Suddenly we have gone from everyone wants to invest in China to no one does. Those who did, now want out.
PE Firms Trapped in China After $1.5 Trillion Betting Spree
Bloomberg reports PE Firms Trapped in China After $1.5 Trillion Betting Spree
Private equity firms that amassed more than $1.5 trillion of assets in China in just two decades are now struggling to offload once-promising investments they were counting on for hefty returns.
With public markets in a slump and offering unattractive valuations, buyout firms are exploring private sales. But mounting concerns about the risks of investing in mainland China have left so-called secondary buyers demanding discounts of 30% to more than 60%, according to people familiar with the market. Haircuts in Europe and the US are closer to 15%.
The lack of easy exits — affecting the likes of Blackstone-backed PAG and Carlyle Group Inc. — has shifted the world’s second-largest economy from a vast frontier for buyouts into an uncertain landscape for long-term investing. Demand for Chinese assets cratered in the past few years, with record outflows even from public markets, as the economy struggles to regain traction and concerns mount over the political direction under Xi Jinping.
Michael Pettis Chimes In
Problem is Scare Demand
Weak Demand the Main Constraint
Weak Demand Question
Q: Why is demand in China weak?
A: Overreliance on property bubbles and overreliance on exports
The answer was well understood (or at least it should have been). Yet, everyone was clamoring to get into China hoping to tap China’s consumer demand.
Now they want out and cannot get out.
Adding insult to injury are Trump’s and Biden’s trade wars, and Biden’s export restrictions. China responded with its own measures.
Tesla’s Oct China-made EV sales fall 2.6% from Sept
Reuters reports Tesla’s Oct China-made EV sales fall 2.6% from Sept
Tesla’s market share in China’s EV segment shrank to 9.89% in the third quarter from 12.98% in the second quarter and 9.93% a year earlier.
It missed third-quarter estimates for gross margin, profit and revenue. It also undershot third-quarter forecasts for its global deliveries, as planned factory upgrades for a revamped version of the Model 3 curbed production.
BYD, Tesla’s biggest Chinese rival, secured its market leadership with a 22.12% gross margin in the third quarter.
Huawei-backed EV brand Aito has also made a splash lately, with its revamped M7 model garnering more than 50,000 orders within the first 25 days after it went on sale in mid-September.
China Export Subsidies
The issue of export subsides came up the other day on Twitter.
Chinese consumers subsidize US consumers. It’s the US manufacturers and politicians who complain over this.
Every country in the world wants to increase exports and reduce imports. Mathematically it’s impossible.
The falling yuan relative to the dollar makes things more difficult for US exporters.
Despite Subsidies, the Supply Chain for Electric Cars is Still Mostly Chinese
Amusingly, Despite Subsidies, the Supply Chain for Electric Cars is Still Mostly Chinese
Eurointelligence on the EU: “Nobody is yet capable of meeting the 45% domestic content requirement.”
“The standards are impossible to meet right now because the car industry is still reliant on Asian-made batteries, which constitute some 40% of the value-added of the car. One industry study shows that the introduction of the customs duty would lead to a fall in EU production by 500,000 during 2024-2026. The UK car industry would suffer correspondingly similar falls in sales. The cost of cars would increase by some €4000.”
In the US, China wins either by licensing Chinese technology in Michigan or by having leased EV batteries built in China.
This has Ford and GM battling over parts.
On September 30, I discussed An Epic Battle: Ford to Use China’s Battery Technology, GM Wants it Blocked
In a battle between GM and Ford, $7,500 in tax credits are at stake depending on Biden’s definition of “foreign entity of concern.” The exclusion aims to reduce US reliance on Chinese batteries and materials to make them.
Global trade is a mess. A key reason is that everyone is starting to think like Trump. He believes there is a winner and loser in trade. And if everyone acts that way, we all lose.
Today President Biden meets with Chinese President Xi Jinping to discuss trade, the Mideast, and other topics.
Don’t expect much of anything to come from it. Both sides are entrenched. And it’s not just a matter of winning, both sides want the other side to lose.
The fearless leaders never listened. It was a bad idea. I lived in China, the philosophy is let them build it, when they leave it is ours
Good!
Clearly there are winners and losers in trade. That is obvious to anyone who bothers to pay attention instead of blindly reciting from the free trade manifesto.
If your nation is running huge trade deficits, you are a loser. You have lost jobs and you have lost competitiveness. You have also given away one of your greatest assets: your technical know how. Yes, you get cheaper products for a while, but when you have no jobs (or worse, government make work job) and your country runs huge budget deficits to make up the difference, eventually the chickens come home to roost.
So, enjoy your cheap trinkets while you can, the impending Greater Depression will be the direct result of your free trade stoked debt super cycle. (Of course other stupid government policies also play a role).
