I wonder why no one is calling what happened to the Chinese for-profit education sector a nationa...

Ralph Humphrey
edited August 24 in Real Vision 7 comments
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  • Weston Nakamura
    Weston Nakamura Moderator
    edited August 9

    Um.. I would dispute the “no one“ part, at the very least as it relates to me, as I’ve said this repeatedly. In fact the reason you/one may not have heard me explicitly say “China ed-tech is nationalization“ as much as I think is because of my far more long-standing and broader take- there is no “private sector” as we define it in western democratic capitalism (and we in western democratic capitalism aren’t practicing capitalism either, as an entirely separate and unrelated conversation), because the state can/has/will/is directly intervening at any time. Hence my long Nasdaq / short China trade named “long capitalism / short with Chinese characteristics.” The Chinese characteristics part are china’s own words- they’re explicitly saying they don’t run capitalism themselves. A Chinese SOE is actually more “honest” in its identification and categorization than a Huawei or an Alipay. So me/anyone saying “this is nationalization“ company by company or sector by sector is like if I went around and said Amazon or PepsiCo or Sony or LVMH are “privatize sector” - it’s just too basic a fact to stamp each one as such. 
     

    And as it  relates to the EdTech/“private education“ companies and industries- nationalization isn’t like some fringe controversial label, it’s just by definition what the process is. Take it in reverse- I’ll use Japan Post as examples. Japan Post Holdings, Japan Post Bank, Japan Post Insurance- state owned enterprises → govt decide to divest →  IPO’d & now publicly listed and traded stocks (which gov still owns majority stake because of how slow things move but the operation and intent remains the same) = privatization. So if that’s privatization, then the reverse of taking a “private” company under state control of the basic tenants of a for profit company → no longer for profit company = nationalization (and it doesn’t matter if it’s via acquiring voting rights or just a top down announcement with zero actual stake in the enterprise itself). Or Fannie and Freddie- they still do the net worth sweep of their net income to the US Treasury (despite having repaid taxpayer bailouts i.e. no longer indebted to the taxpayers who had to save their sad sorry pathetic businesses) = nationalization. 

    Then take Didi (which I know isn’t education industry but that’s why I don’t make granular distinctions and exemptions that end up temporary anyway) and this fact-ambiguous WSJ claim which can very well end up being true- so let’s say it is true hypothetically for this purpose of example. Didi goes/is public. China concerned about their data getting stolen by foreign corps/sovereigns, hilariously ironically. China didn’t suddenly realize this concern the day after they IPO’d to drop several bombs- they allowed them to raise foreign capital, and then crush the shares, and now that it’s cheap, there are talks of getting bought out by Chinese state backed investment and going “private” (as in delisting, but def not privately owned). Well, that was a nice long run as a flashing ticker symbol on NYSE. But regardless of any potential ulterior motive ”plan all along,” the process of taking a publicly listed company into state hands either direct or indirect is the mirror inverse process of Japan Post privatization, or nationalization.
    And again the reason I don’t really distinguish what specific action was taken to what Chinese entity is because why make the granular distinctions- gov’s major intrusion and flipping things on its head at their whim, and with no actual laws broken, the only change from biz as usual is gov‘s agenda preference changing makes anything under PBOC/CCP umbrella of jurisdiction a state controlled enterprise.   
    And by the way I’m not saying this is “good/bad,” I’m simply applying what the dictionary definitions are. 

  • Claudio Delgado
    edited August 7

    Um.. I would dispute the “no one“ part, at the very least as it relates to me, as I’ve said this repeatedly. In fact the reason you/one may not have heard me explicitly say “China ed-tech is nationalization“ as much as I think is because of my far more long-standing and broader take- there is no “private sector” as we define it in western democratic capitalism (and we in western democratic capitalism aren’t practicing capitalism either, as an entirely separate and unrelated conversation), because the state can/has/will/is directly intervening at any time. Hence my long Nasdaq / short China trade named “long capitalism / short with Chinese characteristics.” The Chinese characteristics part are china’s own words- they’re explicitly saying they don’t run capitalism themselves. A Chinese SOE is actually more “honest” in its identification and categorization than a Huawei or an Alipay. So me/anyone saying “this is nationalization“ company by company or sector by sector is like if I went around and said Amazon or PepsiCo or Sony or LVMH are “privatize sector” - it’s just too basic a fact to stamp each one as such. 
     

