A Big Bear Thesis for Ali Baba Stock

September 23. 2020. 7 mins read

“China is more prosperous than before. The people have better lives but they are not happy and confident because the scars are still there.” Those are the words of Jung Chang, an amazing human being who wrote one of the best books you’ll ever read – Wild Swans: Three Daughters of China. In her book, Mrs. Chang tells the riveting story of what happened in China since the beginning of the 20th century. Given that one in five people on this planet is Chinese, we should better understand them, or at the very least, try and make some money off of them.

The Chinese are a superstitious lot, and with that comes an affinity for gambling. If it’s not the horse races in Hong Kong, it’s the baccarat in Macau, a place that produces nearly 5X as much in gaming revenues as Las Vegas. This inclination to gamble has taken foreign financial firms by surprise. When MSCI Barra first started selling risk management products in Asia, they ran into a fundamental problem. Chinese investors didn’t care about risk. If anything, they cared about taking on even more risk. Hero or zero.

Chinese Finance Gone Wild

If you think it’s just Chinese retail investors gone wild, there’s a whole lot more crazy stuff happening in the China financial sector. There’s a shadow banking system – underground financial activity – where more than 40% of Chinese loans are said to be underwritten. Similar to Enron, Chinese companies have been known to implode spectacularly, or even just disappear. When that happens, don’t expect the Chinese courts to drop what they’re doing and sort you out. If a boisterous group of Chinese mainlanders can’t get their money back, what makes you,

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