In Ray Dalio’s online series, The Changing World Order, he wrote a precise focus piece on world history and the subsequent geopolitical and economic events. It is impressive and insightful. The key takeaway from this book, is that Ray Dalio is bullish in China. He also recently wrote an opinion piece on Financial Times (Paywall, but everyone is entitled to one free article per day).
Here I explore a few reasons why I decided that it’s time to invest in China. It’s a new market, and a very huge one, so it will take a lot of hard work to begin stock picking there.
Guess Who’s Back, Tell a Friend
Here’s an interesting chart of the share of world power for the past 2000 years. China, in red, and India, in orange, had dominated for most of the 1800s. They were then overcame by the colonial powers and United States. However, over the last 30 years, China is emerging again to be the largest global economy power, surpassing the United States.
There is little we can do about it so it’s not like I’m cheering here for someone to win or lose. Hence, one should think about adjusting his/her portfolio to adjust to reality.
Ray Dalio says that the growth of an economy is based on technology, trade output, military, financials, reserve financials and reserve currency. China is now one of the global leaders in technology, trade with China is being conducted all over the world, military (hopefully don’t need to use) is getting stronger, and most importantly, China is also starting to question the power of the US Dollar and began to challenge it with its cypto-Renminbi.
For those who had visited China, you would know that it is very modernized with widespread adoption of technology. The fruits stall seller frowned at me when I tried to pay in cash instead of using digital payment like WeChat Pay or Alipay. Everything is done through their mobile apps. From contactless ordering at a fast food restaurant to hailing a cab. It goes to show how much China has transformed compared to 20-30 years ago.
Rediscovering the World
Another reason why China is a compelling market to invest is that they have a huge influence over the emerging markets of India and SEA (population 1.354B and 670mil respectively). This is compared to the United States where Mexico’s population is 326mil and we have population of less than 1B in Europe.
After years of building up their infrastructure, China is finally ready to extend their influence over their neighboring countries. To do so, they established a Belt Road Initiative (BRI). This initiative is an ambitious plan to connect more than 70 countries on the continents of Asia, Europe and Africa via a series of rail, road and sea infrastructure projects.
This draw parallels to a Gavin Menzies book I read a few years ago, “1421, The Year China Discovered the World”. This is a book about how China, led by Admiral Zheng He, opened trade routes globally. They also tried to unite the world in Confucian harmony. It was during the Ming Dynasty period when China was very very prosperous.
This is also similar to a recent Bloomberg article.
From the looks of it, China infrastructure companies will stand to benefit the most from BRI. As demand from the domestic market starts to taper, these companies can diversify overseas
The Rise of the Middle Class in China
A new generation of middle-class consumers born after the 1990s is emerging. While their parents lived through years of a shortage economy and are primarily concerned about financial security for their families, members of this generation were born and raised in relative material abundance. With a stronger sense of security, the emerging consumers are more interested in a lavish lifestyle.
Strong, continuing growth in the size of China’s middle class and its rising incomes will create exciting market opportunities for global consumer companies. These companies are in a range of sectors that supply goods and services to these new consumers. As well as in all aspects of urban infrastructure construction.
We have already seen it happening to other parts of the world a few years back. In Japan, the extravagant spending habits of cash-rich mainland Chinese tourists was even given its own expression, “bakugai”, meaning “explosive shopping”. This was a huge retail phenomenon all over the world (Champs-Élysées in Paris, Ximending in Taiwan and Fifth Ave in New York) where the Chinese tourist almost bought the whole shopping district back home.
The difference now and then was that the Chinese can now find most items in their homeland China.
With an appreciable increase in the number of consumers willing to pay a premium for good quality, it has opened up business opportunities to capture this wave.
Made in China 2025 & Tech Dominance
Made in China 2025 was launched in 2015. The initiative is more of a response to the weakness of China manufacturing capabilities relative to global leaders. This is not the usual “Made in China” you see at the back of your shirts. It aims to transform China into a manufacturing superpower with 10 priority sectors which include IT, aerospace technology, electric vehicles etc, etc.