    And as it  relates to the EdTech/“private education“ companies and industries- nationalization isn’t like some fringe controversial label, it’s just by definition what the process is. Take it in reverse- I’ll use Japan Post as examples. Japan Post Holdings, Japan Post Bank, Japan Post Insurance- state owned enterprises → govt decide to divest →  IPO’d & now publicly listed and traded stocks (which gov still owns majority stake because of how slow things move but the operation and intent remains the same) = privatization. So if that’s privatization, then the reverse of taking a “private” company under state control of the basic tenants of a for profit company → no longer for profit company = nationalization (and it doesn’t matter if it’s via acquiring voting rights or just a top down announcement with zero actual stake in the enterprise itself). Or Fannie and Freddie- they still do the net worth sweep of their net income to the US Treasury (despite having repaid taxpayer bailouts i.e. no longer indebted to the taxpayers who had to save their sad sorry pathetic businesses) = nationalization. 

    Then take Didi (which I know isn’t education industry but that’s why I don’t make granular distinctions and exemptions that end up temporary anyway) and this fact-ambiguous WSJ claim which can very well end up being true- so let’s say it is true hypothetically for this purpose of example. Didi goes/is public. China concerned about their data getting stolen by foreign corps/sovereigns, hilariously ironically. China didn’t suddenly realize this concern the day after they IPO’d to drop several bombs- they allowed them to raise foreign capital, and then crush the shares, and now that it’s cheap, there are talks of getting bought out by Chinese state backed investment and going “private” (as in delisting, but def not privately owned). Well, that was a nice long run as a flashing ticker symbol on NYSE. But regardless of any potential ulterior motive ”plan all along,” the process of taking a publicly listed company into state hands either direct or indirect is the mirror inverse process of Japan Post privatization, or nationalization.
    And again the reason I don’t really distinguish what specific action was taken to what Chinese entity is because why make the granular distinctions- gov’s major intrusion and flipping things on its head at their whim, and with no actual laws broken, the only change from biz as usual is gov‘s agenda preference changing makes anything under PBOC/CCP umbrella of jurisdiction a state controlled enterprise.   
    And by the way I’m not saying this is “good/bad,” I’m simply applying what the dictionary definitions are. 

    second sentence 1st paragraph explains it…basically don’t ever for one minute think that China is a democratic society. 

  • gerald_o
    edited August 8

    Ray Dalio: "In the case of the educational tutoring companies they want to reduce the educational inequality and the financial burden on those who are desperate to have their children have these services but can’t afford them by making them broadly available. They believe that these things are better for the country even if the shareholders don’t like it." 

    https://www.linkedin.com/pulse/understanding-chinas-recent-moves-its-capital-markets-ray-dalio/.

  • gerald_o
    edited August 8

    Ray Dalio: "In the case of the educational tutoring companies they want to reduce the educational inequality and the financial burden on those who are desperate to have their children have these services but can’t afford them by making them broadly available. They believe that these things are better for the country even if the shareholders don’t like it." 

    https://www.linkedin.com/pulse/understanding-chinas-recent-moves-its-capital-markets-ray-dalio/.

    Also. In the Macrovoices podcast where he was the guest, Bill Blain asserted basically the same thesis.

  • Weston Nakamura
    Weston Nakamura Moderator
    edited August 8

    Um.. I would dispute the “no one“ part, at the very least as it relates to me, as I’ve said this repeatedly. In fact the reason you/one may not have heard me explicitly say “China ed-tech is nationalization“ as much as I think is because of my far more long-standing and broader take- there is no “private sector” as we define it in western democratic capitalism (and we in western democratic capitalism aren’t practicing capitalism either, as an entirely separate and unrelated conversation), because the state can/has/will/is directly intervening at any time. Hence my long Nasdaq / short China trade named “long capitalism / short with Chinese characteristics.” The Chinese characteristics part are china’s own words- they’re explicitly saying they don’t run capitalism themselves. A Chinese SOE is actually more “honest” in its identification and categorization than a Huawei or an Alipay. So me/anyone saying “this is nationalization“ company by company or sector by sector is like if I went around and said Amazon or PepsiCo or Sony or LVMH are “privatize sector” - it’s just too basic a fact to stamp each one as such. 
     

