As some of you may know, John Mauldin and Worth Wray compiled an e-book on China, “A Great Leap Forward?” which includes a chapter by us on Invention, Innovation and Implementation in China. John continues to write on what is happening there in his various missives. In a recent conversation with him, I relayed three stories that I thought had some relevance to what is going on in China today. If you have kept up on our China views, you know that we have maintained a perspective that China’s growth this year would be much slower than consensus, but we didn’t see a collapse occurring. China has many levers to deal with its transitional issues from an export economy to a consumer economy. These anecdotes may provide some additional perspective on what is happening there.
Bookstores and Investing
In the major cities in modern China there is a multi-story bookstore on every 5th corner. The first floor is almost always stacked with the following mix:
Half the floor is filled with the equivalent of Mobil guides, showing the latest version of the road maps for various parts of the country including the location of rest stops and restaurants. In spite of the “slowdown” there, these change monthly as roads are still being constructed at a rapid pace—rapid enough to call for new maps quite often. The other half of the store contains two adjacent and, at times, commingled sections. The most significant section, in Chinese and other languages, has books on numbers – their importance in quotidian living and how one would go about picking lucky numbers for various lotteries and other gambling activities. That section, I am told, gets a lot of traffic when there is a group planning a trip to Macau.
The other area consists of books on “investing”—many in English. Based on the titles I saw, some of these would appear interchangeable with those in the numbers section. Gambling seems to be in the DNA, and the Chinese approach to the stock market would certainly seem to fall into that category. Much as the Chinese in Macau increase their bets as a hot streak progresses, the same appears to apply to the stock market. Of course, there is a segment of “investors” in the US market who might fall into the same category. However, at this stage in the development of capital markets in China, the percentage would seem to be much higher there. Classic growing pains in a less than mature capital market, but as with everything in China, it does go to extremes. The Chinese government seems to want equities to rise. They may not yet have gotten it quite right on how to do that; but with lots of volatility, at some point they may succeed. It could be painful between now and then. It’s a little tough already when they haven’t opened almost 20% of the stocks for several days.
The Changing Mix of the Chinese Economy
The second story has to do with the changing mix of the Chinese economy. I did a webinar last Thursday with Henry McVey and David McNellis who run the Global Macro Asset Allocation process for KKR. They had a more sanguine perspective of China growth than the consensus for sure. When I questioned Henry on this view, he said that people were overlooking the amazing growth of the Chinese service sector. He agrees with the major, major slowdown in fixed asset investment, but the services sector, which in many ways relates to internal elements of the China story and the consumer, is quite robust. They have a very specific window on this because they are investors in several service sectors in the country. That was not a story that I had previously heard spelled out so specifically. It’s not that there won’t be some hiccups or worse, but there is a transformation occurring underneath all this turmoil. It may mean slower growth in the long run, but with China following the path of the now developed economies from agrarian to industrial to services. I am paying attention.
A Tale of Transition
The final story has to do with the Mobil guides in the bookstore. I was in Shanghai a couple of years back with a small group looking at some individual businesses in the technology space. We had a driver taking us outside of Shanghai to a semiconductor operation about two hours by car from our hotel. The driver suggested he could save us an hour by taking the newly constructed freeway (eight lanes to a side) that had recently been completed—at least according to the new maps. “Why not?” we said. I must say the freeway was amazing. Very little traffic on it, which seemed a little unusual, but cars going in both directions. Maybe it just seemed like less traffic because there were that many lanes on each side. All went quite well until we got to the exit ramp. It didn’t exist. China seems to build these freeways and then decide later where it’s going to put in the off-ramps depending on what area is growing and needs the off-ramp, or maybe pays somebody to have it built. It actually seems like an efficient way to put in an infrastructure. It would have been nice if the road maps had reflected that. As it was, we had to drive another 120 kilometers to find an off-ramp, and then work our way back to our destination on some paths that were defined as roads. Needless to say, the hour we were going to save turned into an extra four hours to reach the destination and a much shorter visit than planned. Nevertheless, it was still worth the trip. A classic story in a rapidly growing country, and, amazingly, such a combination of modernity with an ancient culture.