In a world in which technology and innovation have become highly globalized, China has sought “self-sufficiency” in core technologies across a range of prioritized industries. The main difference between China and United States race for tech dominance is that many American boards do not have the appetite to invest outside of the core Western and allied markets. Whereas Beijing is heavily supporting this expansion of digital presence overseas.
Huawei’s success has been eased by a state-backed credit line that at one point reached $100 billion and made sure that it was able to outbid all its rivals not only on price, but on R&D too. Countries were given billions of dollars of loansto buy Chinese tech. In the name of development aid.
The world is hungry for more connectivity, and China is satisfying that demand.
Undervalued / Underappreciated?
The Chinese stock market is priced at an expected 6% yield. Other indexes such as the Canadian index is 5% and the S&P500 3.5%. These are based on the Shiller PE. The higher the yield, the “cheaper” the market is. However, it doesn’t mean that cheaper is always better. Turkey is very volatile with huge currency risks but has 14% yield.
Charlie Munger has been vocal about how investors missed out on the Chinese stock market. Despite the encouraging words from Munger, I had also shunned the Chinese stock market due to my perception of their dubious legal framework and fraudulent financial accounts.
China will soon be the largest economy in the world. However, the stock market capitalization is just a fifth of US’s stock market capitalization. When China becomes the leading economic power, it is likely that this gap will be closer.
Some of you may still remember about the Luckin Scandal. Perhaps the most significant fallout of the this episode will be the way in which these Chinese businesses are now perceived by investors. For a business at Luckin’s scale to be caught with its pants down.. It brings into question how they were allowed to get this far. Even seasoned investors and hedge funds were fooled by the lack of U.S. oversight. This will raise questions about other Chinese businesses in the future.
I’m not saying corruption is endemic to Chinese companies, nor am I saying businesses based in Europe or USA hold themselves to a higher moral standard, but the fact remains that people have a biased view about China companies. This is an issue that won’t go away anytime soon due to heightened political tensions between the two superpowers and is a risk investors must take into consideration.
If you managed to read the Financial Times piece by Ray Dalio, go to the comments section. You will see how much hate Ray got just for supporting the other side.
Like Ray Dalio, I’m bullish long term on China and I do think that there is a paradigm shift. My current exposure to Chinese stocks is partly through positions in Tencent and Alibaba which is a bet on the economy and the e-commerce boom.
This doesn’t mean that you should invest in China stocks just because you think that China will prosper and grow stronger. Of course, you could invest in an China ETF but I am not very familiar with ETFs. Then again, it is the simplest way and I can’t see why you will not make a decent return if you hold it for a decade or longer.
For me, I would prefer to target specific stocks. But this takes alot more effort as I need to go deep into individual companies, poring through financials in Chinese (thankfully there is Google Translate), competitors, culture etc etc.
How to Get the Ball Rolling?
For those looking to start but isn’t really sure how, you could go slow by doing some research on your own or attend courses which teaches about investing in the China market.
Personally, I started off by attending the Growth Dragons Investing Course by Dr Wealth. It’s a 3 day online course, with each day spanning about 3 hours long. I would highly recommend this course to those really interested in the China market. Even for people like me who have investing experience, I felt that I have benefitted from this course and some of the stuff taught are new even to me (eg. learn how to invest properly in ETFs). Just learning about the industrial champion stocks you can find in the China market got me really itching to start exploring. The trainer, Alvin, was candid and willing to answer most, if not all, of the attendees’ questions.
Yup, so go ahead and hit the link above if you are interested. (Disclaimer: this is my personal view and not a sponsored post. Dr Wealth if you read this, you know what to do haha… Kidding)
So, wish me luck as I start to invest in China. Hopefully I can write a compelling post about the companies that I found.