Investing In The Far East

Portfolio Exposure To China — One Of The World's Fastest-Growing Economies (Medium Term).

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A Light History Into Chinas’ Economic Growth Story

China wasn’t always the superpower as we know it today. The start of the economic shift occurred around 40 years ago. Believe it or not, China was a place completely different from the high-tech fast-paced economy that it is today.

From the early 1970s to date, the Country’s average GDP growth had stood at 9.9% on a year-over-year basis. 2021 has been an exceptional year of growth with the economy achieving a post-pandemic recovery rate of 18.3%. 

Fun fact — A train in the 1970s took four days to arrive when traveling from Hong-kong to Beijing, in contrast to the 9 hours experienced on today’s bullet trains. The infrastructure advancements are a perfect narration of the economic development over the years.

So, how did they do it? How did china become one of the leading economies in the globe today? 

In the late 1970s, China started to undertake a restructuring of its market reforms that began to overhaul the Chinese Economy. By the early-mid ’90s, China started emphasising the importance of attracting foreign investment to the country. 

Once China noted that there was a lot of interest in its manufacturing industry, the Country passed a bill that in this day and age seems crazy — They allowed mobility of labour out of the farmlands and into the manufacturing plants in the big cities. Sons and Daughters of Chinese families were incentivised to work within the cities/manufacturing plants to find jobs. 

This economic reform had not gone unnoticed by the Western wealth who saw the potential of an expanding market opportunity, whilst also producing their goods and services at lower costs. This was all helping Western Companies to achieve their globalisation targets. 

But Despite all these reforms China remains to be a relatively poor country. It does appear however to be making strides in the right direction. 

In 2020, Chinese consumer spending overtook the GDP of Japan. 

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China’s Technological Gains 

China may be considered to be a ‘middle income‘ country but it’s leading the race or close to leading in many cutting edge technological areas such as: 

• Renewable energy; 
• Fin-tech;
• E-commerce; 
• Digital Currencies; 
• A.I;
• 5G;
• Quantum Computing; etc. 

As the world moves further into the digital age, China appears to be making the right investments in the right places, helping the country to remain the regional dominant player in the Asian markets for years to come and a serious threat to the European and American market share.

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Globalisation, Is It Possible In This The And Age?

Will the global economy be centralised around China in the Future? – Probably Not.

Expectations around China need to be contained. Yes, there belongs a large potential to the Chinese domestic markets, but what about the export market that makes up a large portion of China’s GDP?

Well, let’s put it this way, other global leaders on the world stage aren’t going to hand China their market position that easily, focusing on regional trade policy that benefits their Markets. An example of this would be America and Europe engaging in favourable trade deals as opposed to America and China.

So what we can assume to expect from here is that Chinese policymakers will retain their regional trade dominance with other Asian countries keeping them in power in that region for many years to come.

However, because of the technological advancements made by China, the country is looking like a favourable country to do business with. Remember China is leading the race in many technological sectors making it an attractive business partner. Other than that, it is home to approximately 1.4 billion people, making it an economy and a half by itself.

Should I Consider Investing In China – Medium Term?

If You’re Interested In investing In China, there are a few things that you may want to keep in mind.

Growth

if you’re looking for growth, you can’t avoid China. China accounted for 41% of global growth in 2019 and is forecasted to account for as much as the U.S. and European economies combined over the next several years. 

This growing pie might offer companies room for revenue expansion, especially as China moves away from a focus on “quantity” of growth and toward “quality” of growth. As it seeks more sustainable growth, China is also becoming less reliant on exports, with over 50% of GDP now coming from domestic consumption. A prime example of this would be China’s priority in becoming self-sustainable in the production of semi-conductors.

Chinese Government

Despite the hype around Chinese growth, one needs to keep in mind that China is a communist country. Big tech companies with the likes of Alibaba and now more recently DiDi have been targeted by Chinese authorities for becoming too powerful in the region ultimately bypassing the Chinese regulation to grow their operations. This could potentially result in stricter regulations around these tech companies limiting their growth.

Now the big question remains – will China kill the golden goose?

The tech sector in China has been the pinnacle of the country’s growth model, so much so that the tech economy, has been primarily responsible for China’s employment and wealth creation. However, due to the tightening restrictions on the Chinese tech sector, the Country has been seeing fewer and fewer ‘unicorn’ creations just in the past few months.

