Economists like to talk about the lipstick economy. You know, when we're getting into recession territory or people can't afford high-ticket luxury items, they want to go for something that's a bit more affordable but also prestigious and high status. And it seems like Labubu's, you know, filled that niche. So, we're really living in a Labubu economy.
Welcome to China Decode. I'm Alice Han
and I'm James King. In today's episode of China Decode, we're discussing whether or not China is in a bull market, what Ethiopia's new mega dam says about China's growing footprint in the global south, and how the Labubus might be a perfect example of China's cultural exports. All right, let's get into it.
China's stock market is flashing early signs of a bull run. We're seeing 30% year-to-date increases in both mainland and Hong Kong stocks. And at the same time, Chinese insurers are boosting their equity holdings by nearly $90 billion in the first half of the year. And that's the strongest vote of confidence in more than three years.
Beijing, for its part, says it wants a slow and steady rally to restore domestic confidence without triggering another bubble. And that's been a theme that I saw at least in the last week that I was in China talking to some of the entrepreneurs, policymakers, as well as economists. The main theme that I saw in my conversations was this idea of a slow bull run or a quiet bull run.
Alice, you're just back from China, I think. How's the jet lag? Is the vibe okay?
Well, now that I'm in my 30s, James, I'm not bouncing back like I did in my 20s, so I'm definitely feeling the jet lag, but I'm also feeling a vibe shift in China. It's been interesting on the ground since my last trip in April. Consumers, businesses, I think even the policymakers and regulators are feeling more optimistic about China.
And the stock market in China looks like it's really going well. I don't know about gangbusters, but tell us about it. Really, I'm fascinated to hear. Is it a bull market over there or how do you see it?
Well, what was interesting, James, is that no one is talking about tariffs or trade. Everyone's talking about the stock market. For the first time, a lot of my friends are opening up their investment accounts and seeing it flashing green as opposed to red. So, they're feeling like they're finally making money and not losing money. And certainly we're seeing that reflected in share prices. So even on the mainland we've seen 30% up year to date. You know, notable among them are the big tech platforms that are doing extremely well. But what's been interesting to me is the fact that we're seeing margin trading return to about 2015 levels, even although that as a total size of market cap as a percentage is not as high as 2015. But it's an important metric to add because it's showing the level at which both domestic and foreign investors are buying back into Chinese stocks. And I think this is an important story about China setting up an alternative AI ecosystem, seeming to do better on the trade front, much better than people had expected back in April, and China feeling more confident about its economic plan moving forward. There's a lot of structural issues I noted, but I think the stock market has been one of the biggest examples of consumer and business confidence bouncing back.
And I just did a little bit of a back-of-the-envelope calculation. It turns out that the total value of the A-share markets in China, that's the domestic share markets, is about $14 trillion US right now. And if you look since the beginning of this year, that value has gone up by more than $2 trillion US. So if you compare that to the GDP of a country like the UK, we're getting on for about half the value of the total UK economy that's gone into Chinese stocks. So I mean, are we seeing a real shift here? Is this a whole new departure for China, do you think?
Well, I'm a little bit more skeptical about a big bull market happening. I think what struck me, you know, when I talked to investors and even some of the regulators in Beijing is that ultimately the government wants to see a bull market, but what they call a quiet bull market or a slow bull market, meaning that they, you know, want to see more upside in equities because they think this is a good sign of China being back in business. It's also a great way to create a positive wealth effect for households that have been really squeezed by the macro slowdown and real estate bubble bursting. And then last but not least, I would say that what has become apparent is that regulators are trying to be more pro-market and pro-business. That I think vibe shift happened late last year in September and I think it's carried through to basically this year.
But what's been interesting to me is, and I was talking to an investor just earlier today in London, is the fact that we're starting to see a big shift in the way that the Chinese market is being composed. What I mean is that traditionally, you know, you had about as much as 90% of daily trading dominated by retail investors, not institutional. Whereas say in the New York Stock Exchange, that percentage is only 20 to 25% of daily trade volume dominated by retail investors. We're starting to see a shift whereby we're seeing more institutional players coming in. Insurance companies have been allowed to increase their equity exposure to as much as 30% of total assets. And even everyday Chinese people are now, I think, more savvy about investing. Instead of investing in single stocks as they did in the past, they're investing through ETFs on financial platforms offered by say Alipay. So, we're starting to see, I think, a more intelligent, educated, I would say, capital market system. It's still a long way away from Europe and America, but I think certainly that has been a big shift and is probably not covered well enough in the media.
