Learning to lead: a China story

Wednesday, 16 May 2018
Melbourne, Australia
By Harje Ronngard

  • The hardest thing to watch
  • The old plan was to follow
  • The new plan must be to lead

It is unbearable to watch others get rich while you earn nothing.

It’s why investors follow the herd and jump into ‘hot’ stocks. It’s also why they follow tips from strangers who have enjoyed initial success.

It’s hard to deny emotions rule a lot of people.

It’s also not just the small investor who can’t help but dive headfirst into the stock that’s making their neighbour rich. Institutions, hedge funds and some of the best stock pickers in the world make the same mistake.

I guess you could chalk it up to envy. Because investor A is enjoying initial success, you too want a piece of the action.

Of course, such rash decisions usually lead to horrible investments. Had you rushed into bitcoin with everyone else in late 2017, you’d still be down today. 

It’s why you don’t need an extraordinary IQ to make a lot of money.  What you really need in the market is emotional stability.

You have to get comfortable with looking dumb in the short-term. The best rewards are not felt until years into the future. 

Had someone told that to China in the 1940s, it probably could have saved millions. But more on that later. First let’s take a look at what markets are up to.

Markets

Overnight the Dow Jones Industrial Average closed down 193 points, or 0.78%.

The S&P 500 rose 18.68 points, or 0.68%.

In Europe the Euro Stoxx 50 index finished down 1.45 points, or 0.041%. Meanwhile, the FTSE 100 gained 0.16%, and Germany’s DAX fell 7.67 points, or 0.059%.

In Asian markets, Japan’s Nikkei 225 is down 96.21 points, or 0.42%. China’s CSI 300 is down 0.30%.

In Australia, the S&P/ASX 200 is up 18.60 points, or 0.31%.

On the commodities markets, West Texas Intermediate crude oil is US$71.17 per barrel. Brent crude is US$78.23 per barrel.

Gold is trading for US$1,294.45 (AU$1,730.40) per troy ounce. Silver is US$16.30 (AU$21.81) per troy ounce.

One bitcoin is worth US$8,227.04.

The Aussie dollar is worth 74.81 US cents.

The old plan was to follow

Towards the end of the Second World War, China wanted their own slice of prosperity. They saw the West, advancing and powerful, and wanted a piece of the action.

But the path they would take towards prosperity would be different. It wouldn’t be capitalism and market forces. The Red Kingdom decided to go with the Soviet approach.

Following the Soviet example, Mao Zedong believed he could turn China from a nation of farmers into an industrial powerhouse.

The goal was to make China the industrial equal of the West in just 15 years. It would be The Great Leap Forward.

With such a tight deadline, Mao had to mobilise the entire population. Peasants would work day and night, making steel, sowing crops and praying for a better future.

In the process, Mao destroyed the idea of individual property. He would move people into communes. There was no need for money. The state would instead hand out points. The spoils of production were divided as the state saw fit.

Mao would even break up the family structure. Children were put in communal nurseries, while parents worked around the clock.

To please government officials, workers inflated production levels. This saw the state take more of the spoils. The result was a fat happy Mao and a poor starved China.

Today, even after Mao’s plan killed millions, he’s a hero to the People’s Republic of China. But at least China no longer wants to follow the West. Their new plan is to lead.

The new plan must be to lead

Consider North and South Korea for a moment. Almost 60 years ago, both countries weren’t all that different.

They were both dirt poor. Per capita income was below that of sub-Saharan countries. And both were still recovering from the Korean War.

But today the two countries couldn’t be more different.

While North Korea continues to wallow in the mud, South Korea has quickly become one of the most productive societies in the world.

They’re the fourth largest economy in Asia. Living standards are almost the same as that of the average Aussie. What took us hundreds of years, South Korea did in 60.

How did this ‘Miracle on the Han River’ happen?

Freedom.

South Korea let the invisible hand of the market do its magic.

Today, you could say China is trying to do the equivalent. Property rights, profits and market competition. These are all things China embraces today.

However, you wouldn’t know it at first glance. China still has a way to go before they become a model for the rest of the world.

The Communist Party is still in power, and likely will be for years to come. Leader, Xi Jinping often refers to China as the great socialist nation. They continue to praise radicals like Mao and Karl Marx.

It’s why the mainstream media draws conclusions like the following, published in The Australian:

Xi is set to rule China for life, having manoeuvred to obtain the abolition of presidential term limits. He has tightened his grip over the Communist Party.

‘…Xi dominates the government and the party. His influence also extends deep into the Chinese military, which has expanded its presence in Africa and the Asia-Pacific. Media freedom has been curtailed. Opposition expressed on social media swiftly is erased. Public dissent is dealt with harshly by local authorities. Xi’s “anti-corruption” drive takes care of opposition within the party.

While it’s not entirely inaccurate, China knows they have to loosen the reigns to become a model the world can follow.  

That means they need to let market forces work. They need to let private industry strive for profit. They also need to protect incentives to encourage creation and innovation.

If they can do that, China will be the economic superpower of the world.

Crucial to this plan is technology. China will need to become a tech superpower to become a model worth following.

As Bernd mentioned in yesterday’s Port Phillip Insider, China is filing patents like crazy. They outspend the US and Japan when it comes to robots.

Arguable China is also winning the race in rolling out 5G connectivity. They have a fintech (financial technology) industry second to none. The Red Kingdom is even expanding their artificial intelligences (AI) capacity.

South China Morning Post writes:

The proposal, laid out on July 8 by the State Council and distributed on July 20, takes a three-step approach: firstly keep pace with leading AI technology and applications in general by 2020, make major breakthroughs by 2025, and be the world leader in the field five years thereafter.

The ambitious plan will be an economic bonanza for the country’s technology firms, as the area defined as core AI is expected to be valued at 150 billion yuan by 2020, while AI-related fields are valued at 1 trillion yuan, according to the government’s forecast. By 2025, those values will exceed 400 billion yuan and 5 trillion yuan (US$739 billion) respectively.

Few doubt that more growth will be coming from China. It’s why so many of the world’s best stock pickers are keeping a close eye on China in 2018.

CNBC reports that in Berkshire Hathaway’s Annual General Meeting, second in command, Charlie Munger said,

‘…thebest companies in China are cheaper than the best companies in the United States.

I don’t think it would be all that hard for any smart person to find four or five great companies in China to invest in.

A huge consumer base, a thriving tech industry and potentially more economic reforms to come. Investments with exposure to China could cause your wealth to literally erupt.

It’s one of the mega trends I’m currently focusing on in my new advisory service, Wealth Eruption.

Within two weeks I’ve found five ASX listed stocks which I believe have good chance to significantly rise on the back of China.

On Tuesday I told my subscribers I had another recommendation in the works. It’s another stock that could potentially erupt as China continues to roll out technology all over the world.

You can learn more about my service here

That’s it for today.

As usual, any thoughts, questions, comments? Don’t hesitate to email in at letters@portphillipinsider.com.au. If we publish your letter we’ll only use your first name.

Your friend,

Harje Ronngard,
Editor, Wealth Eruption