Leading Minds on China

The following is an excerpt from our Q4-2015 newsletter...

The end of 2015 presented us with opportunities to sit in front of and with famous investors and economic thought leaders. One consistent topic was China. Already in the first days of 2016, China’s stock market has been the dominant story. Here are thoughts we collected on China:

John Burbank (founder/CIO of Passport Capital): China is where the U.S. was in 1968. In the long-run, China will be the largest consumer market in the world, so there will be tremendous investment opportunities. Today, though, it is pre-consumer and will endure significant growing pains in the near future. In particular, Burbank is concerned about the implications of China’s currency devaluing against the dollar.

Jeffrey Gundlach (founder and CEO/CIO of DoubleLine): China is the biggest risk today. Gundlach is skeptical that China’s autocratic government will successfully manage the switch from a high growth export-driven economy to a lower growth consumption-led economy. Notwithstanding the 7% growth the Chinese government reports, Gundlach believes China may be in a recession right now. He cited myriad stats that highlight how dramatically Chinese building, commodity consumption, and imports have slowed.

Carl Kaufman (Portfolio Manager, Osterweis Strategic Income): China may endure some short-term pains but longer-term it will be a gigantic economy. China exports only account for 1% of U.S. GDP, so China’s pains will not have a big impact on the U.S.

Henry Paulson (former President of Goldman Sachs and U.S. Secretary of the Treasury): Paulson worries about a potential U.S.-China conflict. Never in history have two coexisting hegemonic powers not come to blows. A future conflict may not be a military war. Cyberwarfare could be similarly harmful.

To summarize, the mood on China is a mix of fascination and caution. There is little precedent for China’s economic emergence over the last decade. The consensus is that China will turn out to be an excellent place to invest long term. However, in the near-term there may be growing pains as the Communist Party surrenders its power and lets market forces do the job.