Investing in China: Weighing the Risks and Opportunities
Sources for all charts: International Monetary Fund, World Economic Outlook Database, April 2023 and World Economic Outlook Update, July 2023, September 2023.
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1Peak China. (2023, August 20). The New York Times.
2Mauboussin, Michael J. (2009). Think Twice: Harnessing the Power of Counterintuition (pp 1-16). Harvard Business Press.
3Allison, Graham. (2015, September 24). The Thucydides Trap: Are the U.S. and China Headed for War? The Atlantic. https://www.theatlantic.com/international/archive/2015/09/united-states-china-war-thucydides-trap/406756/
4According to the Annual Threat Assessment of the US Intelligence Community (Office of the Director of National Intelligence) published on February 6, 2023, “Beijing is working to meet its goal of fielding a military by 2027 designed to deter U.S. intervention in a future cross-Strait crisis”, p. 7; In testimony before the House Armed Services Committee on March 29, 2023, Defense Secretary Llyod Austin said in a response to questions about whether and how soon China would invade Taiwan that “I don’t think an attack on Taiwan is imminent, nor inevitable.” Source: Wadhams, N. & Trion, R. (2023, March 29). Austin Sees No Sign Chinese Invasion of Taiwan is Imminent. Bloomberg.
5Case File | Belfer Center for Science and International Affairs. (n.d.) Harvard Kennedy School – Belfer Center for Science and International Affairs. https://www.belfercenter.org/thucydides-trap/case-file
6Allison, Graham, Kiersznowski, Nathalie & Fitzek, Charlotte. (March 2022). The Great Economic Rivalry. Harvard Kennedy School – Belfer Center for Science and International Affairs, p. 31. https://www.belfercenter.org/publication/great-economic-rivalry-china-vs-us
7Wikipedia contributors. (2023). Foreign Trade of the Soviet Union. Wikipedia https://en.wikipedia.org/wiki/Foreign_trade_of_the_Soviet_Union
8Trade defined as the sum of goods exports to China and goods imports from China. Source: Bureau of Economic Analysis (BEA) – U.S. Department of Commerce. (2023, February 7). U.S. International Trade in Goods and Services December and Annual 2022 [Press release]. https://www.bea.gov/sites/default/files/2023-02/trad1222.pdf – Note that in addition to trade in goods, U.S.-China trade in services was $68 billion in 2022. Final 2022 services trade data was released separately by the BEA on July 6, 2023.
9The US-China Business Council. (2023). US Exports to China: Goods and Services Exports to China and the Jobs They Support, by State and Congressional District, p. 1. https://www.uschina.org/reports/us-exports-china-2023-0
10Japan, South Korea, Vietnam, and India were China’s #2-#5 export markets in 2022, excluding Hong Kong. Source: IMF Direction of Trade Statistics. https://data.imf.org/?sk=9d6028d4-f14a-464c-a2f2-59b2cd424b85
11Advanced Democratic Economies (ADEs) are liberal democracies with advanced economies. ADEs defined as the Group of Seven (G7) countries – Canada, France, Germany, Italy, Japan, the United Kingdom, and the United States – plus Australia, Norway, Republic of Korea, and the European Union. Source: Kramer, Franklin D. (February 2023). China and the New Globalization. Atlantic Council | Scowcroft Center for Strategy and Security, p. 2. https://www.atlanticcouncil.org/in-depth-research-reports/report/china-and-the-new-globalization/
12Cronin, Richard. (2022, August 16). Semiconductors and Taiwan’s “Silicon Shield.” Stimson Center. https://www.stimson.org/2022/semiconductors-and-taiwans-silicon-shield/
13Lee, Y., Shirouzu, N., & Lague, D. (2021, December 27). Silicon Fortress – T-DAY – The Battle for Taiwan. Reuters. https://www.reuters.com/investigates/special-report/taiwan-china-chips/
14Crawford, A., Dillard, J., Fouquet, H., & Reynolds, I. (2021, January 25). The World is Dangerously Dependent on Taiwan for Semiconductors. Bloomberg.
15Varley, K. (2022, August 2). Taiwan Tensions Raise Risks in One of the Busiest Shipping Lanes. Bloomberg.
16Wintour, P. (2023, April 25). If China invaded Taiwan it would destroy world trade, says James Cleverly. The Guardian. https://www.theguardian.com/world/2023/apr/25/if-china-invaded-taiwan-it-would-destroy-world-trade-says-james-cleverly
17Compert, David C., Cevallos, Astrid S. & Garafola, Cristina L. (2016). War with China: Thinking Through the Unthinkable. RAND Corporation, pp. 41-50, 85-88. https://www.rand.org/pubs/research_reports/RR1140.html; Based on the work of Reuven Glick and Alan M. Taylor, “Collateral Damage: Trade Disruption and the Economic Impact of War” (2010) which studied falls in bilateral trade between combatants and corresponding declines domestic consumption in World War I and World War II, RAND assumes that U.S.-China bilateral trade drops by 90% and domestic consumption falls by 4% in each country. A potential conflict’s GDP impact is asymmetrically higher on China as RAND assumes that China also suffers an 80% decline in East Asia regional trade and its other global trade falls by 50% because of the postulated “war zone” effect on seaborne trade in the Western Pacific (~90% of China’s trade is seaborne). The high-end of U.S. estimated GDP loss includes an anticipated decline in trade with other Asian countries due to the “war zone” effect on seaborne trade. China’s estimated 25-35% decline in GDP can compared with Germany’s 29% decline in real GDP during World War I, when Germany itself was spared heavy damage.
