often suggested the Chinese Communist Party should go back to its true beliefs up to the mid-1970s under Mao Zedong. Yet Western investors haven’t taken any notice of this.

To be fair to Prosus, it has a more diversified portfolio than many assume. Few look much further than the holding in Tencent as it has grown so much, but Prosus also has educational holdings in more market-friendly jurisdictions such as the Europe and India.

Gary Booysen, a portfolio manager at Rand Swiss in Joburg, was quoted in local online publication Tech Central this week as saying the thought of the authorities wiping out the listed education sector with the stroke of the pen is unnerving. Maybe he needs to read more Chinese history. Investment risk has always been high in China, given its ambivalence towards capitalism.

Booysen also says that many investors who were attracted by the cheap valuations and exciting profit prospects of a large, rapidly urbanising population are nursing hangovers now. Perhaps they will have better luck in India, the world’s largest democracy, which is likely to overtake the US and China to become the world’s largest economy over the next 50 years.

Indian Prime Minister Narendra Modi might not be as popular as Xi is in China, but civil society in India is far stronger, and they welcome foreign investment.

Perhaps Momentum Metropolitan, which has a large investment in India, will soon replace Naspers as the glamour stock on the JSE.

THE THOUGHT OF AUTHORITIES WIPING OUT THE LISTED EDUCATION SECTOR WITH THE STROKE OF THE PEN IS UNNERVING

INVESTMENT RISK HAS ALWAYS BEEN HIGH IN CHINA, GIVEN ITS AMBIVALENCE TOWARDS CAPITALISM