    And as it  relates to the EdTech/“private education“ companies and industries- nationalization isn’t like some fringe controversial label, it’s just by definition what the process is. Take it in reverse- I’ll use Japan Post as examples. Japan Post Holdings, Japan Post Bank, Japan Post Insurance- state owned enterprises → govt decide to divest →  IPO’d & now publicly listed and traded stocks (which gov still owns majority stake because of how slow things move but the operation and intent remains the same) = privatization. So if that’s privatization, then the reverse of taking a “private” company under state control of the basic tenants of a for profit company → no longer for profit company = nationalization (and it doesn’t matter if it’s via acquiring voting rights or just a top down announcement with zero actual stake in the enterprise itself). Or Fannie and Freddie- they still do the net worth sweep of their net income to the US Treasury (despite having repaid taxpayer bailouts i.e. no longer indebted to the taxpayers who had to save their sad sorry pathetic businesses) = nationalization. 

    Then take Didi (which I know isn’t education industry but that’s why I don’t make granular distinctions and exemptions that end up temporary anyway) and this fact-ambiguous WSJ claim which can very well end up being true- so let’s say it is true hypothetically for this purpose of example. Didi goes/is public. China concerned about their data getting stolen by foreign corps/sovereigns, hilariously ironically. China didn’t suddenly realize this concern the day after they IPO’d to drop several bombs- they allowed them to raise foreign capital, and then crush the shares, and now that it’s cheap, there are talks of getting bought out by Chinese state backed investment and going “private” (as in delisting, but def not privately owned). Well, that was a nice long run as a flashing ticker symbol on NYSE. But regardless of any potential ulterior motive ”plan all along,” the process of taking a publicly listed company into state hands either direct or indirect is the mirror inverse process of Japan Post privatization, or nationalization.
    And again the reason I don’t really distinguish what specific action was taken to what Chinese entity is because why make the granular distinctions- gov’s major intrusion and flipping things on its head at their whim, and with no actual laws broken, the only change from biz as usual is gov‘s agenda preference changing makes anything under PBOC/CCP umbrella of jurisdiction a state controlled enterprise.   
    And by the way I’m not saying this is “good/bad,” I’m simply applying what the dictionary definitions are. 

    Yes, and again this isn’t controversial nor contrarian to say- this is what the Chinese gov explicitly labels themselves as (and indeed behaves as). The one thing that isn’t as straight forward is this “capitalism w/ Chinese characteristics“ notion, because that gives the illusion of a core starting point being capitalism, with “Chinese characteristics” (whatever that means) sprinkled in here and there. That is not where the starting point is when thinking of investing in Chinese companies. The standard base to default to isn’t capitalism, but rather, it‘s “Chinese companies with capitalism characteristics.” I wouldn't even say ”socialism with capitalism characteristics“ because they are uniquely Chinese (and who the hell knows what socialism even means - there’s no clear universally accepted snd understood single clear definition). But it’s Chinese companies with elements of capitalism sprinkled in. Which is why it has always and continues to baffle me when western capitalist fund managers evaluate Chinese equities and credit with the exact same template as they do for some company on SPX or DAX or NKY - it’s a completely different game, and you’re somehow assessing relative risk premium based on like valuation metrics and ignoring the fact that it’s not even the same underlying economic system?? It’s like a “professional“ bettor on MMA fighting who then applies the same exact analysis and bets over to a boxing match. Like… no dude.. there are completely different rules and restrictions of what fighters can and can’t do, and the ref WILL step in and stop the fight if your boxer doesn’t comply with the rules of BOXING, and as they should. So don’t start complaining that the ref isn’t following MMA standards of what’s allowed and what’s not- ref is simply following the rules of that system. it’s your fault that you’ve blindly misapplied your irrelevant MMA fighter analysis to an entirely different sport, simply because it perhaps “looks similar.”  

  • Weston Nakamura
    Weston Nakamura Moderator
    edited August 8

    Ray Dalio: "In the case of the educational tutoring companies they want to reduce the educational inequality and the financial burden on those who are desperate to have their children have these services but can’t afford them by making them broadly available. They believe that these things are better for the country even if the shareholders don’t like it." 

    https://www.linkedin.com/pulse/understanding-chinas-recent-moves-its-capital-markets-ray-dalio/.

