The investment world has been mesmerized by China’s potential. And why not? With 1.35 billion people, investors worldwide see opportunity. The eyes of the financial world are on the Chinese people. However, my experience in China has been that the eyes of the Chinese government are also on the Chinese people.
The opportunity seems tantalizing given the tremendous growth in China over the past 20 years. It is unknown how much China can grow economically while restricting political freedom. More on this in later posts.
I have read extensively about China, but I would point to two recent sources as providing valuable insights about China. Former Treasury Secretary and Goldman Sachs CEO Henry Paulson’s new book Dealing with China. This is a very valuable review of the challenging, but promising, relationship with China. In an interview surrounding his book launch, Paulson said the following about Chinese president Xi Jinping:
“It’s important to remember that Xi is not remaking China according to the American model. It may seem inconsistent and worrisome to us that the government is opening the economy more to the market while tightening controls over the Internet and political debate. But to Xi, there is no inconsistency. He has made it clear that he believes the Communist Party is the only institution that can both maintain stability and manage the complex process of modernizing the country’s economy.”
Bridgewater Associate’s founder Ray Dalio has been one of my favorite sources of information for better understanding China. He points out that while China’s economy represents around 15% of the global economy, in recent years it has accounted for roughly half of global growth. Dalio highlights that China has grown by 10% over the last decade, up to 6% of this growth has come from unsustainable sources of spending. Growth in property and heavy industry is slowing rapidly.
Chinese policy makers are trying to reorient and rebalance the Chinese economy. They are beginning to address some of the issues related to debt and inefficient lending. They are using monetary policy to help ease this transition. Their success will significantly impact the intermediate term fate of the global economy and global financial markets.
Dalio is an admirer of Xi, and he pointed to the following article in the New Yorker: http://www.newyorker.com/magazine/2015/04/06/born-red
While I don’t agree with the Xi’s approach, it is valuable to understand the Chinese government’s policies and mindset.
In my recent experiences in both Japan and South Korea, savvy investors told me that their largest concern was the slowdown in China. I hope to glean more insights from sources here inside China.
I was warned on my arrival that I would not have access to Google, Facebook, Twitter, YouTube, etc. and this warning has proven true. I’ll have more to post about my insights and meetings after I leave China in a few days.
Special thanks to Brennan Staheli, Devin Lindley, and the Lunt Capital team for their contributions to this report.