China – Investments thesis

A growing economy

Economic growth is generally a major factor in attracting investments. After all, many want to invest in markets or companies that grow, expand and manage to generate more profits, correct?

Well, the Chinese economy has been growing uninterruptedly for the past 42 years! The last time China saw a GDP drop was in 1976, that is 42 years ago. In other words, for over 40 years we have only heard one keynote about the Chinese economy: growth.

In the past 40 years, the Chinese GDP has jumped from US$ 218 billion to US$ 12.8 trillion, a growth greater than 5700%. It is not by chance that this giant is now the second-largest economy in the world, representing 18% of all wealth created in the world, with a GDP of more than US$12, around six times the size of the Brazilian economy. ¹

The graph below compares the growth of China with other countries between 1990 and 2017 (data from the World Bank) showing the leap that the country has been experiencing.

And perhaps the best way to verify this is to observe the jump in Chinese purchasing power. GDP per capita (the result of dividing the number of GDP by the number of the country’s population) in 1980 was US$312 a year, or US$26 a month! In the 2000s that number had jumped to US$959. In 2010 it reached US$4,561 and today it is US$8,836, something like US$736 per month. The value seems little compared to other countries, but it is a tremendous advance when remembering that we are talking about the purchasing power of 1.3 billion people. Currently, the unemployment rate in China is one of the lowest in the world: 3.6%.²

Nevertheless, did you know that China alone accounted for more than 35% of the world’s growth between 2017-19, this percentage is almost two times higher than the US contribution? ³ But what about 2020? Is this argument still valid? What are the impacts of coronavirus on the economy?

The year started with a negative surprise from a virus that stopped China and is likely to have a negative impact in terms of economic growth in the first quarter of the year. However, the Chinese government attempted to calm down the markets with a massive injection of liquidity into the financial system, in order to guarantee the continuity and sustainability of its growth. Despite slowing down from the 6.1% growth in 2019, estimates point the economic growth to be above 5.5%.⁴

A continental country with equally great opportunities

China is the fourth biggest country in the world and the most populated, with more than 1.3 billion people – a population greater than Brazil, Mexico, the US, Argentina, and Canada together.

This growth created an unprecedented increase in the consumer market in the world. In the last few years, 700 million people have become potential targets for primary consumption. These are people who left rural areas in China and went to cities, demanding refrigerators, cars, motorcycles, cell phones, the internet, etc. That is the dream of any company.

Below two graphs that illustrate the tonic: that the consumer markets in China have evolved strongly in recent years. We have the evolution of car sales in China, and the evolution of the numbers of internet users.

 

Technological Revolution

In addition to growing and creating opportunities in the traditional sectors, the country invested heavily in education, research and technological development. China is no longer the country that produces low value-added products. Today it is emerging with solutions and innovations in cutting-edge sectors such as artificial intelligence, 5G, robotics, electric cars, among others.
China already has the world’s largest markets for Internet and mobile communication, the largest supercomputers in the world, the largest number of academic and scientific works, among others. These and other factors have led China to second place in world patent registrations, representing 21% of the world total, just behind the USA, with 22%. Not surprisingly, China has 86 “unicorns” (startups valued at US$1 billion or more) compared to 151 in the US, according to CB Insights.

This Chinese revolution has reached the American market and some of the biggest IPO’s of the last few years in the US were of Chinese companies – highlighting Alibaba, which sold its shares on the American exchange in 2014 and raised US$25 billion. Other highlights were companies like Baidu’s video streaming company, iQiyi (the Chinese Netflix), the social commerce startup Pinduoduo, and the electric car maker Nio. The number of Chinese companies that opened in New York almost doubled to 31 in 2018.⁵

Bearish view on the topic – And what can go wrong?

• Fears about the sustainability of the country’s economic growth. Issues such as environmental sustainability, an aging population, diminishing returns on productive investments, among others, are issues raised to question the country’s continued growth.
• Differences in regulation and even in the political system compared to Western developed countries, create distrust in many market agents regarding the veracity of the information currently available on the Chinese economy.
• Government participation in the economy is still quite intense and unrestricted in terms of sectors. Even though there is political stability today, there is always a fear of what that will look like in the future.

Assets

There are more than 80 Chinese shares traded on Avenue. Below are some examples:
^{Please keep in mind that these are not recommendations.}