Thread by @niravstoons

Thread on China - the back story, predictions for 2020s and comparisons with India 🧵

China - the back story of growth

China after World War 2 had a Republican Government lead by a party Kuomintang 'KMT' (1945 to 1949) which was defeated by Communists, but the KMT leaders escaped to Taiwan and established 'Republic of China' or ROC there

Similarly from the Opium wars in 1840s the British had been occupying Hong Kong ('Fragrant Harbor') and formally took it over for a 100 year lease in 1897
So while China had its experiment with Communism on the Mainland, Taiwan and Hong Kong were Control Experiments in capitalism

This is very important to compare with India.
Indian comparison of control experiments are Pakistan, Bangladesh and Sri Lanka ... (will revisit it later)

Coming back to China, from 1949 Mao ruled till his death in 1976, and following Communistic Ideals - had many disastrous experiments -
Collective farming,
Re education of city people sending them to farms
Great Leap Forward
Killing all sparrows to save grains ...

Many things which lead to famine and poverty,
He invaded Tibet (which was a separate country) and also had a war with India in 1962 (and occupied Aksai Chin) ... this was critical to ensure the source of the rivers which flow through China - Yang Tse, Mekong, Yellow River

Despite all these flaws, some of the good things which Chairman Mao did (in my opinion) was
- modified the Mandarin script from 'Traditional' to 'Simplified'
This increased literacy by a huge factor.
Mandarin is an ancient and a tough language ...

... Mandarin (or other Chinese languages using the same script) uses characters instead of alphabets.
Being an ancient language, its closer to hieroglyphics or picture writing.
By simplifying the script, it achieved mass literacy, and
Communism ensured universal education

The control groups (Hong Kong and Taiwan) still use Traditional script - (Hong Kong speaks Cantonese, Taiwan speaks Mandarin, but both use traditional script)
But here - Mainland definitely scores ahead. (I have tried learning Mandarin in 9 years in singapore - but given up)

Another great initiative by Mao - was adding women in the workforce.
His famous words 'Women hold up half the sky'
These two 'universal literacy in simplified script' and 'female labor force participation' allowed China to grow rapidly in the future (despite Mao's other missteps)

While Mao years saw China doing much worse, there were famines, and mass poverty, on the other hand Hong Kong and Taiwan saw Chinese people migrating there - and same set of people doing much better.
Surely if people are same the different system works?

So after Mao's death, there was a period of uncertainty and chaos, and previously discredited leader Deng Xiaoping takes power in 1977.

He sees Chinese people doing well in HK, Taiwan, and even Singapore and thinks ... what could be changed?

His two famous quotes (of many)
'Doesnt matter if the cat is black or white, as long as it catches mice'
'cross the river by feeling the stones'

Allowed China to move from previous communist ideology (collective farms) and experiment with capitalism (in small SEZs)

in the early 70s Nixon and Kissinger also had visited China, and under Deng, Chinese economy finally opened up (from being completely closed)
Equivalent in India is opening its economy in 1991 (China is 1977-78) ... and allowed Chinese to start trading with the west.

In this phase again - HK and Taiwan helped a lot.
Hong Kong was still under British rule and English Law.
Foreign companies were willing to set up a trading arm in HK which would buy goods from China.
Taiwanese businessmen setup up factories in Chinese SEZs

These two ports were gateways for capitalism and communism to interact.

Meanwhile - China had reforms in Agriculture, and Labor laws (only in SEZs) and state owning all land made land acquisition easy for setting up manufacturing plants ...

But the problem was after the collapse of Soviet Union in 1980s the Chinese Yuan or 'Renminbi' (literally 'peoples money') was too strong. That was devalued in 1992-1994 from 2.5 to the USD to 8 ...
This also probably was cause for Asian financial crisis in 1997 (my opinion)

Finally in the year 2000 - China joins the WTO but it has all setup in place for a massive take off.

Educated labor force, including women, (not to mention one child policy ensured women had to spend less time taking care of kids - outsourced to grandparents) ...

SEZs with fewer restrictions on labor and land
Capital flowing in via Hong Kong,
Technical expertise flowing in via Taiwan
huge labor force
American firms want to cut costs ...

perfect set of circumstances to export from China to the West

China racked up huge trade surpluses, PBOC (Peoples Bank of China - its central bank) kept a weak currency and accumulated USD reserves and everything was going smoothly ... till the brakes were hit by US (and global) recession in 2008.
How do you survive if your customer is bust

So in 2009-10 China looked more inwards and with its huge savings acccumulated in 2000s decided to go on building its domestic infrastructure
2010s was huge infrastructure boom - building homes, railways, airports, ports ...

It is said China consumed more steel in 3years than US in 100

Nevertheless this boom was financed by local banks (where there were high savings, due to capital controls locals couldnt take money out) and there seems to be lot of bad investments financed by large debt

Infact many Local Government Financing Vehicles (LGFV) in a bid to maintain growth targets (China gives growth targets top down, and Local Governments spend to achieve that) are under too much debt having invested in negative NPV projects

and now probably China has bigger housing stock than it needs, and enough infrastructure ... so what does it do in 2020s?

2000s was driven by trade (exports)
2010s was driven by investments (infrastructure) ...

what next?

They have already started the Belt and Road Initiative (BRI or OBOR) to export surplus capacity in neighbouring countries.

But my personal opinion is others arent ready for it like China was, and arent as productive.
Sri Lanka, Cambodia or Pakistan arent like China ...

Another challenge in 2020s
China controlled population due to one child policy from 1981 onwards. So much so that its been changed to 2 child policy but the cultural norm is a smaller family.
Also the real estate boom means its too expensive to have a bigger house

Thus the wage pressures in China are rising, what will make it grow in 2020s?

The government of China has few stated objectives
- Technology (leaders in 5G and AI/ML)
- domestic consumption (has rich middle class)
- Finance (opening its domestic market to foreigners)

Japan was in a similar situation in 1990s ... large investment bust (and Chinese authorities are well aware of it)

Japan saw banks rolling over debt of zombie companies, and then zombie banks being bailed out by the government.

So corporate debt -> bank debt -> govt debt

We might see similar happen in China.

Its no surprise China is opening up its debt market to foreigners.
Also Chinese households have large savings in local banks earning negative real yields.
This could be deployed directly via bond funds (disintermediating banks)

The challenge of falling population is compounded by the rich elite wishing to migrate out of China, and the authoritarian Chinese state doesnt seem to be attractive enough for Chinese diaspora (in US, Canada, Australia, South East Asia) willing to return to the mainland

Other challenge will be the 'Bare Branches'
due to one child policy - many parents had pre natal screening and aborted female fetuses, thus there are surplus men who arent married.

This might see many going and getting brides from neighbours (Vietnam, Laos, Cambodia, Pakistan)

where Chinese laborers are working on Belt and Road projects ...

Another challenge is if population is falling - who will buy the houses from the next generation.

4 Grandparents have one grandchild, who inherits 3 homes (parents and grandparents) ... what happens to the surplus?

Next Challenge - Trade and US Trade War

despite all the headlines, US and China are in conflict as US sees China investing its trade surplus in technology and taking a lead there.

Chinese technology firms are on forefront of AI
Similar progress is being made on cancer research

There seems to be IP theft, and US has it as a sore point for American companies losing competitiveness to China.

Never the less, with Trump wanting to win elections, and needing a win (focussed on stock market) while China has been thinking longer term (Xi is leader for life)

I feel US might win the battle, but China will win the war.

Unlike Japan, China might actually overtake US in GDP as the biggest nation.

Chinese companies have fewer restriction in testing Cancer drugs ...

So sectors I am bullish on
Chinese technology firms, and Chinese consumption

Bearish on Chinese Banks (bad loans, inverted balance sheet, more competition from abroad)

VERY bullish on
foreign companies setting shop in China to tap the market
(e.g. JP Morgan or Tesla ...)

The foreign companies arent carrying a legacy, and if wrong can cut their losses and move on.
Its a large market (2nd biggest economy) and large savings pool.

Till now rich Chinese could only buy Chinese equities or Chinese housing.
Both are over valued.

Where will this pool of money go for diversification?
Thats where the money is (in my opinion)

If you are a young student, (especially in India) - I would STRONGLY recommend learn Mandarin, (spoken and written) and try to get an internship in China.
Visit it.
If you speak English, and Chinese there are HUGE opportunities.

Next phase will be exporting stuff to China instead of importing from China ...

Sorry forgot to add

China will lead the renewable energy (Solar, Wind) and Battery technology including electric cars too.