I’ve never been drawn to investing in China. As early as 2005, I remember attending investment conferences where speakers would flash the stats about the emerging Chinese economic phenomena on screen.
Population size, growth rates, urbanization trends and the formation of a huge middle-class; on paper China looked like the opportunity of the 21st Century. I wasn’t buying then, and I am still not intrigued.
In a room of everyone discussing China as an opportunity not to be missed, I still recall one speaker from the mid-2000s, an economist who didn’t have a China strategy to sell, getting up and saying, “China will be old before it is rich.”
The speaker was referencing the Chinese government’s one-child policy, and how the nation would have a serious population contraction and resulting cultural issues in the coming decades due to this policy.
The logic was sound, nations need people and families to grow, but what struck me about this statement at the time still rings true to this day. As I heard this material being presented, I distinctly remember thinking, “What kind of government puts limits on children?”
When I contemplate this question, the answer I arrive at is a government that feels entitled to intrude into the intimate lives and homes of its people to control the size of their families, is not the type of government to encourage the entrepreneurial and innovative spirit of its population.
In my opinion, true economic growth resulting in improving general prosperity is a three-legged stool.
The first leg of the stool is people. An economy needs more people to grow, but very importantly it also needs the process of raising families to generate growth. As the parents out there know, kids are incredibly expensive.
But all that money we shell out to get our urchins housed, clothed, fed, educated and entertained provides others with jobs and business opportunities. Families spend, and spending drives opportunity.
The second leg of the stool is entrepreneurial spirit and innovation. How many of the things in our homes did not even exist 15 years ago? How much of it existed but was unaffordable? What new things will arrive over the next 15 years that we won’t want to live without?
Some businesses see a need and build a product or service to meet it, some actually create a need through innovation. In order to create true growth and prosperity, a nation must be free to innovate.
Third is the government. While the government can never actually create true prosperity, it can provide the policies to create an environment for prosperity to grow. How it best does this is the fundamental debate of our nation, but it's hard to argue against the idea that free people will create growth, opportunity and ultimately prosperity.
So, with this frame of reference, which of these characteristics can be said about China? From 1979 to 2013 the State limited family size, and according to Wikipedia, cultural issues in China resulted in an imbalance between birth rates of males and females, with considerably more males being born. Now that these men are entering prime family formation age, how the heck is this going to play out?
Now I wouldn’t call the Chinese people non-innovative, but with state control over the economy and capital formation being controlled by politicians and bureaucrats instead of entrepreneurs and investors, the incentive to innovate has been diminished.
So instead of seeing the Chinese invent new and better products, we see the state-sanctioned theft of the ideas generated by others. This can work for a while, but the hard-line push back from President Trump was going to eventually occur. Trump just took the issue and ran with it.
The news of the past few weeks has started to reveal serious cracks in Chinese society. The Chinese people yearn to be free and the totalitarian Chinese State is walking a tight rope, attempting to control things which may not be controllable.
While I don’t think the situation has reached a boiling point, even investors who chose not invest in China still need to be mindful of the risk presented by a faltering Chinese economic system.
Opinions are solely the writer's and are for general information only and are not intended to provide specific advice or recommendations for any individual. Stock investing involves risk, including loss of principal. Marc Ruiz is a wealth advisor and partner with Oak Partners and registered representative of LPL Financial. Contact Marc at marc.ruiz@oakpartners.com. Securities offered through LPL Financial, member FINRA/SIPC.
