The China Syndrome

Forty years ago, two events occurred that did more to derail an entire industry than any other effort by activists at that time.  In March of 1979, the movie “The China Syndrome” was released.  It starred Jack Lemmon, Jane Fonda, and Michael Douglas.   Reviews of the film were overwhelmingly positive.

The nuclear power industry pushed back against the fictional portrayal of a catastrophe in the making.  The title itself referred to an apocryphal crisis where a nuclear event could result in the plant melting all the way to China. 

And then 12 days after the film’s release, a little-known plant near Harrisburg, PA, Three Mile Island blasted into the public consciousness.   While few people knew what was occurring, the combination of the film and the partial meltdown in Pennsylvania put the kibosh on the growth of the industry. Hundreds of new reactor orders were canceled.  The industry was left moribund for decades.  The Fukushima, Japan disaster was the latest setback to an industry seemingly on the verge of a mini comeback.

The memory of these events led me to consider the recent Hong Kong protests.  In keeping apprised of current events, I always try to consider the potential impact of events becoming a broader concern.   

When Britain handed Hong Kong over to China in 1997, it was agreed that the island would be allowed self-rule for the next fifty years.  It appears that the Chinese government (do we still call them ChiComs?) is not willing to wait that long.

The precise issue that is being protested is proposed amendments to Hong Kong’s laws that would allow extradition to the mainland.  No one in Hong Kong, and probably much of the rest of the world, believes the mainland has a free and fair justice system.   The over-arching concern is the loss of liberties Hong Kong residents currently enjoy via incremental changes ordered by Beijing. 

While it remains to be seen how this turns out, the mainland has not shown restraint in the past.  A violent crackdown could have a snowball effect.  China’s economy has finally begun to reveal cracks that have always been there.

When I traveled to China nearly 20 years ago with my MBA program classmates, we toured a variety of facilities.  It was a mixed bag of thriving joint ventures, export driven manufacturing, and government subsidized “no work” jobs. 

We toured an impressive GM joint venture with a Chinese firm that produces Buicks, among other brands.  It’s interesting to note, that Buick was chosen to be manufactured because of its popularity with historic Chinese leaders, including Sun Yat Sen and their last emperor.  This JV sells nearly 30,000 SUVs a month in China. In fact, one model produced in China is currently exported to the United States.

Other visits proved less interesting.  On tour of a turbine manufacturing plant, we were met with a smattering of employees eating lunch and playing cards.  It was clear that this government subsidized plant merely existed to provide the appearance of employment.

In the lead up to our trip, we did research on the economy.  I was tasked with looking into the financial sector, especially banking.  I had little success in getting any detail one would expect to see of large financial institutions.  It just didn’t exist.  While this opaqueness has lifted somewhat in the ensuing years, there is still a fog around much of the data that comes out of the People’s Republic of China.  We should not forget that the State has nearly complete control over most aspects of the economy and peoples’ lives. 

I share this in context with the longest running bull market we’ve ever seen.  Sometimes, a single event can cause disruption in the market.  This is a friendly reminder to review your risk profile and your investment horizon.  No one knows if the China situation could spiral out of control.

If you would like to discuss my approach to planning or investing, please contact me at your convenience.  Feel free to share with others and make suggestions for future articles: peter.oneill@fiduciamwealth.com