Investing in China
Have you noticed that the mainstream media has been completely wrong about the Chinese economy (and most things!) for 60 years – yet they still insist that it’s about to crash and burn? The Economist magazine has predicted this Armageddon 56 times in the past 35 years! Michael Pettis has built his reputation on predicting the implosion of the Chinese economy for years – yet he’s till hailed as an ‘expert’!
I’ve found only one analyst who’s actually looked at the Chinese economy disinterestedly, James White, of Colonial First State Global Asset Management. I recommend you read and re-read his latest report…
How investment transformed China
- James White releases his latest research paper today. The paper provides his view of China’s economy and seeks to challenge the obsession with China’s weaknesses rather than strengths.
- James highlights the strengths of China’s economic model, details what investment in people, infrastructure and technology can do for an economy and why he feels the developed world should harness China’s engine of productivity, not work against it.Executive summary
This paper is a comprehensive review of my understanding of China’s economy. It’s primary source of data comes from my travels in China and meeting its people from firms to officials across over 20 cities in the last seven years.I have written this review for one specific reason. Too often our understanding of China is focused on its supposed fragilities. It’s not, however, China’s fragilities that should concern the developed world and financial markets but its strengths. These strengths challenge the developed world and its industrial and institutional infrastructure. China is wreaking havoc, just as the United States destroyed the economy of the Old World in the late 19th century. This process will continue until such time as the Chinese engine is harnessed.
China aims to raise the real wages of its people through increasing labour productivity and lowering the cost of living. This is achieved by investment and an organisation of resources that makes the whole greater than the sum of its parts.
Infrastructure is at the core. Beginning on the east coast, China’s infrastructure has made it the pre-eminent manufacturing economy in the world. Increasingly, infrastructure serves to lower living costs through urbanisation and distribution. In this way, it drives both increased consumption but also, importantly, increased levels of equality. And by the power of networks, the more infrastructure China produces, the greater the benefit.
The challenge, of course, is delivering the right outcomes. Here China understands, or seems to, that profit maximising at the firm level cannot lead to an optimal economy-wide outcome. In some instances, this means using natural monopolies for social rather than financial gain. In others, it means cross-subsidisation. While in others, it means producing some of the most competitive markets in the world, where excess returns are non-existent.
Failure is, in many ways, a feature rather than a bug. It represents both innovation and rejuvenation: evident in high speed rail, ultra-high voltage and, for failure, the ghost cities. It will allow industries to rise and, in turn, fall: the SOEs in the late nineties, textiles and coal. Tomorrow it may be trust products.
Yes, there are challenges: property and debt. But these fragilities are over-stated. They do not threaten the model.
The proof is in the numbers. Not just headline growth, but stable and low inflation, strong wage growth and rising tax revenue. The St Louis Federal Reserve estimate that the multiplier on Chinese government spending is two. The economy is creating surplus capital to replace that which is destroyed. Finally, there’s exports. Exports validate internal data: China is taking global market share. and prices are falling even as wages and currency rise. What’s happening externally is surely happening internally.
Like the United States before it, the entry of China into the international economy has raised, in aggregate, living standards globally. The productivity improvement has made available to even more the benefits of manufactured technologies. But rather than being a Golden Goose, China is a deflationary force. A great destroyer of capital. The challenge for the developed world is to harness this engine of productivity, not to work against it. It’s the same for financial markets.
Simply, the largest population on earth, pursuing a radical investment in public goods with near perfectly competitive goods markets was always going to change the world. It’s just a matter of how.