“Clearly there are winners and losers in trade.”
There are no losers in FREE trade. Even masochists don’t freely enter into losing deals.
In unfree trade, OTOH, of course there are losers. If there weren’t, those trades would not be unfree, since both parties would be ok with it.
Betting long range on Communists. Not a good plan.
China can hardly be called Communist. Just as the US can hardly be called free market Capitalist. Both have authoritarian government managed economies. The only difference being that the Chinese government seems to care a little more about its people.
When the game is commies vs financialists who “made money off their home”, the commies will win 100 out of 100 times. As will ABSOLUTELY anyone else.
The freest country will win. And China is vastly freer than the US by now. Despite them being communist.
been saying since WTO that once china stole all our patents and got all manufacturuing processes down
they’d screw the investors
but hey THANKS billy jack clinton for that WTO
making 40,000,000++ million living wage jobs go poof
Billy Jack? He was a cool dude who kicked ass. More like Billy Bob, an Arkantard who grifted his way in the political scene while pushing his crooked, deformed member into intern’ faces.
Somewhat related to all this as far as Chinese assets and investment goes, I wonder what would happen once again if China made an offer to buy a major American oil company the way they did back in 2005, trying to buy Unocal for around 18 billion? Selling a national resource company was considered back then to be important to national security so they were rejected. Yet in the past 18 years the US environmental lobby has become dramatically more powerful as many Climate Change advocates believe fossil fuels are evil and need to be phased out totally by renewables and electric vehicles. So what exactly do you think would happen if China offered a huge premium to buy Exxon-Mobile perhaps the greatest company in the world? Recently Exxon made an unbelievable monster oil discovery off the coast of Guyana and kick ass development continues as more than 11 billion barrels have been discovered so far as they’re just getting started. Soon they will be producing a million barrels a day. Georgetown Guyana has become an absolute boomtown. The money pouring into this poor little country has transformed it into the fastest growing economy in the world. Can you possibly guess who is Exxon’s partner in this amazing endeavor? That’s right none other than Cnooc, the Chinese Oil Company. So once again if China offered to buy this hated fossil fuel company, how exactly would all these dumb ass environmental climate change advocates feel about this?
After what’s happened to Russia (assets seized by US government), I suspect China is not in any hurry to make another bid for a US oil company.
But if they did, would it really matter? They’d own the shares (and resulting profits) but it’s not like they can physically relocate the oil fields to China like they can with a factory or intellectual property. Furthermore, they wouldn’t even be allowed to export the oil they pumped any more than what they can export now because owning the oil fields is not the same as saying China gets 100% of what get pumped. That’s all still regulated by the host country (same thing happens in the Middle East on fields that Exxon owns there, the host country still decides what happens).
> Trade is the voluntary exchange of goods or services between different economic actors
This is like a physics problem that “assumes a frictionless surface”. This might be true in perfect models, but not in life.
In this case we have severe agency problems, specifically CEOs and other executives enriching themselves by moving production to China, while hurting their country, communities and employees. They parachute out and vacation in Nantucket, while the IP they moved to China gets copied, the factory in Ohio shuts down, and the former workers end up on welfare or low paying jobs. Sure, those workers might have lousy jobs compared to before, but the Walmart has cheap crap from China. I would not call that win-win.
If you saw “The Sapranos”, the mob took over a business and did a “bust out”. They made economic decisions that were good for them personally, but bankrupted the company. The US has been one giant bust out for a few decades now, with China being the beneficiary.
“In this case we have severe agency problems, specifically CEOs and other executives enriching themselves by moving production to China, while hurting their country, communities and employees. “
Then get rid of CEOs and other executives. Not freedom.
Just dump them into the muppet’s target year mutual funds in their 401-k account. Welcome To The Vomitorium was a popular slogan amongst Wall Street hoodlums 15 years ago.
I would like to feel sorry for them but I don’t;-)
Just desserts!
No need for any (or all) to lose…
“Trade is the voluntary exchange of goods or services between different economic actors. Since the parties are under no obligation to trade, a transaction will only occur if both parties consider it beneficial to their interests.”
“We are all in this together” —The Red Green Show
The top chart is a mirror of the rise and fall of ZIRP and QE-forever. China had positive rates, and exchange rate fix, so it was easy picking.
One hopes, private equity complains to the dear leaders for this mess.
So many people that need to be demonized these days: Dictators, henchmen and their flunkies. Rich people getting even richer via hedge funds and private equity that borrowed billions at zero percent to buy up everything, making everything more expensive for us. Poor Jim Rogers who wanted to basically move to China, the country of the 21st century. Taught his daughters Chinese. All these fools that we never thought would see the error of their ways … burn, baby, burn
Jim moved to Singapore
Teach your daughter Zimbabwean as second language.