This was the week when the cracks in China’s policy of ‘market socialism’ widened sharply and several investors fell through them. The carnage spread from China’s e-commerce and fintech bigwigs such as Alibaba and Tencent to edtech companies and then to the property sector. Markets were stunned at the speed and ferocity of the government crackdown. Why on earth, wondered investors, would a government hobble its most dynamic sectors? Is the East becoming Red again, or is it just the Chinese markets that are turning red?
And yet, if the utterances of Xi Jinping are to be taken at face value, the signs were in plain sight for everyone. But to read those signs, you have to know some Maoist jargon. One of them is the ‘principal contradiction’, which identifies the most important struggle in society at a particular time. It is through struggle, said Mao, that contradictions are resolved and progress happens.
After independence, the Communist Party of China identified the principal contradiction as "the people versus imperialism, feudalism and the remnants of Kuomintang forces" which evolved into "proletariat versus bourgeoisie" -- this was the Maoist period. In 1981, the CPC changed its assessment of the principal contradiction to "the ever-growing material and cultural needs of the people versus backward social production"—this was the signal for economic reforms, opening up to foreign investment and the growth of the private sector. In 2017, Xi said the principal contradiction had changed again, and it was now between "unbalanced and inadequate development and the people's ever-growing needs for a better life". The signal was clear—development must trickle down to the masses. The corollary was the private sector would be firmly guided towards national priorities.
What would those priorities be? Here too Xi has been very transparent. He has said the Chinese nation has progressed from "standing up" to "becoming rich" to "becoming strong". Deng Xiaoping had said, "Hide your strength, bide your time", but it’s time now for showing China’s strength. That explains China’s "wolf diplomacy" and its assertiveness in territorial claims. It is part and parcel of the "national rejuvenation" Xi keeps talking about. He has also made no bones about the primacy of the Communist Party. At the recent 100th anniversary of the party, Xi said, "We must uphold the firm leadership of the Party. China's success hinges on the Party." And for those who wonder whether China is capitalist or socialist, he said, "We must follow our own path-this is the bedrock that underpins all the theories and practices of our Party."
But Xi has also in his speeches called for more market reforms and more opening up—he knows it is the private sector that is the most dynamic part of the economy. At the same time, he wants to control its direction, for instance by having Communist Party members on company boards.
The decision to transform edtech companies that teach the school curriculum into non-profit firms stems from Xi’s assertion three years ago that these cram schools had put additional burdens on children and parents and "disturbed the normal teaching order of schools". He said that "an industry calling for conscience should not be profit-driven". Similarly, in March this year, he had said, "Homes are for people to live in, not for speculation". The party wants to make sure that important sectors are not "hijacked by capital".
Why now? Some say it is part of the strategy of increasing China’s birth rate and the clampdown on edtech and housing will lower the costs of having a larger family. There may be legitimate concerns about monopolistic practices, or about data going to foreign shores, or about cybersecurity. The Cold War between China and the US has no doubt exacerbated matters, making security and technological self-sufficiency vitally important for the Chinese leadership.
We weighed in on the subject, wondering whether the principal contradiction in China is actually the one between Xi’s penchant for control and the freedom required for the private sector to operate and innovate. But we felt that the carnage in China would have limited impact on markets elsewhere, including in India.
Indian markets have their own worries, with valuations of most companies being too high for comfort. This week saw a torrent of corporate earnings announcements for the June quarter. But while the results may have been encouraging, the valuations are anything but. Examples include a plethora of stocks, such as Indian Energy Exchange, JSW Steel, Yes Bank, L&T, Ambuja Cements, Interglobe Aviation, Navin Fluorine, Dixon Technologies, ABB India, Mahanagar Gas, Dalmia Bharat and TVS Motors. Read the analyses to find out whether they are worth investing in, despite being expensive.
We found valuations reasonable, given their growth prospects and the economic recovery, for Mahindra CIE, SBI Cards, Tata Motors, Dr Reddy’s, Nestle India, Maruti and Tech Mahindra, although we recommended buying on dips for some of them. We had two cautious but positive takes on ITC’s results. We were cautiously optimistic on Colgate Palmolive. And we considered whether China’s export duties on steel would hurt the high valuations of Indian steel companies.
We advised investors about their best strategy for the Zomato stock post-listing. We looked at the Glenmark Life Sciences and the Rolex Rings IPOs. India’s most valuable start-up, online learning firm Byju’s, told us in this interview they want an IPO in 12-18 months. Given the spate of IPOs, we took a look at whether Indian markets have the capacity to absorb all of them. We warned, though, that not all start-ups are worthy successors to the IT pioneers of the eighties.
Our Monsoon Watch showed kharif sowings gathered pace as the rains improved, but the economic recovery tracker indicated the post-second wave recovery may be an uneven one. Our Herd Immunity Tracker estimates that, at the current vaccination run rate, it may take around 11 months to fully vaccinate the country’s adult population—that makes us vulnerable to a third wave. The recent bank results have underlined the K-shaped recovery, with the less affluent sections hit the most. The parliamentary panel on MSMEs came to similar conclusions.
The Green Pivot this week was on the cement industry’s energy saving efforts. We also introduced The Eastern Window, our weekly column on Chinese and East Asian affairs—in this inaugural week, we explored the significance of Xi Jinping’s recent visit to Tibet.
We have had a deluge of articles this month on the 30th anniversary of economic liberalisation. While liberalisation has been a boon, the chart below illustrates the pace of change in India compared to China. It is a sad indicator of what we could have achieved.
But perhaps it will spur us to action. As Chairman Mao wrote:So many deeds cry out to be done,
Seize the day, seize the hour!