In 2015, Chinese Premier Li Keqiang announced the “Made in China 2025” industrial policy strategy in order to end China’s dependence on foreign technology and bring its hi-tech industries up to Western levels.
The 10-year plan was created so that China can remain competitive in a constantly changing global economy by turning itself into a high-end manufacturer, addressing rising labour costs and redefining the “Made in China” label which many people associate with cheap, poorly made products. The ambitious strategy puts an emphasis on innovation and technology.
It is an ambitious plan, but for China to succeed, it must now deal with US president Donald Trump and his “America First” policy, among other challenges.
Many countries are accusing China of unfair trade practices to achieve its objectives. In some sectors, China requires foreign companies to disclose technology information to a local partner in exchange for access to its enormous market. This is one of the principle arguments Donald Trump has used to justify the trade war he’s launched on China and the billions of dollars in tariffs he’s imposed on Chinese imports. The European Union has called China a “distorted state-run economy” and has raised concern that Chinese firms are being given an unfair advantage in the form of government subsidies and support. On the other hand , the EU claims that foreign companies are given limited or no access to mainland markets through ambiguous regulations that Chinese firms are not subject to.
Forty years of reformation and opening up in China.
To better understand what’s going on, we must go back a few years. In 1978, China’s paramount leader Deng Xiaoping said that for China to become a prosperous communist state, they had to adopt some capitalist practices. Under his plan, China would retain its socialist political ideology, but combine it with market economy reforms. Deng called this new way of thinking: “Socialism with Chinese characteristics”.
China has achieved the fastest sustained expansion by a major economy in history
To a large extent, Deng’s plan has been a success. Over the past four decades, China has achieved the fastest sustained expansion by a major economy in history and its GDP has risen tenfold. In present, China is widely considered an engine of growth and has become the world’s second largest economy and taken more than 800 million people out of poverty along the way.
But this rapid growth comes with consequences.
China is also known as one of the world’s biggest polluters. Rapid Urbanization has swallowed more than a million villages and there is substantial income inequality. One third of the country’s wealth lies within the richest 1% of the population, and around 30 million people, mostly in rural areas, live in poverty.
Decades of reforms and opening up have dramatically transformed China, but after 40 years, it remains a developing country facing a future with many political, economic and social issues to tackle.
Made in China 2025, in some extent, is the natural continuation of reforms that aim to revamp the Chinese economy in the long term, but it’s not only that. Moreover, in 2017, China published its “Next Generation Artificial Intelligence Development Plan”, which laid out plans to become the world’s leader in Artificial Intelligence by 2030.
There is no doubt that China has big challenges to face solve and many problems to fix. They MUST open their domestic market for foreign competitors. They MUST respect the international rule of law regarding intellectual property, human rights and data privacy of their citizens. They must embrace a fair and reciprocal trade practices, and more importantly, China MUST get rid of their addiction of fossil fuels.
Despite China’s efforts and progress in the past years, they urgently need to catch up to international standards for the benefit of their people and global harmony.
In this regard, the European Union is the right blueprint to follow. The EU has mastered the ever-challenging balancing act between economic progress with social stability and environmental respect and, along the way, they have been able to overcome internal disputes of the past, like WW1 and WW2.
Forty years ago, Deng Xiaoping began deep reforms in China’s economy and society, and he set up the path of a bright future. At Kaccelerator we are big fans of China. We like their hard working people and we recognize their talent and forward looking thinking.
We believe that their long term view -grand visions- with an efficient planning and accountability in the execution are skills that western countries need to copy.
We see more positive things than negative, and we believe China in the long term is a Value Play. In 2018 China's stock market dropped nearly 20% and despite all the noise and trade wars, their fundamentals remain solid and they have a great upside potential in the next 3 to 10 years.
The Shanghai Shenzhen CSI 300 Index includes the 300 A-share stocks traded on the Shanghai and Shenzhen stock exchanges and is taken as indicative of trends in both of those markets.
For the sake of transparency and spirit of sharing, Kaccelerator discloses investment in ALIBABA, IQIYI which trade in the NYSE and QUDIAN which is a NASDAQ traded company. Apart from this, we are monitoring a handful of other Chinese companies to invest in at the right moment in the near future.
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Kaccelerator is a next-generation thematic investment fund focused on disruptive innovations that are changing the world for the better and that have long-term growth potential. We believe in the transformative power of allocating capital into mission-driven businesses that can deliver positive change and alpha.
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