David Tepper and the Chinese Stock Disappointment. How his investment strategies collide with reality

American hedge funds investing in China do not acknowledge one important truth. Namely, that China is an autocratic state ultimately governed by one person, Xi Jinping. As president and head of the Chinese Communist Party, Xi is all-powerful.

The interests of Americans investing 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 the state. Xi’s decisions are not based on the interests of the Chinese people. Last month, influential billionaire and hedge fund manager David Tepper spoke in detail on CNBC about the reasons why he actively invests in Chinese stocks. He stated that Chinese authorities have 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 turned to Chinese stocks.

Indeed, after Tepper spoke, Chinese stocks surged by 25%. Investors believed that real economic reforms were on the horizon, which would end 15 years of disappointing stock and real estate returns. American hedge funds were left disappointed by the additional economic stimulus measures announced a week ago on Saturday. They aggressively sold Chinese stocks.

Hedge funds want China to address the underlying issues of the Chinese economy. They know that state investments as a percentage of gross domestic product are too high, while household consumption is too low. Hedge funds also want aggressive actions to restore confidence in the Chinese real estate market. However, three weeks after Tepper spoke and after China announced additional stimulus measures, nothing has changed. The latest data on household consumption remains disappointing. Chinese people refuse to increase investments in real estate. People are unwilling to spend more.

American hedge funds do not understand that China’s leaders do not think like American investors. Americans believe that the government, even if sometimes misguided, ultimately tries to act in the interest of the people. But Xi and his advisors do not share the view that people come first. In China, the interests of the Communist Party and the state are paramount. Internal stability and expanding global power are foundational principles of politics in China.

The Chinese communist system also does not encourage difficult truths or self-reflection. Xi will continue to refuse to confront the reality that Chinese households will not increase consumption and will not reduce savings. Investments in real estate already account for 80% of household savings. Chinese people do not want to throw good money after bad. Ultimately, property prices have fallen by 30% since 2021. There is no social security system in China. The Chinese people are on their own. They must save to avoid a life of poverty when they reach retirement age. Xi refuses to create a government-funded social security system because he believes that government assistance encourages laziness. According to a Chinese saying, Xi does not believe in “lying flat.”

There are already signs that hedge funds are reducing their bets on Chinese stocks. Stocks in Hong Kong, which often serve as an indicator for Chinese stocks, have been under pressure in recent days. People in Hong Kong are familiar with how Xi thinks. Tepper clearly is not.

The central problem is that Xi continues to believe he can allocate capital more effectively than the private sector. He is mistaken. The invisible hand of capitalism is the path to national prosperity and national security. Xi Jinping does not understand that freedom and economic prosperity go hand in hand.