China rally loses steam as authorities disappoint markets

Chinese stocks began today's session with incredibly strong gains. Strong is an understatement. They started out up about 11 percent, but that did fade as a key government economic meeting ended with no stimulus announcements. Joining us right now is Patrick Chovanec. He is Silvercrest Asset Management Economic Advisor. Patrick, this is something that you've not been a huge fan of. You're not looking at this and lift all boats for forever. Well, it's been a while since anybody's been excited about China, so that's something. But it's like giving candy to a cancer patient. Make them feel better? Yes. But does it really change the situation? No. They're shoveling money in the general direction of the stock market and the real estate market. Will that have an effect? I wouldn't want to get in its way. I've seen rallies like this continue in China, go up significantly higher than this. But again, if you're a long-term investor, what you're concerned about is whether China's changing direction or not. And people have not been encouraged recently about the direction it's been taking. I think of it kind of like don't fight the Fed sort of mentality, where if China decides that it is going to do this, it will be successful. It will be successful for a time. And we even saw how dependent it is on if this meeting didn't produce another announcement of more money, it starts to cool off. So the concern that I have... The stocks there still closed up 6 to 9 percent. The concern that I have is really, is it fixing what's wrong with China's economy? And there are a number of things. Internally, people are concerned about the direction. It's too much top-down, state-led, closing to the rest of the world, on top of the bad debt problems that they already have and need to be addressed. Externally, lots of trade investment tensions, not just with the United States. And that's not going to change depending on who is elected in November. That will still be a real issue. But also with Europe and with other countries. We just saw China retaliate to recent EU tariffs. So China is not going to be able to export its way out of the slowdown that it has without a significant amount of pushback from other countries. Europe was levering tariffs. So tariffs are all over the place. So I don't know what you're supposed to do with them. Kyle Bass was on the other day. He basically says, you just don't invest in communism. It never works. And he said it on the air. He's got this expression, you're picking up dimes in front of bulldozers. So what does that mean? You're like running out there to pick them up and you could get run over at any second? Do you think it's that bad? You're not that negative. No, I'm not. I've lived in China for many years. To call it communism is a little bit oversimplifying the situation. How so? Well, China has a market-oriented economy. It's an economy where for many years they let the market reform it. They benefited from that significantly. Xi has come in and changed that. It's a repressive regime. I think the Uyghurs might disagree with you on whether it's communism. Oh, don't get me wrong. I'm not trying to sugarcoat the situation in China. And in fact, under Xi, it's become more repressive. And that's one of the reasons why people are concerned about the business climate there. I guess some of those issues make sense too. There's just news this morning that Nvidia is going to be building some of its servers, its Blackwell servers in Mexico, and it's doing that through Foxconn. And if you think more and more about the supply chain trying to diversify and get out of there, that may be different than what we've seen in past cycles. And some of this has to do with tariffs, but some of it has to do with a fear of a future armed conflict potentially. I'm not predicting something here, but all you have to do is look what's happening in South China Sea with the Philippines or with Taiwan or Japan where there are every day fighters are being sorted up to meet Chinese incursions. If you're in Washington or if you're in Beijing, this is kind of all that people are talking about and preparing for. It doesn't take a leap of imagination to see that spilling over into some kind of conflict. And companies, whether they're doing business in China or people who are investing in China, just have to be aware that that's a real possibility. And so when Tepper comes on and says that he is buying everything China, everything, everything, everything, your reaction is? My reaction is for how long and what's the time frame there? Are you simply trying to ride a market wave? If you are and you time it right, maybe maybe that works for you. If you're a longer term investor, I think you should be more concerned about some of the things I'm talking about. So what do you tell people to do instead? What do you like? I think you need to diversify in this economy. I think I think the kind of risks I'm talking about, I don't tell people China's uninvestable. Stay away from it. Don't touch it. I just think you have to be conscious that China has to be part of a broader diversification strategy and you need to diversify away from some of the risks that are associated with China. You can't just be all in on China. When you look around the globe, how do you kind of play out Japan, Europe, the United States, emerging markets? Again, there are you look for diversification of risk that there are some things that are closely tied together, right? Japan and China, because of the tensions that I've talked about, are exposed to similar kinds of risks. But Japanese economy has seen significant reform, whereas the Chinese economy seems to be sort of stuck in the same cycle of trying to move towards reform. Interestingly, if you look at the global financial crisis, Israel did really well, not because it's not a risky place. There are other kinds of risks, but the risks are different and they're not linked to risk. So I think that whenever you look at a kind of risky situation in the world where things could go really off the rails, there are companies that were hard hit by COVID and there are companies that benefited from COVID.