Based on historical events, China has had these crackdowns in the past, however, when it is realised that these types of crackdowns hurt the overall economy and its development, the Chinese government tends to ease on their restrictions to bring about a clear consensus between the sector and the government demands. What will happen in reality remains to be seen.

Common Prosperity

In light of the strength of the Chinese tech economy, the government announced that big tech companies would be forced to donate large sums of money to the common prosperity fund. This will imply short/medium term impacts on the Chinese tech giants, however, these companies may stand to benefit in the long-term (which again remains to be seen).

After researching the implications of the common prosperity fund, we came across a renowned blogger in the field, who’s prime objective is to bridge the gap of misinformation that the western media publishes and the so-called reality of the matter. Rui Ma founder of techbuzzchia.com tweeted this link about the common prosperity initiative, stating that the initiatives are far from donations in themselves, and may benefit large tech companies in the future.

https://zj.zjol.com.cn/news.html?id=1722095&from_channel=52e5f902cf81d754a434fb50&from_id=1722096

Evergrande Situation

Unless You’ve been living under a rock over the past couple of months them you’d better update yourself on what exactly is happening in China. check this out:

In summary, the second largest Chinese real estate entity is unable to pay off its debt forcing the company in an awkward position. This may lead to the liquidation of several assets to keep the organisation alive. The company has offered its creditors properties as a means of payment. Only one problem, the property is vacant, and its value is virtually worthless.

This in turn will cause a domino effect rippling throughout the Chinese economy potentially pulling suppliers of goods and services to Evergrande into bankruptcy. Ouch!

The rippling effects of the failure to pay off debt need to be monitored by investors. This could reduce the spending power of many Chinese individuals and businesses in the long term, and slow the overall growth of the Chinese economy. One must also note that if the second largest real estate company is suffering, then what’s to say others aren’t suffering either. Monitor this closely my friends.

Human Rights Issues

Let’s face it China doesn’t exactly have one of the best human rights records. This could potentially have long-term implications on your investment. As the western world starts to take a more liberal approach to governance, increased pressure may be placed on China to improve its human rights records. This ultimately may lead to large-scale boycotts from western countries wanting to do business with china – although highly unlikely, never say never.

An American business journalist once said, ” if corporate America was charged with running the state then America would have been sold to China a long time ago”. – Capitalism remains on top.

Conclusion

Yikes. The Chinese economy according to several media publishers is seeming like an un-investable economy. The country appears to have a lot against it rather than in favour of it in the medium term.

So take this mindset when assessing the Chinese economy as a whole:

Pros
1. It’s (China) growing fast and the purchasing power of the middle class is increasing.
2. The Chinese economy is set to overtake the US economy within the next 2/5 years.
3. Regulation is set to increase, in general regulation tends to favour the larger companies, and smaller companies now have an additional barrier to entry into the market.
4. Internet infrastructure in rural china only has a penetration rate of about 40% which represents room for growth within the underdeveloped regions of China.
5. If the common prosperity funds help digital literacy in rural regions, then this could be a situation of value creation in the long term for the Chinese economy.

Cons

1. The Chinese government is relentless and will focus on what needs to be done with little thought of foreign investors.
2. In China, 60% of peoples’ wealth comes from real estate, whereas it is just 28% in the US (72% from financial assets). This in its own may highlight a significant risk to the spending power of the Chinese economy, and the Chinese individual, should a real-estate bubble burst – slowing the growth trajectories of the Chinese economy.
3. De-listing risks remain there. Although unlikely, China may regulate the use of holding companies in the cayman islands used to register Chinese companies on foreign exchanges, like the US stock exchange.
4. Increased regulation and possible nationalisation of tech giants. Again unlikely, but never say never. Should a tech giant ever become nationalised by the Chinese government, then holding Chinese investments may be potentially worthless.
5. Human rights issues in China have been questioned time and time again. Understand that this could also leave impacts on your investments should china fail to adhere to issues concerning human rights issues.

In conclusion, investors are faced with a handful of risks that should not be taken lightly. If you have the risk appetite and patients for it, then investing in China could reap some serious rewards in the long-term if things begin to settle in the right way. If not, then you may be setting yourself up for disappointment.

The risk is yours to make, but with any risk, may come reward.

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