18Rich, B. R. (n.d.). The Great Recession. Federal Reserve History. https://www.federalreservehistory.org/essays/great-recession-of-200709#:~:text=Beyond%20its%20duration%2C%20the%20Great,data%20as%20of%20October%202013) .
19Culver, John. (2022, October 3). How We Would Know When China Is Preparing to Invade Taiwan. Carnegie Endowment for International Peace. https://carnegieendowment.org/2022/10/03/how-we-would-know-when-china-is-preparing-to-invade-taiwan-pub-88053
20DiPippo, Gerard. (2022, August 16). Economic Indicators of Chinese Military Action Against Taiwan. Center for Strategic & International Studies. https://www.csis.org/analysis/economic-indicators-chinese-military-action-against-taiwan
21America v China – It’s Worse Than You Think (2023, April 1-7). The Economist.
22Martin, E. (2023, April 6). IMF Warns Five-Year Global Growth Outlook Weakest Since 1990. Bloomberg.
23Qi, L. (2023, August 19-20). China’s Fertility Rate Dropped Sharply, Report Shows. The Wall Street Journal.
24O’Hanlon, Michael E. (2023, April 24). China’s Shrinking Population and Constraints on Its Future Power. Brookings. https://www.brookings.edu/articles/chinas-shrinking-population-and-constraints-on-its-future-power/
25Wei, L., & Xie, S. Y. (2023, August 21). China’s 40-Year Boom Is Over Raising Fears of Extended Slump. The Wall Street Journal.
26Bloomberg Economics. (2023, August 21). CHINA INSIGHT: Rescue – Or Risk Crisis on Debt Too Big to Manage. Source: Bloomberg.
28Our sole holding with net debt had a Net Debt/EBITDA ratio of 0.58x at the end of 2022. Source: Bloomberg.
29Liu, Z. Z., & Stemp, D. (2023, March 21). The PBoC Props Up China’s Housing Market. Council on Foreign Relations. https://www.cfr.org/blog/pboc-props-chinas-housing-market#:~:text=Kenneth%20Rogoff%20estimated%20that%20the,before%20the%20global%20financial%20crisis
31Confidence Trap. (2023, June 24-30). The Economist.
33Ahya, Chetan. (2023, August 8). How China could avoid a 1990s Japan situation. Morgan Stanley Research.
34Source: The World Bank.
35Ahya, Chetan. (2023, August 8).
36Alloway, T., & Weisenthal, J. (2023, July 10). Richard Koo Is Getting Famous in China as Debt Problems Grow. Bloomberg.
37International Monetary Fund. (April 2023). World Economic Outlook.
38Tanzi, A. (2023, April 17). China to Be Top World Growth Source in Next Five Years, IMF Says. Bloomberg.
39Wei, L., & Xie, S. Y. (2023, August 21). China’s 40-Year Boom Is Over Raising Fears of Extended Slump. The Wall Street Journal.
40Swedroe, Larry. (2022, October 5). Is There a Link Between GDP Growth and Emerging Market Returns. The Evidence Based Investor (TEBI). https://www.evidenceinvestor.com/gdp-growth-and-emerging-market-returns/
41Nikkei 225 Index peaked on December 29, 1989, at 38,916. On August 31, 2023, the Nikkei 225 Index closed at 32,619. Source: Bloomberg.
4212-month forward PE for the Bloomberg China Large-Mid Index (CN), S&P 500 Index (SPX), Bloomberg World ex-China Index (WORLDXC) and Bloomberg Emerging Markets ex-China (EMXCN) as of 8/31/23. CN Index 12-month forward PE discounts relative to the SPX, WORLDXC and EMXCN indices are at the high-end of their historical ranges since December 2009 – 98th, 88th and 87th percentiles, respectively. Source: Bloomberg.
43From December 29, 1989, to August 31, 2023, in U.S. dollar terms, Keyence’s total return of 5,227% (12.5% annualized) compares to a total return of 2,451% (10.1% annualized) for the S&P 500. Source: Bloomberg.
44Huang, Z., Zhang, J. and Zheng, S. (2023, July 24). China’s Tech Crackdown is Ending. What Does It Mean? Bloomberg; (2023, August 25). Everything China Is Doing to Juice Its Flagging Economy. Bloomberg.
45Huang, T., & Lardy, N. (2023, January 10). Can China revive growth through private consumption? Peterson Institute for International Economics. https://www.piie.com/blogs/realtime-economics/can-china-revive-growth-through-private-consumption
46Allison, Graham, Kiersznowski, Nathalie & Fitzek, Charlotte. (March 2022). The Great Economic Rivalry. Harvard Kennedy School – Belfer Center for Science and International Affairs, p. 42.
47Health spending as percent of GDP by country | TheGlobalEconomy.com. https://www.theglobaleconomy.com/rankings/health_spending_as_percent_of_gdp/