By Rick Pitcairn, CFA®, Chief Investment Officer
Click here to download the printable pdf version.

April 6, 2018 – The United States has been the world’s undisputed economic superpower for more than a hundred years. Yet in the long arc of history, that dominance has been relatively brief. For thousands of years, China stood as the world’s economic leader and a true global power. For that reason, many Chinese believe that the United States’ economic dominance is but a historical blip that will eventually see China return to its rightful place as the world leader. On both of my trips to China, I have been surprised at the brazen, matter-of-fact way so many Chinese have predicted this outcome. While it remains to be seen whether or not China will achieve that goal, during the Wigmore Association’s recent trip to Shanghai for its bi-annual chief investment officer meeting, we saw plenty of indications that China is pursuing a return to that position of economic dominance.

Our visit gave us a firsthand look at the interplay between China’s remarkable growth and the strong centralized control the government has over its population. On the day our group arrived, China voted to abolish presidential term limits, clearing the way for President Xi Jinping to stay in office indefinitely. Of the nearly 3,000 members of parliament, only two “no” votes were cast with just three abstentions.

In particular, we at Pitcairn were eager to see how our meetings would impact our perspective on China’s place in the global economy and in a global investment portfolio. Here’s a closer look at three areas at the intersection of politics and capital markets we noted during our time in Shanghai.

1. The Speed of Growth

Chinese companies are growing at a rate that organizations in other nations simply can’t keep up with. China has facilitated this progress with aggressive promotion of a laissez-faire approach to business growth and wealth creation that has increasingly diverged from other communist countries who use confiscatory taxes and other methods to limit the success of prosperous businesses. One could make the case that businesses have a freer hand in pursuing unbridled growth than they do in Europe or even the US. Meanwhile, China maintains a stifling level of central government control over the personal lives of its population. Individuals lack the basic freedoms of speech, thought, assembly, and movement that western nations take for granted. That paradox constantly amazes me as I study the vast economic landscape the Chinese are so rapidly building.

2. Rising Innovation Backed by Vast Resources

In the pre-industrial era, China’s large population was the main driver of its economic supremacy. But as technological innovation and not the size of the labor pool began to fuel productivity in the twentieth century, China’s advantage was lost. In that time, China has developed a reputation among western nations for executing on the innovation developed in countries like the United States. US tech companies develop the big idea, and factories in China build it. We saw indicators that this mindset may become outdated.

With the growing impact of machine learning and big data, the amount of data and information to be gleaned from China’s 1.35 billion citizens will be an increasing advantage as it looks to optimize operations. The centralized government’s disregard for the privacy of its own citizens means that it can mine data in a way that many in the west will not.

Ultimately, the question will be whether the centralized government’s ability to use its vast resources will overturn the cultural rigidity that has limited innovation and free thought. This will be the central determining factor in whether or not China will surpass the US in leading the world’s pace of technological change.

3. Expansion of Global Reach

While the US rattles sabers on trade issues and insults our neighbors to the north and south, China is actively expanding its trading network and infrastructure. President Xi’s “One Belt One Road” initiative is reestablishing trade routes that date back to the Silk Road in one of the largest infrastructure projects in history. China is ready to invest trillions of dollars into facilitating trade, even if that means funding bridges, roads, and railways in other nations. Their efforts to influence the global community also extends to their desire to take a leadership role in the Paris Climate Accord, now that the US has announced its withdrawal. That issue represents the dichotomy that is China – they claim to want to lead the Paris Climate Accord and yet they pollute on a scale that would make any developed country blush. They accuse the US of starting a trade war while they blatantly steal intellectual property and cheat on existing trade treaties. China clearly recognizes the value of not only being a dominant world economy, but leading a way that honors international law and embraces the developed worlds’ values around environmental and social responsibility. If its actions can accomplish that goal, then its growth will be extraordinary in the years to come.

Opportunities

US politics were of course top of mind in many of our discussions and in fact, drove many of the uncertainties we identified during our visit. No one in China wants a trade war, and the Trump administration’s new economic team’s penchant for a stronger dollar could hurt international investing in the short run. But these question marks do not ultimately shake our confidence in a global approach. China remains the motor of emerging markets, and we see potential opportunities to maintain our increased exposure there.

In conversations throughout our visit, the Chinese business leaders and government officials that we met were not shy about their desire to supplant the US as the world’s superpower. While they still have a long way to go, what was striking was just how much transformation the country has undergone in the last 18 months alone. China may or may not achieve its lofty goals, but there can be no question that it stands to be a powerful economic force on the world stage. As China speeds towards its future to try and recapture its past, we at Pitcairn will be keeping up.

Share Button