The Great Chinese Transition
Transcript of The Great Chinese Transition
The Great Chinese Transition
Source: Zhang Chengliang/China Daily. June 4, 2012. China's superpower coronation is still some way off.
John D. Hock, CFA Chief Investment Officer
Altrinsic Global Advisors, LLC
Agenda
• “Making China Great Again,” The Great Transition
– From Old Economy to New Economy. From Picks, Shovels, & Smoke Stacks to Consumption, Services, & Innovation
– China’s Next Revolution? Artificial Intelligence And Surprising Technologies Where China Could Lead The World
– Lessons From History and Thucydides Trap
• Implications For Your Investments, Your Business, And The Global Economy
• Q&A
The New Champion of Capitalism?
Source: The Economist. January 21, 2017. The new Davos man. Xi Jinping portrays China as a rock of stability. But does he really want to be a global leader? 1
Pudong 1987
Source: Alan Taylor. The Atlantic. Aug 7, 2013. 26 Years of Growth: Shanghai Then and Now. Aug 7, 2013. http://cdn.theatlantic.com/static/infocus/shanghai080713/s1987.jpg 2
Pudong Today. In China, Things Get Done!
Source: Alan Taylor. The Atlantic. Aug 7, 2013. 26 Years of Growth: Shanghai Then and Now. Aug 7, 2013. http://cdn.theatlantic.com/static/infocus/shanghai080713/s2013.jpg 3
Unprecedented Investment Beijing-Shanghai Express
Source: Railway News. July 4, 2011. Beijing-Shanghai High-Speed Rail Starts Service. Credit: Agence France-Presse (AFP) 4
Has Created A Voracious Appetite for Commodities
Source: Visual Capitalist. September 10, 2015. Jeff Desjardins.
China Consumes Mind-Boggling Amounts of Raw Materials
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…and an Economic Juggernaut
Source: Arvind Subramanian. *Weighted by share of world GDP, trade and net capital exports
Waxing and Waning Top three countries by economic dominance, % share* of global economic power
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And A Very Unbalanced Economy… Reform Takes Time and Has Consequences
Source: World Bank
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Will This Trend Persist? What is the Next Stage of This Transition?
Source: Washington Post Writers Group. December 15, 2014; Credit: Lisa Benson 8
Reforms & Rooting Out Corruption
Source: Business Insider. August 22, 2013. This photo shows that China's massive Bo Xilai trial is an intricately orchestrated charade. Credit: REUTERS/Jinan Intermediate People's Court/Handout via Reuters. 9
“One Belt One Road”… And China’s “String of Pearls”
Source: Bloomberg. May 15, 2017. China’s Silk Road. David Tweed. Credit: Bloomberg.
China’s modern-day adaptation of the ancient Silk Road aims to revive the routes via a network of railways, ports, pipelines, and highways
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The Next Revolution in China Could be Artificial Intelligence “AI”
1Source: WIPO PATENTSCOPE database search; 2Source: The National Science and Technology Council (NSTC). (2016). The National Artificial Intelligence Research and Development Strategic Plan.
Deep Learning2
Journal articles mentioning “deep learning” or “deep neural network”, by nation.
Cumulative Patent Registration1
2010-2016
China
U.S.
Europe
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A Supercomputer in 680 Million Hands
Source: CNNIC
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Number of Users to Access Internet via Mobile Device2007-2016
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Who Needs a Mall? The Ecommerce Opportunity is Massive!
Source: JP Morgan, US Census Bureau, Statista, Company filings
Global E-Commerce Mainly Comes From China and the U.S., 2015
U.S. $0.4tr (20%)
Alibaba $0.6tr (26%)
Global $1.9tr
China $0.7tr (40%)
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China’s Digital Economy is a Story of Commercial Success and Excitement among Investors
1Refers to third-party payments conducted through mobile transactions. For China, mobile payments exclude bank or UnionPay credit-card transactions, digital wealth management, and digital finance. For the United States, payments are in-person payments on mobile between buyers and sellers, and remote payments on mobile devices. Source: Dealogic, eMarketer, iResearch, PitchBook, TechCrunch’s CrunchBase Unicorn Leaderboard, McKinsey Global Institute analysis.
Mobile Payments in 20161
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$74
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China U.S.
11x
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The Environment. Huge Opportunity and Risks. CCTV Tower from CLSA Securities Beijing Office
Source: Harvard Magazine, October 2008. Credit: James Fallows. Source: MyWorld.ru, January 2013. 15
Tourism. No Longer About Shopping and Gambling.
Source: Perth Now. Northern Territory. Credit: NT Tourism 16
Australia a Popular Destination. Chinese Represented 15% of Australia’s Total 8m Tourists in 2016
Source: CLSA, ABS
1,347 1,199
717 711
440 414 388 285 260 249
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Origin of Australia's Top Inbound Passengers
New Zealand, 16%
China, 15%
UK, 9%
USA, 9%
Singapore, 5%Japan, 5%
Malaysia, 5%South Korea,
3%
India, 3%
Hong Kong, 3%
Germany, 2%
Other, 25%
Inbound Passenger Mix
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China45.3%
Japan25.7%
Australia6.6%
South Korea5.1%
India, 4.8%
Philippines, 2.5%Thailand, 1.6%
Indonesia, 1.4%Others1
7.0%
Share of Media Total
China
Japan
Australia
South Korea
India
Philippines
Thailand
Indonesia
Others
Targeting the China Consumer. Opportunities in Advertising, Sports, Media
Source: GroupM. 1Note: Others include Vietnam, Hong Kong, Taiwan, New Zealand, Singapore, Malaysia, Pakistan, Bangladesh, Sri Lanka.
Total Media Advertising Spending by Country in Asia Pacific (2016)
China’s advertising spending accounted to nearly 50% in Asia Pacific followed by Japan and Australia.
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Education
Source: Daily Mail. April 13, 2015. Testing conditions: More than 1,700 Chinese students forced to sit exam in school playground because there isn't enough room for them all inside. Keiligh Baker. Credit: China Foto Press via Getty Images 19
But There Will be Traps in the Consumer Story! China Breweries’ Operating Margin was 17% Below Global Peers…
Source: FactSet
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Operating Margin for China and Global Breweries (2016)
China breweries
average 5%
Global breweries
average 22%
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What Are Primary Risks?
As of 06/30/17; Source: Bloomberg
Excessive Debt in an Unbalanced Economy
150
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CHN need reforms in many areas. The financial sector, state owned enterprises, healthcare… environment
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Demographics. China Will Get Old Before it gets Rich.
Source: UN Data
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Working age population (15-64) % of total population (RHS)
Projection
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The Blue Water Navy
Source: China.org.cn December 20, 2016. Chinese navy goes 'blue water'. Credit: China.org.cn
The Geopolitical Landscape has changed in a meaningful way. 23
Summary • China is embarking on a long-term mission of “Making China Great Again”
– Truly long-term in its planning and horizon – Not encumbered by democratic processes – In China, things get done, leapfrogging others in infrastructure and
important technologies
• China is in transition in some obvious and less obvious but very consequential areas
– From…picks, shovels, smokestacks, and cheap exports…. – To…the next stage is all about consumer and the big surprises will be
in technology and artificial intelligence
• The risks are massive. Be mindful of the Blue Water Navy. And we must respect the Thucydides trap.
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