Aikya is a UK-based fund manager that looks for long-term opportunities in emerging markets. In this investor letter they’ve written about the risk of investing in China – using the analogy of foie gras, as the Chinese state fattens up companies and mints billionaires only to decide to consume them when they get too large.
China is experiencing the fastest expansion of consumer purchasing power the world has ever seen, by 2027 1.2 billion Chinese people will be in the middle class, making up a quarter of the world’s middle class. It has many of the hallmarks of a capitalist economy – a vibrant entrepreneurial class, a growing stock market and a massive consumer base. Yet, the economy is still state controlled and numerous examples over the past few years should serve as a reminder of the Chinese state’s powerful control over all levers of the Chinese economy.
In this investor letter, this control is illustrated by ‘fat geese’ billionaires – Chinese business leaders that benefited from state patronage on their way up, only to see the state take it all away. Wu Xiaohui, founder of Anbang Insurance, had the support of party princelings as he grew his business but eventually lost the support of Beijing and ended up with an 18 year jail term. Jack Ma, the founder of Alibaba, has benefited from relationships with the Shanghai faction of the CCP however has recently felt the wrath of Xi Jinping. These are just two examples of a long list: Chen Feng (HNA Group), Wang Jianlin (Dalian Wanda Group), Xiao Jianhua (Tomorrow Holdings), Guo Guangchang (Fosun International), all billionaires that benefited from close patronage of Communist Party officials only to see their fortunes reversed by the Chinese state.
When economic fortunes are so closely tied to political patronage – there is a risk that you can lose it all. As investors, looking to participate in the Chinese economic story, we all need to be wary of these dynamics in China. Individual companies (like Anbang Insurance and Alibaba’s Ant Financial) and whole industries (like the for-profit education industry) can be decimated with the stroke of a pen on the whim of the Communist Party. The trick, according to Aikya, is to avoid these ‘fat geese’ businesses and find companies that have succeeded without the need for political patronage for these are at less risk of political interference.
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