Somewhere to Go

Why China’s wall of patient capital, the demand to absorb it, and the returns to reward it are lining up at once

Good morning,

We have something a little different in store today. Our founder, Leonid Mironov, recently sat down with CNBC’s Squawk Box Asia to talk about investing in China, and you can watch the segment here. The conversation was a good one, but 15 minutes of live television only allows so much ground to be covered, so we asked Leonid whether he would mind laying out the argument in a little more detail. He kindly agreed, and the essay below is the result. Do Subscribe if oyu’re interested.

Now the part our lawyers care about. Leonid runs the China fund at Gavekal, and the views that follow are written in a strictly personal capacity. They are his own, not those of Gavekal or any affiliated entity, they are not research, and they are not produced for or on behalf of his employer or its clients. Panda Perspectives is publishing this piece because we think our subscribers will find it interesting, not because we endorse it or any view, security or strategy mentioned in it. Nothing here is an offer, a solicitation, a recommendation, or investment, legal or tax advice, and nothing in it should be relied upon as such. It takes no account of your circumstances, it may refer to positions the author or his fund hold or have held, and past performance is no guide to future returns. Markets carry risk, including the total loss of capital. Do your own work, and if you have comments or questions, take them up with Leonid directly rather than with us.

IMPORTANT NOTE: We are presently in the process of getting a license with a major regulator, and while that process is ongoing we are not able to publish the portfolio update and company notes. We’ll do a big reveal of the new plans as soon as we’re in a position to do thusly. We apologise for it taking time, but this is unfortunately a fact of life. With that we’re also putting the opinion part of this behind the wall.

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A guest essay by Leonid Mironov.

Every conversation about artificial intelligence still opens with Nvidia, and every conversation about electric cars still opens with Tesla. The more interesting money is being made one layer down and several thousand miles east, in the plumbing of the Chinese financial system and the capex it is now redirecting. That is what I want to bring to your attention today.

Here is the central point, in one line: for the first time in roughly 20 years, the supply of capital in China, the demand to put that capital to work, and the returns available to reward it are lining up at the same time. The consensus is still trading the China of 2021, a story of deflation, debt and demographics. The data has moved on, and the gap between the two is the opportunity.

I will make the case in five parts: where the capital comes from, where it goes, why the demand behind that demand is real, how to tell the winners from the value traps, and whether the returns actually justify the prices. Then, as ever, the case against.