By Santiago Hunt
China has been top of mind lately. Be it this week with Evergrande, this month with their multiple sectorial crackdowns, these past 2 years with COVID…
I’ve been working for a long time on a China primer. It may or may not see the light of day (depends on how good I feel it is). But I did want to share 10 charts which provide valuable China insights. Without further ado:
1. Demographics are destiny
China’s population is aging. Fast. To the extent that the CCP has been very intent on driving what it is calling “three child policy” (三孩政策). Ie: A series of policies driven at rising Chinese birth rates.
Tightening of minority rights (eg. LGBT), economic stimuli, videogame crackdown, a constant proclamation of the importance of “family values” by Xi Jinping… all of these can be traced back to China’s biggest challenge: Their urgent need to drive higher birth rates.
2. From poverty to middle class
In the past 30 years, China had 2 critical unlocks which led to its dramatic increase in GDP per capita, leading to the single biggest “poverty to middle class” transition the world has seen in the 21st century.
The first one goes back to the early 90s. A series of economic reforms allowed for 2 key things: greater regional/local autonomy for economic decisions (vs. top/down party mandates) + substantial opening up to FDI.
The second unlock took place in the mid 2000s. When China hit 4000 USD per cap, its middle class hit a critical mass milestone that made all of the productive world turn their eye to China (if they hadn’t already done so). 4000 USD per cap meant escape velocity: It cemented the fact that China will become the biggest economy in the world in all likelihood before 2030.
3. An evergrowing domestic focus (I)
Hitting escape velocity meant in turn that China could focus on its domestic economy. Thus reducing its size of Trade as %GDP. This has not only an economic impact, but also more importantly, cultural implications. 10 years ago foreign brands were the peak of aspirationality in China. Today, not so (though luxury brands in particular still retain huge clout).
If anything, the CCP’s body language + the post COVID world will only heighten this trend. Whilst China will continue to be a fundamental player in international trade, it’s primary focus is cementing & futureproofing its domestic economy.
4. An evergrowing domestic focus (II)
Conversely, China has markedly reduced its Belt & Road Initiative investment in the past 2 years (the BRI is a very aggressive China backed infrastructure plan to be deployed across multiple countries).
To be fair, part of this is explained by COVID restrictions. IRL work has taken a toll as we all know due to the pandemic. Nevertheless, it’s eye catching. COVID has made China turn its eye increasingly inward in an attempt to assure the CCP does not lose control. It wouldn’t be surprising to see a slower deployment of prior BRI plans moving forward.
5. The global GHG emission hotspot
China is the #1 source of GHG emissions globally.
Honestly, this is a somewhat skewed picture. China’s per capita emissions are less than 50% those of the US, while also being below Germany’s and Japan’s (the other top 4 economies in the world). Furthermore, CO2 emissions in China have slowed down massively in the past 10 years.
Nevertheless, if we’re to find a solution to curb emissions, China will have to be a part of the equation. There’s no way around that.
6. The most powerful videogame company in the world is Chinese
Long before Tiktok had become a global phenomenon born out of China, there was Tencent. Amongst its many faces, Tencent has a stake in almost all of the most relevant videogames out there.
Most played game globally? Belongs to Tencent. Fortnite is the first game to truly breach the cultural zeitgeist? Tencent owns ~40% of Epic. Free Fire is the top grossing mobile game globally? Sea Ltd has a strategic relationship with Tencent. And Tencent owns ~22% of Sea.
This is important not just because of the scale Tencent has in gaming. But because gaming will be the fundamental cultural building block of the 21st century. While video might remain the most popular medium, it will increasingly rely on videogame technology for production purposes (eg. Unreal engine for rendering). And Tencent will be at the center of it.
7. The number of African students in China has 45X in 15 years
Speaking of cultural relevance, this one is pretty straightforward.
This has hit a roadblock with COVID during the past 2 years, as for the last 20 months China has refused to allow foreign students to return to resume university expect for some specific cases like South Korea.
8. 2 out of 3 people monitor their health via apps
Chinese people take the lead globally when it comes to health monitoring via apps. Nutrition is the primary usecase, followed by heart/body monitoring apps.
Age expectancy in China today sits at 77.3 years old, according to the UN. This places China in a similar line with the US (78), and well above Asia norms. It’s worth noting that in some pockets, life expectancy is well into the eighties (such as Hong Kong with 85!)
9. China nuked its competitive advantage in crypto
Prior to Q2 this year, China controlled most of the hashrate for Bitcoin/Ethereum/Rest of Crypto. And then, after many false alarms during the past years, the CCP decided to de facto outlaw crypto mining.
What’s particularly interesting is that China decided to do this, despite crypto mining being a strategical industry from a geopolitical standpoint where China had global leadership. It’s unclear how much of global hashrate remains in China, but it is clear that the picture shown by the chart is no more. As with Internet, it seems likely that China will attempt to firewall its territory from decentralized crypto (CBDC will be the strong push they go for).
10. Why is Evergrande such a big deal?
It’s likely that the Evergrande crisis immediate impact has been overplayed. My personal view is that, if worse comes to worse, the government will step in to bail it out.
What’s telling about the crisis though is that it shines a light on a fundamental difference on the end destination of Chinese people’s savings. Unlike the US, the shape of China savings is heavily dominated by real estate. The challenge with this is that real estate markets are by nature more illiquid, allowing for greater risks. Part of the issue with the 2008 crisis was that the illiquid aspect of RE led to asset mispricing, which in turn caused a painful unwinding. While stocks/bonds are definitely not exempt of bubbles, the fact that they are more liquid allows for earlier and therefore less painful price correction.
When you combine illiquidity with massive relative size compared to other markets, you are playing a risky game. Perhaps China is too big for implosion, but I wouldn’t be surprised to see more “China Real Estate” scares popping up in the coming years.