I remember some of these bull runs in the past. I was in China in 2007 and 2015 for the bull runs, and those did get pretty crazy. I remember almost every taxi you got into, the driver was either asking you for a stock tip or giving you a stock tip. And there was a strange spectacle in 2015 of the People's Daily, which is the very state newspaper that acts as the mouthpiece of the Communist Party of China, urging people to do the most capitalist thing imaginable, and buy stocks. I remember in April 2015, the People's Daily declared that 4,000 points is just the beginning, and the market did actually go on to exceed 6,000 points that year. So there are a lot of crazy things happening. I wonder what it's like now. Just one more remembrance from then. I remember covering as a reporter an investor who for Valentine's Day of 2015 gave his wife 99 stocks as presents. And that's because the Chinese for 99 sounds like 'for a long time' or 'for eternity'. I don't know whether his love lasted that long, but sadly the stock market bubble didn't last that long. Just four months later it crashed. So Alice, what do you think? I mean, I'm not going to ask you to look into your crystal ball, but do you think this stock market rally has more solid foundations?
Well, I think given how cheap the forward P/E ratios are and valuations still are by historical and comparative standards, when you look at the US market, I think that this bull run has a bit more to go. I do caution, and this is where I think, you know, it's worth putting our China hats on, I do caution against a massive bull run because I think ultimately the government prioritizes control and stability. So if they see that we're going north of 5,000 in the next few months, things seem to be going out of hand on the upside, I could foresee potential intervention through some of the state-owned players to try to cool the market down a little bit. But certainly I think in the next few months we'll see more positive stories coming out of China, potentially with the new five-year plan, which I think will prioritize the AI revolution, and potentially a Xi summit at the end of October in Korea as well. But again, I do not think that we're going to see a massive bull run. I think that ultimately, you know, back to the top of the call, I think ultimately they want to see a slow bull run or a quiet bull run, which came up in many of my conversations in Beijing this past week.
And are the foreign investors getting really excited now?
I think that we saw the nadir late last year before the September pivot by the PBOC. On the margin, we're starting to see hedge funds get back in. We're starting to see even pension funds that have been reluctant, for China-exposed reasons, to get back into China. I think COVID was a bad time for China and certainly after that it was difficult for many of these endowments and pension funds to justify to their boards increased China exposure. I start to see that the rhetoric is starting to shift because there is more upward momentum and because ultimately, you know, they feel as though China is going to be the main competitor with the US in this broader technological, AI-driven race. And so if you look at the Mag 7, valuations seem very stretched, why not get some exposure to China and hedge some of that overexposure to the US? So I think on the margin, to your question, James, is we're starting to see more interest. I don't think we're going back to 2015, you know, pre-COVID levels of interest anytime soon, but certainly marginally we're seeing more interest.
Am I wrong to be picking on this aspect of it, Alice? I mean, when I looked at the most popular sectors for Chinese investors in their stock market, it seemed to me that these sectors are almost exclusively the very same as the US has been targeting to prevent China's progress, in other words, semiconductors, artificial intelligence, and some others like that. Am I being too simplistic about this?
Oh, no. I think, James, you've definitely hit the nail on the head in some respect because what has happened since Trump 1.0 is that China, through its state apparatus but also through bottom-up initiatives, has, you know, plowed trillions of dollars in the case of semiconductors of fixed asset investment to try to build a resilient China supply chain because it has seen since Trump 1.0 that, you know, the US can easily cut off certain choke-point industries like semiconductors and AI. So I think given the investment in those areas as well as, I would say, a preferencing amongst some of these companies for China alternatives, I think that ultimately these sectors have seen a lot of upside and growth and I think that will remain the case. I think it was interesting that Alibaba was announcing, as well as other tech companies, announcing that they are sourcing their own chips. I think it's also interesting that there's been more focus on not going fully into Nvidia's H20 chips and trying to cultivate and opt for Chinese alternatives. I think this is all part of a broader strategy, which is to say, create an ecosystem which is a China-driven ecosystem for these technologies. And again, it was sparked by Trump 1.0. I think in addition to what you've said, James, another region that hasn't gotten that much attention yet, I think, is biotech, where there has been massive upswings in valuations as well.
Okay, let's take a quick break. Stay with us.
Welcome back. Ethiopia has just switched on Africa's largest hydroelectric dam, a $5 billion project years in the making that Addis Ababa says will transform its economy and electrify the region. The Grand Ethiopian Renaissance Dam now generates over 5,000 megawatts, putting it among the world's biggest dams. It's also a symbol built largely with Chinese expertise and financing. And the dam shows how Beijing is reshaping infrastructure and influence across the global south. But not everyone is celebrating. Egypt, for instance, depends on the Nile for nearly all of its freshwater and says that the project threatens its survival and violates international law. Ethiopia insists that the dam will not harm its neighbors and instead will provide power, stability, and even pride for a nation long plagued by conflict. Now, James, I didn't know much about this dam. I was fixated on the Tibetan dam, but you brought my attention to this. What does this mega dam in Ethiopia say about China's growing role in the global south and in Africa?
