I just got back from a recent jaunt in China. It was my first time to “mainland” China and what follows are some of my thoughts brought about from my experiences there. It is worth noting that this was only a two-week trip through a small part of the country (Beijing, Chengdu, Lijiang and Shanghai) but I felt I had a great opportunity to pester locals and the various tour guides to get a sense of the environment there. It’s also worth noting that many have commented extensively on the Middle Kingdom yet never set foot in the country itself and I find much said is not entirely accurate once you visit the country.

Technology is developed for a country considered developing

Mobile phone usage was extensive and rampant. Even the Buddhist monks were walking around with devices tethered to their hands. I’m pretty sure China would immediately collapse if smartphones suddenly disappeared. Which also leads me to an interesting observation: I never saw anyone use a credit card or cash to buy a thing in China … except for myself. Everyone uses their phone. WeChat Pay or, less so, Alipay is absolutely dominate there. In fact, one day we stopped along the side of the road at a small fruit vendor and purchased some fruit. On the side of the wagon was a small QR code that others where scanning with phones to pay for their purchases. Apparently not only can you pay for things with WeChat but you can also file for divorce.

The theory of the Chinese always stealing intellectual property may have some instances of truth, but I can assure you that they have their own and sometimes more advanced technological innovations. In fact, like payments, they seem farther ahead than many developed nations. WeChat Pay is one example but they use their own version of TripAdvisor (Meituan-Dianping), their own search engine (Bidu) and their own ride-hailing (Didi). Even the police force is using Taser-wielding robots that patrol crowded areas to automate some security. In a recent piece by Byron Wien, “Innovation and Limits on Personal Freedom in China” Mr Wien succinctly states that “the theory goes that China has to obtain technology from others because it cannot develop creative ideas on its own. While that might have some truth to it for much of its recent economic history, it is no longer true today”. I would agree. He goes further to list a few Chinese recent and current advancement efforts:

• In 2017, 34 Chinese companies become “unicorns” with market values of $1 billion or more, only the US had more.

• The US, as of 2017, has two supercomputers, so does China.

• China had 359,000 students studying science and technology in 2000 compared to 1.65 million in 2014. In comparison the US had 742,000 in 2014.

• “The area of gene editing is controversial, and Europe and the United States have taken a cautious approach. China has become the leader here with nine clinical studies of cancer and HIV infections versus only one in the US.”

These are only a few but China is clearly focused on innovation, moving up the value chain and becoming a leader in science and technology. While a great deal of the developing world continues to tinker with inconsequential domestic issues or populist underpinnings, China is steadfastly moving forward with an urgent and determined focus.

Maybe the best example of this is its infrastructure development. While Elon Musk tries to sell flame-throwers to support his dreams, including maybe a high-speed tunnel train in California, China is already there. The bullet train between Beijing and Shanghai takes less than five hours and runs at speeds up to 350km/h.

China’s airports are basically brand new and the one we saw being built in Shanghai looks to be bigger than their current airport. Infrastructure in China is now at or far ahead of North America in many cases. In fact, North American infrastructure in many cities is over a century old and crumbling … in China it is essentially brand new.

Fears of a debt induced crash

Many have fretted about China’s exploding debt burden brought about mainly due to its huge growth in capital investment. I myself have also questioned its trajectory and sustainability. In many debt cycles, excessive and rapid growth in leverage has often led to periods of ineffective and unproductive investment. In fact, it often results in excess capacity that ultimately destroys itself. This may in some sense be China’s problem but I am now beginning to believe that they will simply nationalise any problem to the extent needed. The main reason for this is their ardent desire to prevent, if not suppress, any domestic descent.

Social order appears to me to be paramount for the constructive functioning of China’s future development. From what I saw and heard the people are generally content if progress is being made and social mobility continues to evolve in a positive fashion. From my discussions it seems to be a general belief that the Government will do whatever is necessary to quell social discontent and progress its plan of advancement. Is it right to potentially socialise loss and run an economy with major governmental oversight? In my opinion no. But I would be remiss to not suggest that when it comes to investing what you think should be and how things should work doesn’t really matter. Investing is about what is. Don’t let personal politics interfere with investing. The two don’t mix and often prevent investors from making money.

China is an incredible country with a deep history. It has been occupied throughout history (think Opium Wars, Sino-Japanese Wars, the Japanese 1931 invasion of Manchuria, etc) and because of this I feel they are fiercely proud of their progress and where they want to be. They do not want to be subjugated in any form if possible and I think this will fuel their desire to progress independently. It would also seem, from an investment prospective, to be a place to focus on in investing for decades to come, as they will almost assuredly be the biggest economy in the world and maybe even the most advanced.

Sources:

• “People in China can now file for divorce on the WeChat instant messaging app” by Alexandra Ma. Links: https://tinyurl.com/y9cqumlr and https://tinyurl.com/y96us2zm

• “China turns to robotic policing” by Ben Halder. Link: https://tinyurl.com/y94upxa5

• “Innovation and Limits on Personal Freedom in China” by Byron Wien, Blackstone. Link: https://tinyurl.com/yaqckegh

• Nathan Kowalski CPA, CA, CFA, CIM is the Chief Financial Officer of Anchor Investment Management Ltd. and can be contacted at nkowalski@anchor.bm

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