What I learned on a trip through China: Overview

Our trip in May took us to 16 cities and included close to 90 meetings and visits to 20 manufacturing plants. In our travels, we spoke with a large cross section of people, from corporate executives and private entrepreneurs to rural villagers and young urban dwellers.
Winnie Kwan

Equity portfolio manager

Capital Group

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Several colleagues and I made our first journey back to China in more than 15 months as we start to get back to on-the-ground research. Our trip in May took us to 16 cities and included close to 90 meetings and visits to 20 manufacturing plants. In our travels, we spoke with a large cross section of people, from corporate executives and private entrepreneurs to rural villagers and young urban dwellers.

We made the trip just before regulatory uncertainties rapidly escalated and drove a sharp selloff in China’s equity markets in July. It seemed that management teams appreciated that we visited in person, especially after they learned we had quarantined. As a global portfolio manager, I believe these conversations have given me a long-term perspective that has been helpful during this volatility.

Risks to investing in China have obviously risen over the course of this year. That said, there are longer term forces at work that could have global implications over this decade. I’ll address both here. Having invested in Chinese stocks for more than 20 years, let me start with some impressions from my trip. I’ll then share a few recent high-level observations on what’s happened since.

Entrepreneurship is still alive and well

Even though some foreign investors have become spooked by the government’s intervention in the private sector, entrepreneurial activity remains vibrant from what I could discern. There is still lots of interest from venture capitalists and private equity investors in China, and we met with several entrepreneurs and company founders in their late 20s and early 30s. There is also a sense of pride as it relates to comparing China’s achievement versus the rest of the world in the development of public infrastructure, digital payments and internet platforms.

I detected a sense of meritocracy that is appreciated by the younger people: Hard work plus creativity can produce results, which could equate to a lot of wealth. I also came away thinking that women feel very much empowered in China.

China is not a monolithic economy

As an investor, I find it useful not to make broad generalisations about the world’s second-largest economy. China consists of many regional economies that are rapidly transforming.

Shanghai is cosmopolitan and booming, with an incredible amount of wealth creation. In the Yangtze River Delta region around Shanghai, large health care clusters are being developed in the cities of Suzhou and Wuxi. Further inland, the cities of Hefei and Hangzhou are hubs for component manufacturing and the electric vehicle (EV) auto industry.

Along the southeast coast in Guangdong province, Shenzhen (home to Tencent) remains the Silicon Valley of China but also is now a health care hub and the world’s largest vaping manufacturing centre. Dongguan has become the yester-year manufacturing powerhouse for developing communications and computer-related equipment. It is a reminder of how competitive the manufacturing sector is in China: reform or die! The rest of Guangdong province remains the bedrock of small merchant enterprises, traders and niche service providers empowered by the internet and digitalisation.

Source: Capital Group

The private sector isn’t the only one going through intense transformation. The way local governments work is also changing. KPIs (Key performance indicators) for local officials now include competitive advantage (instead of blind competition), as well as green and clean environment for the cities.

A manufacturing revival is being driven by demand for automation, renewables, energy storage and electric vehicles. Automation was a powerful and prevalent theme from our factory visits. It had been 15 months since we were last on the mainland, and the amount of new factory and process automation that we saw was staggering.

The country continues to move up the value chain in manufacturing and exports. It started with apparel and footwear in the 1990s and moved into power tools, furniture, appliances and personal computers in the early 2000s. Over the past decade, China has been a global hub for smartphone manufacturing and assembly. Now, we are seeing a shift to the manufacturing of electric vehicle batteries, solar power systems and automation equipment.

Rising labour costs and the government’s strategic decision to transition the economy to higher-value products are the primary reasons for the automation push. This is leading to some inflation. I suspect a decent base salary and better welfare coverage will eventually become the norm. The skilled and educated labour force is also enjoying lots of opportunities. Factories are more automated and hiring skilled technicians. From what we were told, R&D scientists and tech-sector coders have enjoyed annual pay raises of 15% to 20%. This has enticed many Chinese-born workers and their families to return from other jobs in the United States, Europe and the rest of the world.

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What I learned on a trip through China: Overview