My Comments: By first choosing to opt out of participating in the Trans Pacific Partnership (TPP) and then inviting a trade war with China, the US has effectively ceded global economic supremacy to China. The expressed logic behind these moves was in the guise of ‘Make America Great Again”. Hah!
In turn, China is attempting to match their new found economic supremacy with military supremacy. It’s only a matter of time before we find ourselves in a conflict or “Cold War” with echoes of what we lived with years ago and the Soviet Union.
September 27, 2018 Knowledge@Wharton
China’s economy is so large – and growing so rapidly – that it’s difficult to get a true read on the size of its influence on the world stage, according to this opinion piece by David Erickson, a senior fellow and lecturer in finance at Wharton. Before he taught at Wharton, Erickson was on Wall Street for more than 25 years, working with private and public companies to raise equity strategically.
Some of the rhetoric out of Washington recently has been suggesting that the U.S. is “winning” the trade war because the U.S. stock market is near all-time highs as China’s domestic equity markets have declined significantly. While the domestic Chinese equity markets have suffered since the trade tensions started earlier this year, I think that premise underestimates the economic power of the rapidly growing number-two economy in the world and really needs a bit of context.
The Chinese equity stock market — as represented by Shanghai stock market — actually peaked in 2015. This is not too dissimilar from the market cycles we have experienced in the U.S. in the last 20 years. This includes what we saw in the Dow Jones Industrial Average (DJIA), which reached 11,000 in May of 1999 but took more than seven years to reach 12,000. While the DJIA advanced from October 2006 to July 2007 from 12,000 to 14,000, it took almost six years, until May 7, 2013, before it advanced to the 15,000 milestone. For the NASDAQ market, the cycle was even more dramatic where it took 15 years to reach new highs in 2015. Markets do go through cycles.
But hasn’t the Shanghai stock market been quite volatile since the trade war started? Yes, it has. This is not surprising with much of the domestic Chinese equity market activity largely being from retail investors, especially with many having very limited experience in Chinese equity investing (which I will address shortly). With the uncertainty of the trade rhetoric over the last few months, there was likely to be some significant volatility. However, by way of comparison, the U.S. equity markets went through significant volatility earlier this year after a significant run since the 2016 U.S. election. If you go back a bit further, the U.S. equity markets, which are largely institutionally driven, had significant periods of volatility during the 2008 Financial Crisis, where the DJIA fell almost 800 points on September 29th; the technology “bubble” in 2000, where on April 14th the NASDAQ fell 9% and for the week 25% (and the NASDAQ 100 index lost 78% of its value in two years); and when the Dow Jones fell almost 23% in one day on “Black Monday” of 1987.
Why do I go back to 1987 for context? Because in 1987, while a Wharton finance student could study “Black Monday” in the context of previous crashes in the U.S. stock market, the Chinese domestic equity market didn’t exist and wouldn’t until 1990. That’s right, a Chinese student studying finance on mainland China at the same time couldn’t learn about investing in the Chinese equity markets because it did not exist until a few years later. The Shanghai Stock Exchange was founded in 1990 (and Shenzhen around a similar time) creating a domestic equity market for both mainland Chinese companies to list and finance, and for Chinese institutions to invest. Today, it is estimated that the Shanghai Stock Exchange has over 200 million retail investors — total U.S. population is just 327 million — and for the full year 2017 was the number-two IPO market globally in terms of proceeds raised. So, while the Chinese equity market has suffered significant losses this year, given the “rapidity” of its evolution, these changes need to be put in context.
“Now, markets in Hong Kong, Shanghai and Shenzhen collectively represent the largest IPO market in the world….”
These are just a couple of the things we learned on our recent trip to Hong Kong, Shanghai and Shenzhen as part of Wharton’s MBA course called Strategically Investing in the Growth of China. A delegation of 58 Wharton Executive MBA students, along with three faculty members, met with prominent Chinese companies, leading Chinese public equity and private equity investors, as well as representatives of the Hong Kong and Shanghai Stock Exchanges, and explored how they strategically invest in the growth of China. While I had been to China many times during my previous investment banking career (though the last time was in 2013 before I retired), about 85% of our students had never been to Hong Kong or mainland China.
When we started our trip, given that many of our students had never been before, I wanted to give them a few numbers to provide some context as to the size and scope of the Chinese economic opportunity. Here are some of them — all approximations:
• a population of 1.4 billion people;
• 620 million mobile internet users as of 2015, according to China’s Mobile Economy: Opportunities in the Largest and Fastest Information Consumption Boom;
• 400 million in the middle class.
And to get some sense of the rapidity of the change:
• Exports have grown for the last 30 years at a 17% compound annual growth rate (CAGR), making China the world’s largest exporter at $2.3 trillion in 2015, according to The China Questions – Critical Insights into the Rising Power;
• In 1980 about 70% of Chinese labor force was in agriculture; by 2016 only 30% was in agriculture;
• In 1980 only 2% were university educated; by 2016, approximately 30%;
• In 1980 Shenzhen had a population of 30,000; by 2016, Shenzhen had a population of some 12 million.
What I realized as we progressed through our visits to these companies and investors was that these numbers were understated, and significantly under-estimate the economic power of China. Let me outline three of the specific attributes that we learned about and discussed as part of our trip: