What have the Romans ever done for us?

This is probably one of the most iconic moments in the Life of Brian.

It jokingly ends with this:

Well, apart from medicine, irrigation,
health, roads, cheese and education,
baths and the Circus Maximus,
What have the Romans ever done for us?

What have the Romans,
What have the Romans,
What have the Romans ever done for us?

Brought peace.
Oh, shut up!

When I read the doomsayers on China, it often reminds me of this. What amazes me is that for a country in relative poverty compared to the rest of the world, it is the second-largest economy and will eventually overtake the US.

Between 1980 and 2022, GDP per head went from 2% to 28% of US levels. For example, Korea reached this level in 1988; by 2007, it was 57%, and today it is at 70%. If China followed the same trajectory, it would reach 70% of US levels by 2050.

There seems to be an argument that China is a cheap manufacturing base, which was true in the past. China today is very different. If we look at the products we buy, we will start to see that “Made in China” is being replaced by “Made in Vietnam” or “Made in the Philippines”.

China today is very different.

1. Private firms contribute approximately 60% of China’s GDP, 70% of its innovative capacity, 80% of urban employment and 90% of new jobs.
2. There are 1.4 million engineer graduates a year.
3. It is the world’s busiest patent office.
4. It is highly entrepreneurial.
5. It is potentially leading the race in electric vehicles.

China is shifting, and moving manufacturing to other economies makes sense. It also broadens the opportunities in other emerging market economies. The current beneficiaries of these changes include India, Mexico, Vietnam, Cambodia and the Philippines. But this shift is in areas such as textiles and toys. China has become a power base regarding specialist products such as electric vehicles, solar, etc. This is much harder to replicate.

There are many arguments for why China is uninvestable. I will take a couple of them. GDP is falling.

The projections are that GDP will settle around 4% p.a.  This is far from previous highs. But this is still double that of the US.

The second point I would turn to is the 20^th Communist Party Conference. The media printed headlines around a hard-line team being put in place, sovereignty and state-owned enterprises to get more substantial.

What most seemed to ignore was a common thread around “common prosperity”. It is simple: bring people up, keep them happy, and keep power. Some of the key phrases that came out include:

“Focused on promoting high-quality development.”

“Bring per capita disposable income to new heights.”

“Substantially grow the middle-income group as a share of the total population.”

“Development is our Party’s top priority.”

“We will provide an enabling environment for private enterprises.”

It was fascinating how protests against the COVID-19 policies forced a policy change. The West's expectations for China to recover immediately seemed in contrast to their paths, so there has been significant disappointment.

So, why might there be a misconception about China? China is a significant part of the global economy. If you take China away, it would be the equivalent of an economic global nuclear bomb.

Below are some examples.

To move to a better world, we need rare materials. The biggest producer? China.

Consequently, China dominates the rare earth value chain.

Another way to consider this is the chart below, which shows the shift from oil and gas to clean technologies.

China is taking the lead across future critical technologies.

Take the solar panel supply chain, and we can see China’s dominance.

China has challenges.

Below is the breakdown of GDP in China in 2022.

The fear centres around the property sector, and figures show this contributes between 15% and 30% towards GDP. Taken from the UN, these charts might help.

The point is twofold. Firstly, it is hard to determine the actual figures, but secondly, it is fair to say that the collapse of Evergrande will have an impact in the short term, but does it impact the longer-term opportunities?

What about human rights?

China has some of the lowest Human Rights.

It is a debate; Saudia Arabia has lower human rights, yet economies have found a way to trade. It is not for me to debate this, but the fact is that China is such an integral part of the world’s future that navigating this is likely to be the pattern in the future.

The point is that there are risks with any economy, but the question is, do we write off an economy that is so integral to our future world?

In summary, if we were to point out why the doomsayers might be wrong, we would highlight the following:

1. GDP per head is 28% of the US; by 2050, if it follows the same trajectory as Korea, this could be 70%.
2. Growth has slowed, but even at 4% p.a., this is double that of the US.
3. China has shifted from low-production items such as textiles to high-quality technology.
4. Looking beyond the headlines, Xi Jinping understands that bringing people up keeps them happy and keeps power.
5. China has developed into a technology powerhouse in a matter of years, something the West has spent decades building. This is not going to change.
6. For a world that has to move to cleaner energy sources, this means a shift in the previous leaders (oil and gas), and China benefits from this change.

It is worth ending with these charts. The first is from JPMorgan; if this is correct, then 10% annual growth would double your money in 7.3 years.

Is this realistic? The table below from Invesco shows market valuations. China is cheap compared to many other equity markets.