Where the Silk Road ends

(Originally sent to clients on 4th October 2024)

Dear David,

My European vacation ended last week in Rotterdam with a tour around the enormous port. It was not on my list of fun activities but our Dutch hosts had arranged a guided boat tour with great enthusiasm.

A week earlier my wife and I were staying on the Grand Canal in Venice, watching the gondolas and Vaparetto’s sailing past our window; with the waters lapping at our front door at noon each day.

Looking up at the enormous container ships I was struck by the links between these two cities. The largest centres of traded goods in Europe separated by five hundred years of history. The exploits of Marco Polo generated enormous wealth for the city state built on water at the end of the silk road.  Did you know that by the end of the Middle Ages Venice was the largest centre of ship building in the world and Venetian secured its pre-eminence in trade by the passing of certain laws largely prohibiting the sale of galleons to foreigners. So it is perhaps no surprise that Venice became the major hub between Northern Europe and the Silk Road where merchants and traders would gather to do business. We saw the influence of the Silk Road through the islamic designs on Venetian buildings; the low domes of St Mark’s, the onion arches and quatrefoils on the windows of the of the buildings opposite our house on the grand canal (in the picture above) . The wealth and splendour of the palaces and churches continue to impress tourists to this day, so one can only imagine the dazzling impression on visitors arriving in the 16th century.

Merchants on the modern silk road have no need of caravans with vessels like the One Ingenuity shown above; holding 15,000 containers it exemplifies our growing consumerism. However it was reassuring to hear that the containers do not return empty; but one does wonder what exactly we Europeans are sending back to China? Because China has a problem post COVID akin to a buyers strike, with excess inventories and oversupply in both the property market and factory output. Additionally, a rising cohort of under-employed graduates openly express disenchantment with their prospects and the fundamental social contact that trades loyalty to the state for better living standards.

So the market was pleasantly surprised by the recent actions of the Communist Party to ease monetary policy in an effort to stimulate growth. The PBOC cut interest rates, mortgage rates and relaxed property ownership rules in tier 1 cities like Guangzhou and Shanghai. They also announced 6.7 Trillion Dollars worth of support to stimulate consumer demand with trade-in deals and vouchers for autos and home appliances. But whilst this is a massive number you have to remember that it only represents 0.3% of total annual retail sales. Many of these same items would typically fill the aforementioned containers bound for export.

The language of this announcement is certainly more explicit than before and acknowledges both the problem and the disenchantment. It explicitly mentions low and middle-income groups and safeguarding the bottom line of people’s livelihood but do the measures go far enough ?

Speaking to fund managers the consensus seems to be that whilst these measures and the change of tone are welcome they are unlikely to be enough. The problem is lack of domestic demand rather than availability of credit. Many property owners have quite enough debt and the reduction in interest rates is unlikely to convince them to gear up even more. Chinese investors typically have two-thirds of their wealth in property which, like their western counterparts, is invariably secured with a mortgage. As one pundit observed,  a man who has gorged himself on cake is unlikely to consume more with the sudden arrival of a different confection !

Stock markets have nonetheless responded with a strong bounce in the MSCI China index. Investors can see that the PBOC has capacity to do more and clearly expects further announcements. Data that I have seen from Bloomberg and Guinness Global suggests that Chinese equities have underperformed by 79% since COVID (December 2020) so there is still room for catch-up there.

Golden Weeks

It is not uncommon for European factories to close down annually for two weeks, so the workers take their holiday at the same time. The Chinese state has taken this industrial practice to a larger scale across China with whole swathes of industrial production coming to a grinding halt at the same time each year. These “Golden Weeks” started as an exercise in efficient use of resources but have become a means to ease the transition to a consumer led economy. Workers invariably spend time with their families, enjoying tourism, leisure and shopping.

The above announcement was carefully timed with the National Golden Week starting on the 1st October. Whether workers will be getting their wallets out remains to be seen, certainly there were a large number of Chinese tourists in St Mark’s Square during our stay. Venice has become a Renaissance theme park but I doubt whether tourists will be taking tours around Rotterdam harbour one hundred years from now. One can only hope that Visitors will still be enjoying the splendours of Venice in 2124.

Max