    @Gerald A Olchowy  yep that’s basically it. But if we’re going to do the exercise of breaking it down to the most basic fundamental level of “why,” it’s the same simple method of assessment that applies to all- just identify who’s in power (and assume that they not only want to remain in power, but it’s their foremost priority to do so), then look at how they respectively believe they can rise in/stay in power or risk losing it from THEIR own perspective (right or wrong), and what tools are at their disposal to execute upon their best interests.

    For China, CCP is in power, and Xi is in power of CCP, and he/they obviously don’t want to relinquish that power. Their perceived biggest risk to relinquishing their power is no different from western democracies - an angry and organized uprising of the many who are either suffering unnecessarily at the expense of a few privileged beneficiaries, or feel left out of an improving quality of life that only a small handful are participating in despite the many who are following the path to promised but unrealized upside in qualify of life. So if that promise of a better life turns out to be perceived as BS, the many overthrow the status quo, whatever that may be, and however that may be.

    What democracy allows for is this battle to take place at a ballot box and public dialogue, and resulting in the elections of the Trumps, the Brexits, the anti-wealth/wealth gap, the anti capitalism sentiments, and the various other expressions of populism and tearing down the existing systemic norms. In non democracies where there are no ballot boxes or public forums and media to express the dissatisfaction of the masses, the battle takes place in the form of congregating masses in protest, and then that either leads to a “voluntary” stepping down relinquishing power in a relatively civil manner (Egypt-Mubarak resignation), or bloodshed - either the incumbent using force in order to maintain power (Syria/Assad civil war), or the masses using force to strip power (Libya-Gaddafi caught escaping and beaten to death in the streets).

    So Xi is looking around the world and sees many different examples and outcomes of overthrow after overthrow to differing degrees, but it doesn’t matter if it’s a democracy or dictatorship. The connecting tissue across the board is a pissed off population, unified by the same issues / against the same perceived cause (unification en masse made possible via free media/social media), and who feel they have nothing to lose should they attempt to overthrow what they feel is a corrupt and broken status quo system. Dispelling all of that and maintaining social order and stability is priority #1 of 1 in order to maintain power. So while free speech, press, assembly and really just information isn’t made available in China (and for this very reason), Xi knows that these are just bandaids that can rip apart, they aren’t underlying fixes. He also knows that if only relying on a tactic of forcing the masses to shut up, be obedient to government, and close off info/communication from the rest of world, that’s the North Korea model - which doesn’t result in becoming a global economic power. And on the other hand, while participating in freedom of info + capitalism does allow for building economic power, it’s susceptible to concentrated wealth inequality and bottom up populism all the same. Xi needs to balance the two “extremes” of America and North Korea with degrees of freedom, but he really needs to make sure the citizens don’t feel the game is rigged, and all have opportunity for a better quality of life- if he can provide that image, then there’s no social unrest and Xi/CCP remains in power with organic support from over a billion citizens.

    So the for-profit education thing is just one of many pieces of maintaining long term social order, in which the few wealthy children have a leg up on the majority poor. He sees what happens in places like the US where the wealth gap fuels the wealth gap. If the for-profit education industry continues, bottom up populism will follow and then social unrest threatens his reign. If he cracks down on it, then no more advantages in education for the rich only, and social order (at least from that angle) is preserved, as is his reign. And if the cost of doing so is a few wealthy western and domestic asset managers get a marked to market position loss, then who wins/loses in that non-debate is a no brainer

  • Ralph Humphrey
    edited August 9

    Um.. I would dispute the “no one“ part, at the very least as it relates to me, as I’ve said this repeatedly. In fact the reason you/one may not have heard me explicitly say “China ed-tech is nationalization“ as much as I think is because of my far more long-standing and broader take- there is no “private sector” as we define it in western democratic capitalism (and we in western democratic capitalism aren’t practicing capitalism either, as an entirely separate and unrelated conversation), because the state can/has/will/is directly intervening at any time. Hence my long Nasdaq / short China trade named “long capitalism / short with Chinese characteristics.” The Chinese characteristics part are china’s own words- they’re explicitly saying they don’t run capitalism themselves. A Chinese SOE is actually more “honest” in its identification and categorization than a Huawei or an Alipay. So me/anyone saying “this is nationalization“ company by company or sector by sector is like if I went around and said Amazon or PepsiCo or Sony or LVMH are “privatize sector” - it’s just too basic a fact to stamp each one as such. 
     

