Forty years of transformation
Steve Watson
Equity Portfolio Manager

In 1981, my wife and I visited China on a whim. We were students eager to see a nation that had recently opened to outsiders. It was the start of a lifelong relationship: Today, I invest in many of the country’s businesses as a portfolio manager in our Hong Kong office.

I didn’t know it then, but our first trip to China came amid sweeping change. Starting in the late 1970s, paramount leader Deng Xiaoping had begun decollectivizing agriculture, allowing private business and pursuing foreign investment. In the following four decades, I’ve watched the country grow from an isolated agrarian state to a commercial and industrial dynamo. However, its path wasn’t always direct or predictable, especially to those of us looking in from the outside.

There’s a lesson: Whatever China watchers individually have wanted or expected of the country, it has steadfastly pursued its own goals in its own way. Its leaders have resisted calls to liberalize, but they’ve been eager to adopt business practices. China has confronted debt and corruption, but often in ways that would be unthinkable in the West. And despite many predictions of imminent disaster, China has stubbornly refused to collapse under its own weight. When we consider the country, we should be mindful of the many soothsayers who have underestimated its resourcefulness and resolve.

That determination was marked during my 1981 visit, as China’s ambitions clashed with daily reality. Years before high-rises and monumental infrastructure dominated the country’s skylines, we traveled in sweltering trains pulled by coal-fired locomotives. The engines belched gritty smoke that burned our eyes and blackened our clothes. Telephones and air conditioners were fantastic luxuries; the school where my wife and I learned Mandarin, Wuhan University, had only one cooled room.

A changing China, by the numbers

This chart compares China's growth across a number of metrics from 1980 through to the modern era. Its GDP increased from $191.1 billion from December 31, 1980, to $14.7 trillion by December 31, 2020. In the same timeframe, its GDP per capita has grown from $195 to $10,500 and the percentage of its population living in urban centers has grown from 19.4% to 61.4%. Finally, from December 31, 1980, through December 31, 2019, its life expectancy at birth has risen from 66.8 years to 76.9 years. Source: World Bank. As of July 31, 2021.
Source: World Bank. GDP figures in current U.S. dollars. GDP and urban population data are through December 31, 2020. Life expectancy is through December 31, 2019. All data as of July 31, 2021.

But regular people were getting a taste of the modern world. The lucky few who owned televisions would sometimes set them up for their neighborhood to watch. The appliances didn’t function well — “Chinese televisions produce more smoke than light,” a joke of the time went — but they drew dozens of people. I vividly remember crowds, sometimes as many as 50 strong, resting on mats in the streets and watching TVs well into the evening.

China’s modernization efforts quickly bore fruit, as we saw on our second visit, in 1984. In three short years, ice had changed from a luxury to a staple: Every day, we saw people sipping ice cream coffees at the De Da Coffee Shop on Nanjing Road in Shanghai. Other changes were less concrete. Young people discussed fashions and hairstyles with a new verve, and everyone was eager to learn English.

Despite all that, it was still easy for me to fall into the trap of underestimating China. For example, the new Special Economic Zone in Shenzhen offered a golden opportunity: the right to purchase land for $5,000. Yet it seemed ludicrous. Where was someone in China going to find that kind of money? Perhaps I should have known better. When we traveled to Chongqing by boat, our cabinmates were abuzz over the chance to own property, and Shenzhen quickly started to resemble the technology powerhouse that it is today.

I would help Western businesses tap into Chinese markets for a few years, but my path took me to London in 1990 after I joined Capital Group as an analyst. Along with my other duties, I still reviewed Chinese investment opportunities. The Shanghai and Shenzhen stock exchanges opened the same year I went to Britain, and China Eastern Airlines was my first Chinese recommendation. I met Jack Ma long before Alibaba became the juggernaut it is today.

A decade later, my wife and I decided to rekindle our relationship with Asia. We packed up the family and moved to Hong Kong, where we’ve been based ever since. We arrived in the wake of Hong Kong’s handover to China and amid the wind-down of the Asian financial crisis. China and Hong Kong, again bucking expectations, refused to devalue their currencies — a decision that weighed on their exports and slowed business dramatically. Property values had plummeted. It was in that environment that I took on my new analyst role.

It was also the environment in which The Coming Collapse of China was published. The author, Gordon G. Chang, catalogued the ills that he believed would bring China’s economy to its knees: the viselike grip of the Communist Party, bad debts building up in the banking system, capital misallocation, corruption and property bubbles.

But once again, China defied outside expectations. The country’s leaders were — and remain — focused on avoiding decline. The pitfalls that are so obvious to foreign and domestic observers are not lost on China’s policymakers. We can watch the danger zones, especially the debt buildup and misallocation of capital, with concern, but it has been useful to remember that the country’s leadership is focused on those same issues.

And China does accept guidance. I’ve long worked with the Asian Corporate Governance Association to help seed best practices. It’s been especially rewarding to promote practical, day-to-day changes such as board independence, high-quality audits and timely publication of reports and accounting. These victories have made a difference for investors throughout the region.

In the years since, I’ve become a portfolio manager. In that role, I still invest in Chinese businesses. The Shanghai and Shenzhen stock exchanges now have a combined trading volume that rivals that of the New York Stock Exchange. Property values have rebounded from their 2003 lows. It’s not all rosy. China still faces challenges, including trade disputes, rising international sentiment against its actions in Xinjiang and Tibet, and the potential for violent conflict with Taiwan. But China has proven resilient, resourceful and fruitful. I remain hopeful that it can continue to chart a course toward further prosperity — a path it has steadily followed for 40 years.

Steve Watson is an equity portfolio manager with 33 years of investment experience. He has an MBA and an MA in French studies from New York University as well as a bachelor's in French from the University of Massachusetts.

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