Investors in China should be wary of revolution. China is heading for a social revolution, according to Fidelity fund manager Anthony Bolton. Mr Bolton is one of Britain's most famous fund managers, having earned investors in his Fidelity UK Special Situations fund an average of 20pc a year for 27 years. He stepped down in 2010 to launch a China-focused investment trust for Fidelity, but performance was disappointing. He is confident of turning around the situation and remains bullish about the prospects for the country and its stock market. – UK Telegraph
Dominant Social Theme: China is holding up well and the soft landing is progressing.
Free-Market Analysis: We wrote a number of articles about the threat of social unrest in China using the logic of "three strikes." The first strike was the great famine under Mao; the second famine was Tiananmen Square; the third strike would be an unwinding of the modern Chinese economy.
This article (excerpted above) makes just this point. While social unrest in China (or worse) is not a given, the current Chinese economy is both overheated and inflationary.
Chinese don't have very many ways to save, and thus real estate purchases have been an attractive option. Chinese have now purchased millions of empty apartments (which apparently return to the government after 100 years). Whole Chinese cities are empty. This cannot last. Here's more from the article:
"There is a new generation of internationally educated, internet-informed individuals who will push for reforms," he said. "They are aware of the realities of their country and their government in a way that no previous generation has been. The people will want a say."
Ongoing political rumblings with Japan and South Korea will prove a sticking point with this generation, who are able to access non-censored news through social media websites, he said.
Mr Bolton is not alone in his musings.
A recent debate chaired by Duncan Lawrie Private Bank and attended by Cass Buisness School Professor Kate Phylaktis concluded that the burgeoning middle classes of China, with many business executives being educated in the West, are making the country less tolerant of corruption.
Mr Bolton said that the government was "damned if they do reform, and damned if they don't".
"Some people are nervous of investing in China because of bad local government debt. This does not concern me," he said. "Local governments are simply part of the main government, which is a cash-rich body. What does concern me is the socio-political changes which will be taking place over the next decade."
Bolton is probably correct about coming socio-political changes. But he is making it sound fairly low-key. If sufficient Chinese lose part or all or their net worth due to the popping of the current investment/real estate bubble, the consequences could be severe and even violent.
According to Bolton, reforms will come from within the current governmental structure. That is best case, of course, but worst case, reforms will be attempted in ways that are inimical to the current sociopolitical entity.
Will Mr. Bolton's "social" revolution turn into a real one? That's what Asian investors have to consider as they ponder a Chinese economic unwinding over the next ten years.