What happens when you think differently about something important? Something that can move markets, influence investor decisions or help sway policy?
If you said, “You make money,” you’re partially right. You may have identified the next big thing, but, unless other investors agree with you, a stock won’t move. Ask any of the protagonists of Michael Lewis’s “The Big Short” what it’s like to wait for everyone else to catch up to you.
Thinking different — and going unheard — was the situation Leland Miller found himself in this past winter. Miller is one of the founders of the China Beige Book, a unique economic research firm that uses survey data from industry sources inside the country to compile a more granular profile of economic conditions than the notoriously opaque Chinese government provides.
Miller’s pitch is that the details matter. Even if investors could believe the big narrative yarns that the Chinese government spins — and they can’t — those broad-brush ideas can’t guide investment theses or policy decisions.
But this winter tested his faith. It was just a few weeks after China’s National Party Congress, and Western investors were content that the country’s leaders had everything firmly in hand as they deftly steered the country from a manufacturing-intensive old economy to a 21st-century service-based one, all the while keeping a careful watch on overall growth so that it would downshift gradually, not in fits and starts.
“People are binary on China — either it’s the greatest country in the world, defies economic gravity, or it’s about to implode,” Miller said. “Now they’re back on the first one.”
Indeed, here’s how IHS Markit, an economic research firm, put it: “Recent economic growth in China has been remarkably stable — real GDP increased 6.8% year-on-year in the first quarter of 2018, the same rate as in the previous two quarters. IHS Markit predicts a mild slowdown in growth from 6.9% in 2017 to 6.7% this year and 6.4% in 2019, as the government continues to (gently) squeeze some of the excesses from the economy.”
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The trouble, for Miller, was that his data, specifically his data on steel production, said something different. Steel isn’t just any industry. If you could draw a Venn diagram with all the “reforms” China’s supposed to be making to its economy — de-emphasizing manufacturing and heavy industry in favor of a consumer-oriented service sector, cracking down on polluters, and letting market demand, not government subsidies, dictate supply — steel would sit smack in the middle.
The China Beige Book has tracked Chinese steel production, and the government’s oversight of the industry, for years, and it’s seen nine straight quarters of increasing capacity, in defiance of that “China pivot” narrative. Miller was worried that the party congress and the increasing unease over a possible trade spat with the U.S. would make steel firm sources reluctant to tell the truth about their activity — but even that didn’t happen. Steel producers kept pumping the stuff out, and they kept reporting on their increases.
“It was very politically sensitive, but firms were telling us right up and through the party congress that they were adding capacity,” Miller said.
So they published that in their research. But no one wanted to listen.
“People didn’t really care about it until it became a political issue with Trump. Until the middle of last year, the world wasn’t watching,” he said. “When they started watching, they said commodities prices are going up and China is claiming in their state-run press that they’re cracking down on production. We’re going to decide to blindly listen to the Chinese government argument. People bought into that.”