Why China is ‘unstoppable’

Key takeaways 

• China is responsible for over 70%¹ of global electric vehicle production.
• China dominates in solar, wind and battery technology in the renewables sector.
• China is not dependent on the US for buying its goods.
• China offers an abundance of opportunities for value-focused investors. 
  
  

As the high-tech might of the country’s armed forces rolled past on parade in Tiananmen Square, China’s president, Xi Jinping, declared: “The great rejuvenation of the Chinese nation is unstoppable”. Only a few days earlier, I had said something similar about Chinese economic recovery.  

Last year in the US more than 1.56 million electric vehicles (EVs) were sold. It sounds impressive. But Chinese drivers bought 11 million. China is now responsible for over 70% of global electric vehicle production and Tesla has lost its crown as the world’s leading manufacturer of EVs to Chinese rival BYD¹.  

Government subsidies have undoubtedly helped. In 2007 the Chinese national government identified EV production as a “priority industry” and over the course of just over a decade to 2022 it invested more than $21bn² in EV subsidies. Cities keen to attract jobs supported manufacturers further. There has been private investment, too. Success has bred success. Fierce competition has made producers fiercely competitive. As the industry has become established the subsidies have fallen. Producers themselves have invested heavily. BYD invested around $7.5bn in R&D last year. China really does look unstoppable.  

This is the might of the Chinese government in action and investors should not underestimate its power. Similar stories might be told for the renewables sector³ – China dominates in solar, wind and battery technology. And also for other areas of high-end manufacturing. 

Chinese microprocessor chips may not match Nvidia’s yet but I am not sure I want to bet on how long they will lag. In 2021-22 alone 55% of global semiconductor patent applications were Chinese in origin⁴ – there were twice as many as for the US.  

It would be wrong to talk about the advantage China has to drive targeted industrial growth without reference to the downside. The problem with a planned economy is that the government can oversteer. We have seen oversupply and falling profits in many of these sectors that have grown rapidly with government support. This has introduced deflationary risk into an economy that has taken longer to recover from Covid than most others. Meanwhile, a failure to intervene early enough on property prices meant a bubble inflated that needed popping, causing further pain.  

The government has initiated supply-side reforms. It still has much to do in creating consumer demand – reassuring Chinese who have seen their property prices sink that they do not need to save as much.  

But I think we are on the cusp of a recovery that has the potential to take investors by surprise. The government has announced further targeted stimulus. It is loosening its controls on the tech sector and has made an open-ended commitment to support economic growth. I think this has provided the launch pad for consumers to start spending again and absorb some of that overcapacity.  

And that reminds us that China is not dependent on the US for buying its goods. Its population may not be the most wealthy – and salaries vary enormously, so comparisons are difficult. But it has a population of 1.4 billion compared with nearer 340 million for the US. That’s the world’s biggest single market.  

Retail sales and manufacturing data show growth generally, if below expectations⁵, and business sentiment is improving. The government is being strategic in its control of supply – seeking to “guide enterprises to improve product quality and promote the orderly exit of outdated production capacity⁶.” 

I believe that by the year end we’ll see much better data from China, and that could encourage a strong recovery in asset prices there.  

China offers great opportunities for value-focused investors. It is already cheap but look closely and you can find quality businesses trading at discounts in the region of 30% to the wider global emerging market (EM). That’s a double win in our view.  

Any change in sentiment could be a strong tailwind for these companies. Added to this is the backdrop of a weaker dollar and potential for monetary easing, which is a good argument for allocating to EM more widely.  

The final point I would make is to reiterate where I started. BYD overtaking Tesla is a reminder that China is a sophisticated manufacturer. It’s that which makes it unstoppable. How it got there is almost irrelevant. What matters to us as investors is that many companies there are not content to supply the domestic market with sub-standard products.  

This is not Russia building clunky, utilitarian Lada cars in the 1960s and 1970s⁷ – simple vehicles that were easy to repair, which was just as well given their reliability. Picture any Soviet era spy film and these would be the cars the KGB drove. Plus 80% of the rest of the population. I think that sort of image is often what comes to the minds of Western investors when they think of China. They underestimate the threat and the potential of Chinese companies.  

China has 3,167 colleges and universities with over 40 million students enrolled⁸. It has the world’s highest number of top universities by many studies. This investment in education and innovation is fuelling the growth in many sophisticated Chinese companies.  

Take Sino Biopharm – a leading drug manufacturer in China which is investing in treatments for cancer, liver disease and cardiovascular markets. It’s one of several national champions in this field. Its ambition is not just to meet the needs of Chinese patients, but to be a global player. Its share price is up 156% this year, but still below its pre-Covid high. 

In our view, there are many companies poised to experience a similar recovery. Don’t be caught in the slow lane.  

Raheel Altaf, manager of the Artemis SmartGARP Global Emerging Markets Equity Fund.