In my last article, I shared my notes about Li Lu’s thoughts on the link between the modernization of China and value investing during his exclusive interview with Barron’s China. He also touched upon a few other very important topics, which we will go over in this article.
Impact of Covid-19
When asked about the impact of Covid-19, Li said that while the duration of the pandemic so far is relatively short when you put it in the context of the human history, it has accelerated many trends that have been taking place since before the pandemic. These trends may be long-lasting. In his own words, Covid-19 has “turned the trend into reality, and the reality that may take five years and seven years to form before Covid-19 to form in a just few months.”
On the US-China relationship
Two years ago, Li wrote an article on the U.S.-China relationship. At that time, he pointed out that if the U.S.-China relationship were to be decoupled, the global economy would have to enter recession at the same time.
Now, the black swan event of Covid-19 has brought the world into a recession. The economic decoupling between China and the United States under the present conditions will not have as large of a societal shock as it could have, according to Li. In the present situation, the possibility of the parallel development of the U.S. and Chinese economies has greatly increased, while the economic relationship between the two countries have become more distant.
However, Li mentioned that this does not mean that China and the United States can or will completely disintegrate from each other in the global market. The U.S.
and China will still do business with each other, but it is difficult to say whether it will be done directly or through a third party:
“This means both China and the United States will deepen their trade relations with their allies. For example, at present, China's largest trade partner is ASEAN, the second largest partner is the European Union, and then the United States and Japan. This situation may be aggravated in the future. China's relations with ASEAN, Japan and Europe will be further deepened. Similarly, the United States and its allies will do the same thing. And because there is no fundamental national security conflict between China and the United States, a relatively fragile balance will still be maintained.”
He warned that the competition and tension between the U.S. and China may very well last a long time, and it will be a test for top level leaders and citizens of both countries.
Li estimated that this period of tension may last 10 or 20 years until a balance is found between the two countries, with both sides ideally gaining a clearer understanding of each other's strategic intentions and ideologies. As long as there is no military conflict between China and the United States, the world will continue to move forward in this direction.
On China’s economy and investment opportunities
Li believes that there is still a long way to go for China's economy in the future, and there are a lot of drivers for the economy to move forward. At present, China’s per capita GDP is only $10,000, and China’s savings rate is still as high as 40% or 50%. That is to say, the Chinese are not particularly confident about the future and feel that they need more savings and more investments. The Chinese are not satisfied with the current reality. This kind of dissatisfaction is a driving force for the further development of the economy.
Another driver for the economic development is the regional gap between the east, the central and the west. The gap is as large as several decades of economic development. It would add a lot of power to the economy if people in the central part of China can catch up to people living on the eastern coast, and if people in the west part can catch up to the people in the central part.
Therefore, China's economic opportunities are still many. It is not only the continuous improvement of industrial technology, but also the large-scale upgrade to urban living standards by the rural population. Many endogenous needs will be created in this process. When China passes the Lewis Point, per capita productivity will increase as the labor force shifts from labor-intensive industries to service and technology industries.
In terms of investment opportunities, Li sees all-around investment opportunities in China. He said that “it does not depend on the number of opportunities you can find or the universe of opportunities. The key is that you should only grab the opportunities within your circle of competency. That's the most important thing."
Of course, investing in a place with lots of opportunities is also a good decision. As Charlie Munger once said, "fish where the fish are," and China is a market with lots of fish.
Read more here:
- Notes From Li Lu's Recent Interview - Part I
- Amazon- Still Day 1?
- Retail Investors and the Recent Rally
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