The interests of Americans who invest in China do not align with those of Xi. The chairman acts to ensure the dominance of the Chinese Communist Party and the power of its state. Xi’s decisions are not based on the interests of the Chinese people. Last month, influential billionaire hedge fund manager David Tepper spoke at length on CNBC about why he is aggressively investing in Chinese stocks. He said that Chinese authorities promised to do “more and more” to stimulate the economy and encourage Chinese households to increase consumption. Other American hedge funds followed Tepper’s example and jumped into Chinese equities. 

Indeed, after Tepper spoke, Chinese equities soared, up 25%. Investors thought that real economic reforms were about to take place which would end 15 years of disappointing returns from both equities and residential real estate. But China did not do “more and more.” American hedge funds were disappointed with China’s additional stimulus measures one week ago Saturday. They aggressively sold Chinese equities.

Hedge funds want China to address fundamental problems with the Chinese economy. They know that state investment as a percentage of gross domestic product is too high. That household consumption is too low. Hedge funds also want aggressive action to restore confidence in the Chinese residential real estate market. Today, however, three weeks after Tepper spoke and after China announced additional stimulus measures, nothing has changed. The most recent data on household consumption remain disappointing. The Chinese refuse to increase investment in real estate. The people refuse to spend more. 

What American hedge funds do not understand is that the leaders of China do not think like American investors. Americans believe that the government, even if sometimes misguided, ultimately tries to act in the interests of the people. But Xi and his advisers do not share the view that the people come first. In China, the interests of the CCP and the Chinese state are paramount. Domestic stability and expansive global power are the fundamental underpinnings of policy in China. End of discussion.

Nor does the Chinese Communist system incentivize hard truths or introspection. Xi will continue to refuse to address the reality that Chinese households will not increase consumption and reduce savings. Investment in real estate already accounts for 80% of household savings. The Chinese will not throw good money after bad. After all, real estate prices have dropped by 30% since 2021. There is no social welfare system in China. The Chinese people are on their own. They must save in order to avoid living in poverty when they reach retirement. Xi refuses to create a state-sponsored social welfare system because he believes government handouts encourage sloth. To use a Chinese expression, Xi does not believe in “lying flat.”

There are already signs that hedge funds are paring back their bet on Chinese equities. Stocks in Hong Kong, often a proxy for Chinese equities, have been under pressure for the last few days. The people of Hong Kong are familiar with how Xi thinks. Tepper clearly is not.

A central problem is Xi’s continued belief that he can allocate capital more efficiently than the private sector. He is wrong. The invisible hand of capitalism is the road to national prosperity and national security. Xi Jinping does not comprehend that freedom and economic prosperity go hand in hand.

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Don’t listen to billionaire hedge fund managers talking about China.

Instead, listen to Xi’s actions and China’s economic fundamentals.

James Rogan is a former U.S. foreign service officer who later worked in finance and law for 30 years. He writes a daily note on the markets, politics, and society. He can be reached at [email protected]