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Investment views

Podcast: China’s evolving economy

4 December 2018
Author: Michael PowerStrategist

Michael Power updates Lindsay Williams on China, following his recent interview which looked at why China should no longer be seen as a copy-cat economy.


Lindsay Williams: Recently I spoke to Dr Michael Power, Investment Strategist at Investec Asset Management in Cape Town, and the topic of our conversation was China’s economy no longer being a copycat economy. Since then, Michael has been criss-crossing the country, updating clients on China and he is with me now.

It is almost as though you could do a monthly China update because of the pace of change in that country and its juxtaposition with the rest of the global economy. What was your message this time, Michael?

Michael Power: Look, I think, continuing on from where I was before, the evidence is now growing that, although Donald Trump’s position in saying that China is stealing both intellectual property and jobs, China, almost in reaction to what Trump is saying, is developing its own independent capabilities and before long it is going to be largely disconnected from the need to be intellectually connected in any way to the United States.

For instance, in the realm of semiconductors or microprocessors, it is hell-bent on developing its own capabilities over the next 7 years so that it doesn’t have to import from Micron and Broadcom and the like and be subject to periodic tantrums from Donald Trump when he decides they can’t have this chip or that. They basically are sick and tired of his tantrums and they said well, fine, if that is the way you want it, we will develop our own capabilities.

Lindsay Williams: So what you are saying is that the strategy may well have been in place to be self-sufficient in certain areas, certainly economic areas, certainly industrial sectors, but it has been enhanced by Mr Trump’s tantrums (as you call them) and it has now become a medium and long-term strategic strategy (if that is the right phrase).

Michael Power: It probably was all along. It is just that they have now speeded up the process by which they are going to disconnect themselves from a supply chain that is rooted in the United States. Of course, for his part, Donald Trump is trying to disconnect himself from a supply chain that is rooted in China but that is backfiring because so many of the big companies of the United States (exhibit A being Apple) pretty much get all of their product from contract manufacturers in China and, were Donald Trump to slap 25% tariffs on every iPhone coming into the United States, that would have a severe impact on Apple’s products, demand and therefore their profits.

Lindsay Williams: Yes, indeed. I was hearing some comments from Mr Trump the other day and he said well, people that buy Apple anyway can afford that sort of increase, which was a rather churlish comment I thought. Michael, of course, all eyes in the next few days will be on Buenos Aires and the G20 meeting and the meeting (is that a private meeting – it probably is) between Xi and Trump and their advisors. Do you think that it will go beyond the two getting what they want and affect the markets in a positive or a negative way? What is your assessment?

Michael Power: Well, my assessment in the short term is we will get what can only be described in Donald Trump language as “a fake deal”. It will be a deal of sorts and there will be lots of smiling for the cameras and handshakes and the like and then in the next 6 weeks Donald Trump and his advisors will shoot themselves first in the left foot and then in the right and we will probably end up going back to square-minus-one.

That is part of the problem with Donald Trump. Whenever he meets people, it tends to be a happy occasion (we have seen this with what happened with the leader of North Korea) and then when the details start to invade the happiness, the reality is exposed and the deal is undone.

Lindsay Williams: In whose interest is it the most to come to some sort of satisfactory conclusion to what has been going on now for many, many months?

Michael Power: It is not easy to say. I think on one level, obviously, it is in China’s interests to buy time, if only to achieve what I was talking about before, namely increasing its level of independence from a US supply chain and I suppose, to some extent, diversifying its consumption of its products away from a heavy concentration in the United States but, in the final analysis, I think the people who are really going to be affected by all of this are going to be US Inc. because their supply chains are going to be disrupted and their capacity to generate profit is going to be severely restricted.

Lindsay Williams: Michael, I recently spoke to a colleague of yours, a Portfolio Manager at Investec Asset Manager in Singapore by the name of Wilfred Wee, and he was talking enthusiastically about the way that the Chinese authorities have managed growth and managed inflation and the regulatory environment being more favourable. We spoke specifically about bonds. Do you have a look at China now and say, even apart from the asset class of bonds, it is starting to be in a sweet spot?

Michael Power: Look, I think so. I have to say that, while I do think that we have got turbulence in global markets in the next two quarters, by the end of 2019, for the first time in modern history, we will see some semblance of sanity returning to markets but led by Asia and this is in large part not led by the production side of Asia but the consumption side of Asia and I think that is the absolutely critical point.

Asia could never be a locomotive to this whole process if all it was doing was leading by production but it can be a locomotive if at the margin it starts leading by consumption and we are starting to see the Asian consumers centred on China play a massive role in the increment of demand on a global basis from one year to the next.

Lindsay Williams: And did you conclude your presentation to your clients that I spoke of in the introduction with optimism, with your usual enthusiasm about China that is something that has been going on for 20 years now, the transformation, the reformation (if you like) but will continue to do so?

Michael Power: Optimism maybe – realism absolutely. I think the realism of the moment is that China realises that the United States is an unreliable trade partner under the whip of Donald Trump for as long as he is around and they need to be very, very careful about their level of dependence on the United States either for products that they must buy (like microprocessors) or products that they must sell and they must start to diversify away from the US consumer. So realism is probably what I ended with.

I also asked a question using a very good line from a Bob Dylan song called “Union Sundown” where basically the chorus goes: “It is sundown on the Union. What is made in the USA sure was a good idea until greed got in the way”, and asked the question: so whose greed is it?

Now, in part, it is, of course, that of China but that is an understandable greed given where they have come from but I also pointed out the role that US Inc. has played in this whole process and they have been rather greedy too. I think that the arrangement that they have built in terms of their dependence on the China supply chain has created an extraordinary amount of greed because they have been able to leverage it through tax havens in Ireland and share buybacks and the like and do extraordinarily well personally out of this whole process but it is all starting to come unstuck and I think it is starting to show up in stock markets notwithstanding the 2% that we saw in the Dow yesterday, which was largely due to Jay Powell buckling to the rhetoric of Donald Trump.

Lindsay Williams: Yes, indeed, many people speculating as to whether it was a buckling but it really does look like it, doesn’t it? Michael Power, thank you very much for your time. Michael Power is an Investment Strategist at Investec Asset Management in Cape Town.


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Important information

This podcast is provided for general information only and assumes a certain level of knowledge of financial markets. It is not an invitation to make an investment and should not be construed as advice. The views in this podcast are those of the contributors at the time of publication and do not necessarily reflect those of Investec Asset Management.In South Africa, Investec Asset Management is an authorised financial services provider. In Hong Kong, this content has not been reviewed by the SFC and is issued by Investec Asset Management Hong Kong Limited. In Singapore, this content is issued by Investec Asset Management Singapore Pte Limited (Co. Reg. No. 201220398M).

Michael Power
Michael Power Strategist

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