Getting Priorities Straight
Telling someone to align him or herself with Beijing's priorities still is generally good advice.
- And, when I tell you what those priorities are, I know I am right - until I'm not.
Discerning Xi's preference for 'hard' tech seems pretty obvious.
- Not so obvious is sussing out and predicting the outcomes and impacts of the many ways Xi Jinping is reshaping China's economy in this own vision.
Therein lies the problem when the priorities aren't so clear:
- Reasonable people, working from the same facts, can come to different conclusions and act on them.
- In the meantime, no one knows for sure if he or she is right - and that in itself is important to know.
This conundrum is well-laid-out by Mohamed El-Erian, president of Queens’ College, Cambridge & former CEO of the PIMCO investment firm, in his Financial Times essay, 'Are investors facing a Yukos moment in China?'
- He is writing about investors, but the points he makes apply to senior managers' calls on business decisions and strategy as well.
Dr. El-Erian notes: ‘The headaches for foreign investors in China have mounted.’
- ‘It is not just a matter of a strongly underperforming stock market and several corporate bonds trading at distressed prices.’
- ‘Due to Chinese government actions during the past few months, there is also real concern about investability of the market.’
- ‘The question is wide open.’
‘For emerging market investors in particular, is this the equivalent of a “Yukos moment” of almost 20 years ago which saw the Russian market reel in shock from the government seizure of the oil company before a rebound?’
- ‘Or is it the start of a secular Chinese realignment that will see westerners treated repeatedly as the equivalent of a high-risk junior tranche of a financial investment that is the first to be hit by any shock?’
He pegs correctly that 'the main driver of the underperformance of Chinese assets has been government intervention to upend the operational and financial conditions for several sectors.’
- ‘Motivations range from the need to stop excessive debt and leverage to bringing rich tycoons to earth as part of the government’s new focus on “common prosperity”.’
'Dip-buyers believe that Beijing has gotten its point across and that the situation is reverting — maybe not as far as the prior paradigm in which the government was viewed as a reliable financial backstop but at least one in which its role is neutral.’
‘But there is another interpretation with opposing investment implications — that government intervention will restart and roll into other sectors.’
- ‘It is part of a bigger realignment of the Chinese economic and financial system fuelled by both internal and external considerations.’
- ‘Internally, it is about reasserting the authority of the state and restraining the power of the super-rich, both as a standalone objective and as part of the common prosperity drive.’
- ‘Externally, it is about a generally less accommodating geopolitical operating environment, particularly as the administration of US president Joe Biden shows little interest in deviating from the more forceful posture towards Beijing.’
He says, ‘I, for one, am unable to opt with confidence for one of these two competing views even though global relative valuations clearly favour Chinese assets.’
- But investors have to make that call - and so CEOs.
For my part, I am in the 'government intervention will restart and roll into other sectors' camp.
- And I know I am right - until I'm not.
In these cases of extreme uncertainty, add a little humility and you will know when you are rolling the dice and when you're not.
- In this way, you'll be better prepared to change course more quickly if you find you made the wrong call.
Confucius (of course) said it best:
- 'Recognizing that you know what you know, and recognizing that you do not know what you do not know—this is knowledge.'