China

As an economic superpower, China has made an immense contribution to global growth thanks to the incredible story of its shift out of emerging market status over the past two decades. The transformation of its economy, not least its thirst for commodities has been so spectacular that the question continually asked is what happens to the rest of the world when the slowdown comes in China?

As an economic superpower, China has made an immense contribution to global growth thanks to the incredible story of its shift out of emerging market status over the past two decades. The transformation of its economy, not least its thirst for commodities has been so spectacular that the question continually asked is what happens to the rest of the world when the slowdown comes in China?

The opaque nature of the Chinese economy has often left investors and economists with more questions than answers, particularly regarding credit markets and capital flight. But one thing has been made abundantly clear by its leaders – China is ready to lead the world economy and will take up that responsibility, if others fail to do so.

Comments in early 2017 by Zhang Jun, head of international economic affairs in China’s Foreign Ministry highlighted China’s desire to be a driving force for globalization and they stand in sharp contrast to the protectionist, isolationist policies now being pursued by the US and President Trump. As the US withdraws from the Trans Pacific Partnership trade agreement with countries in the Asia Pacific region, China is busy planning the world’s largest infrastructure project: The $5 trillion ‘One Belt One Road’ as it is called, underscores China’s mission for globalization as it seeks to connect the country with Europe and the rest of Asia.

The One Belt One Road project starts in China and will wind its way through up to 60 countries across four continents. It has been dubbed the project of the century and it aims to revive the ancient Silk Road trading routes. Waves of transport infrastructure will include spending on ports, railways, bridges, roads, pipelines and fiber optic cables, all designed to connect Asia, through the Middle East to Europe and Africa, by rail, road and sea.

One Belt One Road was the special feature in the Real Vision Podcast – Adventures in Finance – Episode Five and you can download the full episode here.

China also made headlines by strengthening its relationship with the EU in other ways. Primarily by taking a lead role in the battle against climate change in stepping up its efforts to reduce carbon emissions, as part of the Paris Accord. This is another area where the US has stepped back from international cooperation.

Investors in China over the last five years have seen a return of 55% on the Shanghai Composite Index.  But for the $10 trillion, second largest equity market in the world (behind the US) international participation has always been tightly constrained, with very modest foreign ownership. That could all start to change now that Chinese stocks will be included in the MSCI global benchmark equity index, which will automatically bring some $1.6 trillion of index tracking funds into China’s market.

Given its importance to the global engine of growth and the commodities cycle, much attention is focused on the economic outlook for China and in particular any signs of a slowdown. The problem for many commentators is that no-one really knows the real picture in the Chinese economy and have trouble believing the official data releases.  While everyone has an opinion, few people – including Kyle Bass – know exactly what’s going on.

Anne Stevenson-Yang lived in China for 25 years and is a true insider. In her Real Vision interview she shared her unique perspective of the China economy, the true position on credit markets and capital flight, as well as the lengths Xi Jinping will go to in order to achieve his objectives.

Another aspect of China that is recognized by a number of leading investors is the huge potential from its emerging middle class particularly with regard to the retail and technology sectors. Mark Yusko, founder and CIO of Morgan Creek Capital Management, who is a frequent guest on Real Vision is bullish on the technology sector in China which he said has some of the most amazing companies in the world, like Alibaba, Tencent and WeChat.

“I said on the day of the Alibaba IPO, and everybody thought I was absolutely out of my mind, that within five years, Alibaba would be the most valuable company in the world. And I actually still believe it. I still think it can get past Apple. Because they dominate everything they do,” Yusko said.