This is the last installment of my article series on Li Lu (Trades, Portfolio)'s speech at the Global Investor Conference held in January 2019. At the end of the speech, Li laid out what he identified as the fourth and fifth big drivers of China's future economic growth and summarized the big picture case for investing in China.
According to Li, the fourth growth driver is the flexibility and practicality of the Chinese government in dealing with major issues and crises. There are two major goals of the Chinese government: namely, the comprehensive and disciplined governance of the party and the country, and the maintenance of medium and high-speed sustainable economic growth.
These two goals are unified and contradictory at the same time, kind of like the Fed's three mandates. Sometimes they are not handled well and may even evolve into crisis. However, in response to crisis, we also see that the Chinese government has shown enough flexibility and pragmatism to adjust the priority level of its two major goals. For example, faced with the U.S.-China trade conflicts, the Chinese government has adjusted the strategy of negotiation with the United States and has also changed some of the previous attitudes towards private entrepreneurs in order to prioritize economic growth. It also changed the lending policy for private enterprises and as well as the way to handle equity financing during the collapse of the equity market.
In addition, the result of the comprehensive and disciplined governance of the party and state affairs may result in more political stability, which may be difficult to understand and accept by domestic and foreign observers who are only familiar with the Western political model. People will try to make adaptive adjustments to political realities. With the gradual adoption of policies and the passage of time, everything will be back to normal. Businessmen will continue to do business. This wealth will not flow away from China and productive assets will not be lost. Most people in the society, even the Chinese government, will learn to adjust to new realities. If the Chinese government is flexible and adaptable, the whole Chinese society must be flexible and adaptable. As long as the government does not change the goal of economic reform and development, China's economy will continue to develop in a stable and single big market.
The fifth growth driver Li identified for China's economy is the Confucian culture. To predict the future of China's economy, it is helpful to refer to the development experience of countries of similar culture. The East Asian region is greatly affected by Confucianism. Japan, South Korea, Singapore, Hong Kong and Taiwan are still under heavy influence by the Confucian culture, and although they are greatly different from China in terms of government control and population size, their development process is still instructive for predicting China's economic prospects.
Japan's GDP per capita reached $10,000 for the first time in 1962. Over the next 24 years, the average compound GDP growth rate was about 6.1%, which continued to reach the per capita GDP level of US $30,000. Then, growth began to slow as the country reached late-stage capitalism.
South Korea's GDP per capita broke the $10,000 mark in 1993. Over the next 24 years, GDP grew at an average compound rate of 4.7% to more than $25,000.
Singapore's GDP per capita reached $10,000 in 1976 and then compounded at 8.2% during the next 21 years, reaching $30,000 in 1997.
Hong Kong has had a similar growth rate of 10% in 28 years once it reached GDP per capita of $10,000 in 1979.
Of course, both Singapore and Hong Kong are very small economies, so they are not very comparable to China. South Korea and Japan are more comparable. Their political organization is similar to that of China. They also place great importance on education, technology, industrial upgrades and domestic consumption, especially Japan. South Korea's economy is still very dependent on foreign countries, but they have shifted some of their focus to consumption.
The experiences of these East Asian Confucian societies can provide us with some insight into China's growth potential, which is very helpful. The important thing about Confucian culture is that it emphasizes meritocracy, encourages a high saving rate, attaches great importance to education, science and technology and encourages strong ambition. Moreover, other countries heavily influenced by Confucianism tend to be similar to China in terms of social organization, and the government plays a different role in economic development than it does in Western countries. Thus, the Chinese economy is likely to follow a similar path.
Conclusion
As Li Lu (Trades, Portfolio) said, value investors are bottom-up investors. Our investment decisions are generally unaffected by the overall macro environment.
The reason why we should spend time thinking about the macro environment from a country level is that the companies we invest in are closely related to the fate of their countries, so we need to have a rough idea of the country and where it is headed. This kind of cognition does not have to be very accurate, nor does it need to be correct all the time. We just need to have a rough guess about what will happen with economic growth and political risks in the next 20 or 30 years in the countries we are betting on.
That's why we do these analyses and why we think about them. As fundamental investors, the case for investing in China is at its strongest now because, as Charlie Munger (Trades, Portfolio) has pointed out in the past, the best businesses there are cheaper and will grow faster than their counterparts in the West in the coming years.
Read more here:
- Li Lu Explains the Case for China - Part 7
- Li Lu Explains the Case for China - Part 6
- Li Lu Explains the Case for China - Part 5
Not a Premium Member of GuruFocus? Sign up for a free 7-day trial here.
