Vol 26 – Lost in Translation: The Misreading of China’s Economic Story

The world has been quick to label China’s recent economic slowdown as a crisis, but have we overlooked the bigger picture? While headlines focus on GDP declines and real estate struggles, a quiet revolution is unfolding—China’s industrial sector is leaping ahead.

A recent article, Prejudice and China, highlights a crucial reality: the external world has been too distracted to notice China’s rapid technological advancements.

“The Chinese carmakers are moving at light speed, he told John Thornton, a former Goldman Sachs executive who spent years as a senior banker in China. They are using artificial intelligence and other tech in cars that is unlike anything available in the U.S. These Chinese EV makers are using a low-cost supply base to undercut the competition on price, offering slick digital features and aggressively expanding to overseas markets. John, this is an existential threat” – Jim Farley, CEO Ford.

The factors and biases that the external world held which led them to not notice the progress made in China are as below.

COVID, Russia Ukraine conflict

Covid restrictions and Russia Ukraine war led to China becoming uninvestible and visitors staying away from the country, the pandemic also resulted in other challenges that required the attention of global CEOs. These factors led to global giants missing to see the progress of development of industry in China. The key takeaway from this is –  True progress moves along without notice, in this case though it was not voluntary but induced by the pandemic and the Chinese focused on building their capabilities when the others were firefighting and dealing with other issues.

Underestimation

There has been a history of the West underestimating the East. Some instances for the past include – Douglas MacArthur and the US general staff underestimating their opponents resolve in the Korean war and US automakers laughing off Japanese competition.

“There is no greater danger than underestimating your opponent” – Sun Tzu

Anchoring Bias

View from certain sections in the west is that China resembles Japan 20 to 30 years ago due to unfavourable demographics and large losses across the real estate sector. This view anchors the current situation of China to events that happened in the 90’s and leads to failure in looking at things objectively. One difference that has been failed to be noticed is that China has not seen its banking system go bust and lose its ability to fund new projects. Another difference is that China today is not only more productive and efficient that what it was a decade ago but also more efficient and productive than most other major industrial economies.

Source: Gavekal Research

 

Source: Gavekal Research

 

Who you speak to

Millennials who live in tier one and two cities have been impacted the most over the last five years due to falling real estate prices and their income prospects have been threatened due to rising number of Gen Z (18-25) graduates. Millennials are the group that most westerners have contacts in China and the picture that they paint in not rosy. However, on the other hand, people living in tier three and four towns are seeing better paying jobs due to industrialization and improved infrastructure.

As analysts we experience this in our day to day work. For instance, in company conference calls we have observed that certain managements do point out a rosy picture even when the company is facing headwinds, it is for us as analysts to not rely on one version and speak to various stakeholders to ascertain the true picture.

Check the incentives

The Western media has portrayed China with relentless negative coverage, while there are issues that the country is facing developments like – the country moving up the value chain, China installing almost twice the number of industrial robots as the rest of the world combined and China’s leadership in the nuclear industry are rarely covered in the press. In addition, the US house of representatives approved a bill entitled “Countering the PRC malign influence fund authorization act” on September 9,2024, if this passed by the senate the US government proposes to spend $325 million a year to highlight stories about the negative impact that China may be having around the world.

The primary reasons for the media to behave this way are – bad/negative news sells and they are incentivized by the way of advertising revenues from governments.

As Charlie Munger liked to say “show me the incentives, and I will tell you the outcome”

Back home we have observed headlines like – “Investor net worth wiped out due market corrections” in various newspapers, these tend to create fear and panic amongst investors and sell. The right approach would be to look at the situation on hand holistically and understand the incentives of houses carrying such messages.

Final Thoughts

While China is facing issues there is no denying the fact that the country has leapfrogged in Industrial progress over the last few years which the external world has failed to take note.

The lesson here is simple: progress doesn’t wait for external validation. While much of the world was distracted, China quietly transformed its industrial landscape. Whether in business, policy, or investing, recognizing and overcoming our own biases is the key to seeing reality as it truly is.