China Is The Next Japan

2023年8月22日

In the 1980's, Japan was the ascendant global power.

Year after year, Japan's GDP grew, and it seemed like a foregone conclusion that the country would flip the USA in terms of economic output and political standing (as you can see from the chart above).

What happened next? Utter stagnation.

Demographic issues and a popping asset bubble led to issues that continue to this day, and the economy has never really been able to get off the ground in the last 30 years:



Today, the parallels with China are clear.

China is the new ascendant power.

However;

The country faces a credit crisis, an asset bubble, and demographic shifts that could lead to a massive period of stagnation for the world's second largest economy.

Will China fall behind?



Combined with other weakening economic data, it seems likely that the Chinese dream is over.

Here's the problem; China is an autocracy.

People have put up with a lack of freedoms due to the increasing quality of life.

What happens if that stops?

Thankfully, nobody knows what the future holds. That said, political instability seems likely.

As housing continues to worsen, we're worried about exposure to China from a big picture perspective:



Individually, the best ways to play this seem like puts on FXI, the largest concentrated Chinese mega cap bet. If the economy stagnates, we expect mega-caps will be hit accordingly:



Long puts on big companies like BABA and JD also seem like reasonable trades over the next few years as multiples come in.

Cheers!


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