Well, I mean, it really is a big event. First of all, the size of the dam is just huge. It could be the type of infrastructure that might change the destiny of a whole country, and Ethiopia is a large country with about 122 million people. Only about 20% of those people currently have access to electricity. So if this dam comes to generate at full capacity, it could mean that many millions more are connected to the grid. But you asked about what does this mean in terms of China's outreach to the global south, and what I mean by the global south is really the developing world. These are countries that are less economically powerful but much more numerous than the countries that populate the West. And I really think that this is a key point because China is building infrastructure all over the global south. In the case of this dam, Chinese companies were central to the construction of it. 11 of the dam's 13 generation turbines were supplied by Chinese companies, and China lent about $1.2 billion US to help finance the dam. This is happening all over the developing world, or the global south as it were. And that's really important because I think when you visit countries in the global south, they have a very different conception of China from perhaps the perception that we tend to have in the West. They see it as a bringer of infrastructure, a bringer of development. I very much had this experience last year when I went to Nigeria, which is a country of more than 200 million people. And I had no idea before I got there that virtually all of the telecoms network is laid by Chinese companies, that the mobile phone market in Nigeria is completely dominated by Chinese companies, including one called Transsion, which has close to a 50% market share not just in Nigeria but in the entire African continent. And then when you look on your mobile phone in Nigeria, you get two mega apps. One is called PalmPay and the other's called Opay. And virtually all of the Nigerian middle class, so upwards of 35 million people, use these apps for their daily life. They use them to transfer money, to pay their utility bills, to borrow money, to invest money, to do all kinds of things. So really from the telecoms cables in the ground to the Nigerian consumer using a smartphone for just about all of his transactions every day, it's all supplied by China. And I think that this creates an economic engagement between China and the global south that really is transforming the global south. And just one final thought before we talk more about this: maybe China exports more than 50% more to the countries of the global south than it exports to the United States and Western Europe combined. So this is really a tectonic shift in how the world works. It's almost as if there's a world beyond the West that is, you know, growing faster, becoming more vibrant than the West itself, and to a large extent that activity is promoted or led by China.
Oh, and this is a great story, James, because what struck me, I think, at the SCO in Tianjin is China's focus on maintaining good relations with the global south. Not just the African nations as you mentioned, but also nations in Southeast Asia where we have seen a massive amount of investing going into the region. The four largest trading partners, Indonesia, Malaysia, Thailand, and Vietnam, have seen a quadrupling of Chinese investment over the past decade, averaging about $8.8 billion a year. So China, I think, is putting a lot of its eggs in the basket, so to speak, of the global south. But this makes me think, James, why is it that we in the West are not really getting that much media coverage of this issue?
That's a great question. I mean, as a former journalist, I think it's... I just think it takes a while before newspapers in the West really kind of catch up with this idea, before it really comes onto their radar. A lot of these countries seem rather far away. They're not historically, you know, the animators of global activity, but these days they really are growing into that role. I mean, collectively, there are so many of these countries, of course, but as you just said, some of the figures are really stark. I mean, because of the trade problems and friction between the US and China this year, in August, China's exports to the United States declined 33%. But in the same month, China's exports to Africa grew by 26%. So we can see very clearly there's a kind of switchback in the world at the moment. China's embrace of these developing countries is growing extremely rapidly, and China's trade relationship with the United States obviously is declining sharply, and with Europe it's sort of level-pegging. So big changes are underway.
Just to take a step back, you know, if we look at China's relationship with the developed markets, I think we're going to see more trade tensions because China is committed to increase its manufacturing share of GDP in order to meet its growth targets. I think given China's excess capacity in many sectors and deflationary pressures on global prices, we're only going to see more, I think, trade tensions, sanctions, pushback from the developed markets. You know, how will China be able to fill the hole, so to speak, with the global south? You know, I struggle to see how that gets solved, but certainly what's struck me in the last year or so is the focus on trying to maintain good ties and even trade relations with some of these global south countries. I think it wasn't a surprise that China announced at the beginning of the year that it was going to have a zero-tariff trading with what they call least developed economies. I mean, this is all part of a PR strategy, right, from Beijing, but does it help meet its economic goals?
Well, I mean, of course, when China exports to these countries in the global south, the profit margins are significantly lower than when China exports to the US or Europe. That's simply because in the US and Europe, people can afford to pay more. So there is that. But certainly overall, if we look at what the global south accounted for in terms of China's total exports last year, it was about 44%. So that's almost half of China's total exports last year was to the global south. So really, I think we are already in a world in which the global south is almost holding up half the sky, as Chairman Mao used to say. And perhaps in the future this will only grow. In fact, my projection is that this year it will become even more pronounced, and we may well get to Chinese exports to the global south being more than half of China's total exports to the world.
