Is China the New Evil Empire?

Given the current political climate and given the reports of the Biden family sellout to Chinese interests, it is difficult to look at our major strategic competitor objectively. In a political season, everything becomes politicized-- though the Trump administration effort to blame China for the coronavirus does not seem to be working.

As for the multitude of Republican 2024 presidential candidates who are basing their incipient campaigns on anti-China sentiment-- including Cruz, Cotton, Pompeo et al.-- I have found their tone to be off. I am sure that no one cares, but, when you start sounding like Elizabeth Warren, you should do some serious self-reflection. 

Besides, it is trendy on the right to consider China the new evil empire and to confuse today’s Communist Party with yesterday’s. David Goldman counts among the very few who has tried to be rational about China, but he has been drowned out by the din.

For those who care-- and if you don’t, stop reading now-- yesterday the Financial Times published a column by hedge fund billionaire Ray Dalio. 

Dalio’s was a sobering assessment. It has even more value since it echoes points I have argued occasionally on this blog. As noted, David Goldman has done the same, though with far more information than I possess.

Dalio opens:

For as long as I can remember, people have said that China cannot succeed. Communism doesn’t work. Authoritarianism doesn’t work. The Chinese aren’t creative. They have a big problem with bad debts and property speculation. Yet every day we see China succeeding in exceptional ways.

It has achieved some of the world’s lowest Covid-19 case rates. Over the past year, its economy grew at almost 5 per cent, without monetising debt, while all major economies contracted. China produces more than it consumes and runs a balance of payments surplus, unlike the US and many western nations. This year nearly half the world’s initial public offerings will be in China, including Ant Financial’s $30bn listing, the world’s biggest ever. Even Tesla’s best-selling Model 3 car may soon be made entirely in China.

Obviously, we are not going to compete effectively with China by ranting about injustice or even about having more anti-racism training. We are being consumed by our own bias-- not our racial bias-- but our hatred of China.

The world order is changing, yet many are missing this because of a persistent anti-China bias. China’s extraordinary performance isn’t new. 

In fact, apart from the 1839-1949 “Century of humiliation”, it has historically been one of the world’s most powerful countries and cultures. Just over the past four decades its economic changes have been remarkable. Whatever criticisms you may have about Chinese “state capitalism”, you cannot say it hasn’t worked, even if you strongly disagree with how Beijing has done it.

When I first visited China 36 years ago, I would give $10 pocket calculators to high-ranking officials. They thought they were miracle devices. Now China rivals the US in advanced technologies and will probably take the lead in five years. Since 1984, per capita incomes have risen more than 30 times, life expectancy has increased by a decade and poverty rates have fallen nearly to zero. In 1990, China’s first stock market was launched, designed by seven young patriots who I knew. Since then, it has become the second largest in the world.

Things are not looking bad for China:

Meanwhile, China’s economy is roughly the same size as the US’s and expanding at a faster pace — so time is on China’s side. It has a growing population of well-educated people, with around a third of the world’s science and technology university majors, three times the US share. It also produces and collects vastly more data to process with artificial intelligence. For many in the west, this has a dark side in terms of state surveillance. But for many Chinese it reinforces positive social norms while also promising vast efficiencies. One way to look at China’s relative power is that, with four times the US population, when its per capita income reaches half the US’s in about 25 years, its economy will be twice as large.

Then again, we are training more social justice warriors and more lawyers. China produces high technology-- increasingly with its own equipment-- while America can do nothing but sue.

I think it fair to say that Dalio is an investing genius, so we pay special attention to his outlook in that arena:

Last, there are the investment implications. As a global macro investor, I think a lot about how much I should invest where, looking at fundamentals and how others are positioned.

China’s fundamentals are strong, its assets relatively attractively priced, and the world is underweight Chinese stocks and bonds. These currently account for 3 per cent or less of foreign portfolio holdings; a neutral weighting would be closer to 15 per cent.

This discrepancy is at least in part due to anti-Chinese bias. I think it is about to change. Chinese markets are opening up to foreigners, who can now access at least 60 per cent of them compared with 1 per cent in 2015. Benchmark weights in major indices are rising. As a result, I expect China to enjoy favourable capital inflows that will support the currency, already at a two-year high, and financial markets too. All this argues for a China overweight in my portfolio.

Of course things can go wrong in any country. Beijing may not stay its current course of economic reform, though I doubt that will happen. The US and China are also competing fiercely — some say warring — over trade, technology, geopolitics, capital markets and military power. No one can know how bad these wars will be, which country will win, or how. That is why I diversify and allocate money to both countries.

What causes countries to succeed or to fail. Dalio explains:

In the long run, timeless and universal truths determine why countries succeed or fail. In brief, empires rise when they are productive, financially sound, earn more than they spend, and increase assets faster than their liabilities. This tends to happen when their people are well educated, work hard and behave civilly. Objectively compare China with the US on these measures, as I chronicle in an ongoing study, and the fundamentals clearly favour China.

I trust that the news does not brighten your day.

Prejudice and bias always blind people to opportunity. So, if you have been a China sceptic for reasons that don’t square with what is happening there, I suggest you clear your mind. Likewise for events in the US and its place in the changing world. The eve of the US election is a good time to reflect on both.

It’s time to get over our bigotry about China.