    And as it  relates to the EdTech/“private education“ companies and industries- nationalization isn’t like some fringe controversial label, it’s just by definition what the process is. Take it in reverse- I’ll use Japan Post as examples. Japan Post Holdings, Japan Post Bank, Japan Post Insurance- state owned enterprises → govt decide to divest →  IPO’d & now publicly listed and traded stocks (which gov still owns majority stake because of how slow things move but the operation and intent remains the same) = privatization. So if that’s privatization, then the reverse of taking a “private” company under state control of the basic tenants of a for profit company → no longer for profit company = nationalization (and it doesn’t matter if it’s via acquiring voting rights or just a top down announcement with zero actual stake in the enterprise itself). Or Fannie and Freddie- they still do the net worth sweep of their net income to the US Treasury (despite having repaid taxpayer bailouts i.e. no longer indebted to the taxpayers who had to save their sad sorry pathetic businesses) = nationalization. 

    Then take Didi (which I know isn’t education industry but that’s why I don’t make granular distinctions and exemptions that end up temporary anyway) and this fact-ambiguous WSJ claim which can very well end up being true- so let’s say it is true hypothetically for this purpose of example. Didi goes/is public. China concerned about their data getting stolen by foreign corps/sovereigns, hilariously ironically. China didn’t suddenly realize this concern the day after they IPO’d to drop several bombs- they allowed them to raise foreign capital, and then crush the shares, and now that it’s cheap, there are talks of getting bought out by Chinese state backed investment and going “private” (as in delisting, but def not privately owned). Well, that was a nice long run as a flashing ticker symbol on NYSE. But regardless of any potential ulterior motive ”plan all along,” the process of taking a publicly listed company into state hands either direct or indirect is the mirror inverse process of Japan Post privatization, or nationalization.
    And again the reason I don’t really distinguish what specific action was taken to what Chinese entity is because why make the granular distinctions- gov’s major intrusion and flipping things on its head at their whim, and with no actual laws broken, the only change from biz as usual is gov‘s agenda preference changing makes anything under PBOC/CCP umbrella of jurisdiction a state controlled enterprise.   
    And by the way I’m not saying this is “good/bad,” I’m simply applying what the dictionary definitions are. 

    What Deng Xiaoping promoted was the idea of “socialism with Chinese characteristics.”  Their economy was later officially described as a “socialist market economy,” which many outside observers have described as state capitalism. It is of course true that China’s private sector is different than the one found in the US or other Western countries. But I don’t interpret this as meaning they have no private sector; it is just fundamentally different from the one that we are used to in the US.  To me property rights are an essential ingredient of a private sector, and their property rights are weak not nonexistent.  Citizen A may have property rights against Citizen B, but it is unclear to me what property rights Citizen A has against the Chinese government.  I wonder what Jack Ma would say about the rights one has as against the government.  Mikhail Khodorkovsky may have a similar characterization of rights under the Russian autocracy. 

    I cabined my comment to the education sector because it is to me the more clear-cut example of expropriation.  The starting point here is that not every use of government power that reduces a property’s value can be said to be expropriation.  In the light most favorable to China, it could be easily argued that regulation of DiDi was a legitimate application of its data security laws, regulation of cryptocurrencies was a legitimate application of its regulatory power over the financial system, and regulation of Tencent and real property were the legitimate applications of their antitrust laws.   But, even in the light most favorable to China, I see cannot see the conversion of a for-profit education sector to a non-profit education sector by fiat, after the fact, as anything other than expropriation.  Goldman cut its price target on Chinese education stocks by a mere 78%. So, maybe they don’t see it as an expropriation, which I would think would cause a 100% price target cut.  But, expropriation seems to be an uncommon characterization, which is curious to me.  Had it been in Venezuela under Hugo Chavez, I could easily see the word expropriation bandied about. 

    I’d characterize the US, UK, Japan, and other western countries as having mixed economies, having elements of socialism.  After all, programs like social security are socialist. Margaret Thatcher had her “Big Bang” which essentially spun off a bunch of UK state owned enterprises into the private market as did Japan.  And, in the US we also privatized several government sponsored enterprises.  Amtrak is still 100% government owned.  So, we see elements of government ownership in the west of entities that should or could be 100% private and that we could be critical of. Although, this is in no way the state capitalism we see in China.