China’s 20th Communist Party Congress concluded on October 22nd. The week-long, semi-decade, seminal event appoints leaders, implements constitutional changes, and specifies public policy priorities. Western media focused almost exclusively on Xi Jinping’s appointment to a norm-defying third term as well as his decision to place more allies in the top ruling committees to solidify his power. Investors fear President Xi will move aggressively to roll back free market reforms, and rein in open-market capitalism. If true, this has negative implications for not only China, but also portends a weaker world economy, engendering a less positive environment for global equities. Fortunately for investors, this media narrative, although becoming the generally accepted belief, is a fundamental misread of China’s recent developments.
The question of China targeting private enterprise for greater government control is, of course, crucial to the world’s economy. Private entrepreneurs largely drove China’s ascent to become the world’s growth engine. Accounting for 38.6% of global growth between the years 2013 through 2021, China’s annual GDP growth of 6.6% outstripped average emerging market growth of 3.7% and contributed more to the global economy than the Group of Seven’s economic contributions combined. (The Group of Seven includes Canada, France, Germany, Italy, Japan, the United Kingdom and the United States.) Although less geared to China than much of the rest of the world, the US, through trade, investment, and greater input efficiencies benefits from a strong China economy as well. For example, Oxford Economics estimates US exports to China support 1.9 million US jobs. Thus, any meaningful crackdown on the free market economy by communist China hurts everyone.
Although the media mostly covered the Party Congress in a one-sided, superficial manner, one should not be too critical. Despite the fact that a weak China economy hurts the US, the media understands negative China stories are generally popular with domestic viewers. Also, we live in a world driven by sound bites. We’re all exposed to massive amounts of information and we’ve become adept at scanning, skimming, and scrolling. Catering to this modern reader, media stories tend to present information as black and white. Shades of gray takes time and concentration to contemplate. (Sadly, the most frequently answer given by youth for the popularity of Tik Tok is that the short videos convey information without the viewer having to think). With China, however, everything should be viewed in shades of gray, otherwise, misconceptions develop. For instance, investors assume President Xi prefers SOEs, or state-owned enterprises, to privately owned companies. The facts show something quite different. Under Xi’s leadership, the number of private companies among the top 500 Chinese enterprises more than doubled and have come close to overtaking the number of SOEs. Further, under President Xi government spending, as a percent of GDP, has come down significantly, falling from 26% to 18%, recently. Obviously, President Xi does not seek a government takeover of the private sector.
Naturally, China perma-bears point to the targeting of the private technology sector over the last 18 months, especially in the eCommerce and social media area, which punished stock prices. Many blindly accept this will continue, with some stating China’s entire technology sector should be avoided completely. What was missed, however, was Beijing’s pledge to support even greater private investment in this high priority area. With private enterprises already accounting for 70 percent of technology innovation in China, policy makers understand this crucial pillar of the economy requires greater private investment for high-quality development. Indeed, in the semiconductor category, for example, China’s investment spend dwarfs the rest of the world, running eight times US levels in 2021.
While headlines trumpeted Xi’s populating the Politburo with loyalists (not atypical for a leader in any political system), less appreciated is that six of the 24 members have science and technology backgrounds with experience in attracting and working with private investment to facilitate China’s continued leadership in newer industries. This includes electric vehicles (50% global share of passenger cars and 99% of electric buses), solar panels (80% global share), wind power (33% of global capacity), high speed trains (both in technology and operation with more track than the rest of the world combined), space development (launching more rockets to space than any other nation), rare earth refining (80% global share), nuclear power (including greatest number of patents on the latest technology, total capacity, and new plants under construction), as well as robotics (China’s 2021 installations at 240,000 were more than the rest of the world combined). In artificial intelligence research, the top eight research schools globally are Chinese. Stanford and MIT rank 9th and 10th, respectively. China’s investment opportunities in these areas and others were in full display at Hong Kong’s recent Global Financial Leaders’ Investment Summit. In early November, thirty chief executives from leading global banks and investment firms including Blackstone, Goldman Sachs, HSBC, Morgan Stanley, Standard Chartered and UBS announced plans to expand operations in Hong Kong. They understand Hong Kong is the gateway for foreign capital and trade with China.
There is still much to consider and dominance in these areas does not guarantee heavily China-influenced investments won’t suffer due to political developments or increasing geopolitical conflict. Key items to watch include US-China-Europe relations, efforts to mitigate business disruptions from Covid control mechanisms, the new economic priorities laid out by the Central Economic Work Conference next month, and the legislative agenda set by the early 2023 annual National People’s Congress.
In summary, regardless of your geographic focus, domestic or global, we believe successful long-term equity investing should include in-depth China analysis. The country touches and impacts too many globally-oriented companies and industries to ignore. Certainly, identifying investment opportunities within China, or investing in companies positively leveraged to China’s development trends can be rewarding, but possibly more importantly, investors need to be careful to avoid companies and industries at greater risk of being snared by China’s growing competitive threat. China is incredibly nuanced, and trusting in overly simplistic, lopsided news reports is doomed to fail. ACM investment teams meet daily to cover investment-impacting world events. You’ll be relieved to know we try to go much deeper than simply scanning headlines or relying on incorrect public perception.