China is a central planning economy. The government takes a top down approach to decide which industries to be developed.
The U.S. is more ground up where entrepreneurs figure out the opportunities and eventually drive the direction of the economy.
In other words, investors should follow the entrepreneurs’ vision in the U.S. but watch for clues in the Chinese government’s plans when investing in China.
The good thing about a centrally planned economy is that the Chinese Government often publicly announce which industries are going to be developed. Investors should keep abreast with such plans.
- The first example is the Greater Bay Area (GBA). The Government planned to amalgamate 11 cities such as Hong Kong, Shenzhen and Macau to form a megapolis.
GBA would have a population of around 70 million, larger than the under UK (66m) or Canada (36m). It will have 3 of world’s top 10 container ports. The area would be the 12th largest economy in the world.
- The second example is the Made in China 2025 (MIC 2025) plan.
There are 10 key industries that the Government wants to develop and achieve a certain level of market penetration in the world.
IT, robotics, green energy and green vehicles, aerospace equipment, ocean engineering and high tech ships, railway equipment, power equipment, new materials, medicine and medical devices and agriculture machinery are the 10 industries mentioned. And its semiconductor industry will be key to provide the chips to these industries.
Investors who are interested in investing in China can think about which companies may benefit from these developments.
However, it isn’t as simple as buying any company that are in these industries because not all businesses are equal, some are too difficult or the competition too tough. Investors have to dig into the company financial performance to complete the analysis.
An example is CRRC Corp. The world’s largest rolling stock (trains) manufacturer, bigger than Alstrom and Siemens. Railway is one of the MIC 2025 industries to be developed and Belt Road Initiative could increase the export of this capability to other nations too. So CRRC is in a good place but its fundamentals aren’t showing. The revenue and earnings have flat lined for the past 5 years. There’s no growth. It is more of a dividend paying stock with 6% yield. It isn’t for growth investors but dividend seekers may fancy.
China is different from the West. The Government has a lot of say in the economy and it makes sense for China stock investors to take heed and ride with the plans rather than to be against them.
Buffett said ‘don’t bet against America’. Some say ‘don’t fight the Fed’. China stock investors can say ‘don’t bet against the Chinese Government’.
What are your thoughts as an investor? Do you agree?
p.s. I’ll be sharing my strategy to picking China growth stocks with strong growth potential at my upcoming webinar, register for my Growth Dragons China Investing masterclass here.
Also be aware that govt intervention may include getting companies doing well to do “national service” to help companies not doing well (e.g. buy them over and take over their debt and their not well-motivated staff) and so the shares may be affected in this way.