China. Is there a topic more important to our perceptions of global hegemony and the structural changes afoot? It was the French emperor Napoleon who famously stated “China is a sleeping giant. Let her lie and sleep, for when she awakens she will shake the world.”
I could fill volumes of books with content on China, so to try and condense it, if even in a series of blog posts, newsletters and podcasts will inevitably do a disservice to the complexity and nuance of the situation.
Nonetheless, I will touch on a few key points and insights, many gleaned from my trip there about 2 years back coupled with recent developments.
China is the world’s largest economy. It has been so since 2014 on a purchasing power basis as highlighted by the World Bank. At over $25tr (PPP) vs. the US around $20tr, its roughly 25% larger!
China accounts for 20% of global population. However, fueling the growth and development of a nation as vast as China means that China consumes roughly half of the world’s concrete, aluminum, nickel, copper, coal and steel as it races along its path to global dominance.
Sure, this will plateau and possibly reverse as China transitions increasingly from its old model of infrastructure-led growth toward a more mature services orientated economy. Services were already the lion’s share of the economy since 2013 and the natural maturation of the economy will see its share continue to rise.
This is evidenced by the rise of service giants like Tencent, Alibaba and Ant (whose listing was abruptly suspended last week) to name a few, and it is apparent that the changes happen as we speak.
Intellectual property and innovation are key drivers of a services led economy. In 2019, China officially surpassed the US in the number of global patents registered at 58990. What is more telling is that the annual growth rate in Chinese patent registration was over 10% compared to the US at 2.8%.
Is China the new centre of the world?
My visit to China in 2018 was insightful. I had the privilege of meeting business leaders and regulators from a myriad of sectors. It was a phenomenal eye opener to the potential nascent in the still growing Chinese behemoth.
Despite its size, China is growing in sophistication and when judged anecdotally by its state of the art infrastructure compared to ageing and crumbling infrastructure in the west, it is clear that China aims to take the lead even in areas it is still lagging.
While it is easy to get excited about the potential, there are many areas where China has a long way to go. Over the last 20 years, China has lifted over 450 million people out of poverty. The population of rural China living below the extreme poverty line (approx. $350/yr) is now under 6 million but the challenge to move these people into the middle class is still very real.
Population of China below the poverty line
The Chinese contextualize their challenges through the long-term strategy of the CCP which includes 3 ‘battles’. Yes, this sounds dramatic but shows the mindset of a China which is taking its internal reform seriously even though this process may seem staccato to western observers.
These battles are broadly about: Addressing Systemic Risk, addressing Environmental Risk and Alleviating poverty and are all seen as key pillars to transition China to a sustainable growth path.
One of the most telling anecdotes in providing a lens for the Chinese approach to regulatory reform was from a dinner with a key financial institution in China at the time. Our hosts introduced us to 2 key ‘philosophies’ or analogies.
These stem from metaphors used by Deng Xiaoping about “crossing the river by feeling stones” and the “Cat Theory”. Now as cryptic as these sound to those in the west, they house 2 fundamentally simple concepts.
The first is that when crossing a river by feeling stones underfoot, one should not proceed unless one has a firm footing, lest the current sweep you away. This certainly goes a long way in understanding what many perceive to be the slow pace of reform in China.
It is grounded in a culture steeped in conservatism which will only give way, as confidence and ‘line of sight’ improves for the powers that be. It also explains why policy makers are not shy to dial back on policies which seem to be having unintended consequences and reassess or wait for a better opportunity to proceed. This is what I see when apparent backtracking of communicated policy changes or a stance to companies IPO’s don’t go as originally communicated.
The second stems from an inscription in Chinese calligraphy that says: “It doesn’t matter if a cat is black or white; as long as it catches mice, it’s a good cat.” This helps shed light on the seeming contradictions we tend to perceive from Chinese policy makers when trying to bucket initiatives into inherently socialist or capitalist models. China is doing what is right for China. Inasmuch as that helps the rest of the world, that is also good. The labels and ideology are perhaps less important that the long-term outcome which is sought, whether that be domestic stability or outwardly orientated expansion.
I have promised that this is likely only the first of many pieces on China and the reason is that there is so much to unpack. In the context of increased nationalism globally and a US which has been in relative geopolitical decline, it is interesting to see China rise to the challenge and exert its own influence in geopolitical matters.
It was fascinating during 2019 to see the US withdraw from multilateralism only to see China attempt to position itself as a champion of globalization. This is obvious in that China has been a large beneficiary of globalization but how the US proceeds (or attempts) to make up lost ground under a new administration will be interesting to watch.
What will we be focusing on in upcoming posts on China?
The signing of Regional Comprehensive Economic Partnership (RCEP) recently highlights China’s multilateralism at work within its own sphere of influence. The rise of the Asian Infrastructure Investment Bank as an alternative to the World Bank and other Western institutions builds China’s financial influence among its members and trading partners.
These all represents mere cogs in the greater machine at play. The ‘One Belt One Road’ or ‘New Silk Road’ strategy is an overarching architecture aimed at a multi-decade strategy of putting China on top and keeping China on top and deserves some focus in and of itself.
A commitment to be carbon neutral by 2060 is fascinating and leap years ahead of many other large economies. With coal making up more than half the current energy mix, the opportunities for other energy providers and clean energy and tech is immense!
For example, during my trip, among many companies, I visited the headquarters of BYD (Build Your Dreams). This is a company which many in the west haven’t heard of save for the fact that Warren Buffet owns a large share of it.
BYD started as a battery manufacturer and in the early 90’s supplied Nokia (remember them?) and other giants. 30 years later, it has become a behemoth in its own respect. It is the only manufacturer globally who can claim to make electric vehicles of all classes (passenger, commercial, utility and even a monorail), and this is just the start.
I hope I have whetted your appetites in terms of the multitudes of facets we may cover on this topic. For now, I will end by saying, China has awoken and the world is shaking. Whether its from fear, or doing the boogie will depend on how you approach your investment strategy to China.
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