Monthly Musings

I’m starting a monthly series where I share interesting things I’ve come across (articles, podcasts, reports, recent travels, etc.) with brief summaries for your reading pleasure.

Articles I’m reading

Dan Wang (of Gavekal fame) was interviewed by Noah Smith in this piece and it’s a very astute take of today’s China.

Source: Noahpinion

Dan is one of my favourite China watchers and writers, and he never fails to deliver a balanced view of the issues surrounding China. This is rare in today’s fragile geopolitical climate and it’s important for investors to have a clear-headed mind when approaching this topic. Here’s some of the takeaways:

On China’s industry:

“China has built the basics of the industry, but is at best 10 years behind the leading edge of manufacturing logic chips, and even more on the tools needed to produce chips: lithography equipment and EDA software. On aviation, China’s answer to Airbus and Boeing has been years behind schedule, and is anyway substantially dependent on western engines and avionics systems...

The folks at Bloomberg New Energy Finance estimate that China owns 90% of the solar supply chain: everything from polysilicon production to the tools needed to make photovoltaics to the panels themselves. It’s also doing very well in batteries and has a shot at dominating the hydrogen supply chain as well...

There are enormous macro headwinds for China’s economy: lousy demographics, a domineering central government, and greater political emphasis on state-led growth. But I tend to think that China will be able to solve its technological deficiencies. Its main task is to reinvent existing technologies: arguably firms like TSMC and ASML have the harder task, that is to push forward the technological frontier. On chips in particular, there’s a broad sense that it costs too much to keep pushing forward Moore’s Law. So if the leaders hit a wall, it’s only a matter of time for Chinese firms to catch up. These products are technology, not magic. And Chinese firms have already mastered a lot.

On China’s engineers:

“These engineers are a key part of China’s manufacturing ecosystem. They allow manufacturers to move fast: a large pool of experienced engineers raises the tempo of design and production cycles because they can quickly try new things. It’s easier to fix problems when things go wrong. And scale always helps to bring down the cost curve. I understand that the largest Foxconn facilities today have around 300,000 people, producing iPhones around the clock in three shifts per day. By contrast, the largest facilities in India are still closer to 30,000 people, for reasons that include less mature infrastructure and a lower female labor force participation rate. Manufacturers are able to gain so much in efficiency when they have more workers by one order of magnitude.

China’s manufacturing advantage isn’t only this deep pool of labor. It also has comparably dense clusters of component makers. Its infrastructure for shipping goods around is excellent. And instead of trying to extract their share, local governments tend to bend over backwards to help large employers. These factors aren’t impossible to replicate elsewhere. But they’ve worked pretty well to slow the pace of the decline of manufacturing.”

On China’s population dynamics:

“China’s population decline is a simmering issue. But it’s not a hefty blow to the economy, as you’ve pointed out too, only a persistent drag in the long term. Furthermore, it’s not something that the leaders can immediately fix. Almost no countries have been able to reverse fertility decline. And I think it’s next to impossible to see China as an immigrant-friendly country. So I think demographics are on the back of the minds of policymakers, but I don’t think that they’re counting on any solutions. Instead, they’re going to be trying to emphasize growth in other forms. Even if the population declines, the number of people becoming affluent consumers is still growing fast; and policymakers are going to try to make the workforce more productive than before. And I don’t see why a gently plateauing population should threaten China’s future capabilities in something like semiconductors or electric vehicles.”

On China’s tech regulations:

“The state has relented. But it hasn’t reversed. As my colleagues at Dragonomics have written, Beijing’s regulations on platform companies are now entrenched at a permanently burdensome level. The good news for these companies is that future regulations are more likely to be marginal. The bad news is that the golden age of internet platforms is over: they won’t again have such an easy time making enormous profits in a lightly-regulated market.

These regulations have indeed left scars. Entrepreneurs in sectors that include ride-hailing, video games, and especially online tutoring were left shell-shocked. But pain set in for sectors that went beyond those directly targeted by the state. A common sentiment from an entrepreneur goes along the lines of: “I would like to focus on building a business and working on my product; instead I’m being forced to become a political scientist to understand the direction of policy.”

Here’s the link again for the full interview.

Jesper Koll wrote a short post here on Japanese equities. With the Nikkei 225 making new cycle highs, it’s grabbing investors’ attention all over the world. In essence, there’s five reasons for the bullish case according to Koll:

“(I) Japanese monetary policy remains inflationary

(II) Japanese fiscal policy remains inflationary

(III) Japanese financial regulatory policy remains pro-shareholder value

(IV) Japanese tax policy creates incentive for greater allocation for retail investors

(V) Japanese corporations are finally beginning to invest in both human- and productive capital

Podcasts to check out

The uber-macro investor Jim Leitner was on The Market Huddle recently.

He is extremely sharp, very well-read, and overall a great person to listen to when he talks about markets, his investment process and his investment ideas.

In this episode, he talks about the issues with the US debt ceiling debacle and how he is using artificial intelligence in his work. Do not miss it.

A book I’m reading

The Great Leveler: Violence and the History of Inequality from the Stone Age to the Twenty-First Century – Walter Scheidel

This is an epic read from Stanford University’s Walter Scheidel, where he explores how violence has historically been the solution to ‘leveling’ inequality in human societies.

Professor Scheidel brings the readers from ancient times and across geographies (Ancient Rome / Han China) till the twenty-first century, with his research covering how the “Four Horsemen” of Levelers – mass-mobilisation warfare, transformative revolutions, state collapse and catastrophic plagues, work to destroy the fortunes of the rich.

This is a relevant (perhaps solemn) read for the present times where most economists believe that societal inequality across countries are at historic highs.

The language and prose is somewhat academic but it is rigorous and in-depth – perfect for the serious student of history or for readers who want a base of knowledge before undertaking further deep dives on this subject.

Observations from travels

I came back from Hong Kong two weeks ago, and it’s bustling with business and tourists. Tourism is booming once more and it’s certainly the case after I’ve been to the airports in Sarawak and in Italy in my recent travels over the past six months.

If you want a different view of Hong Kong, consider hiking one of its many trails on the outskirts. Dragon’s Back (龍脊) located near Chai Wan at the far eastern end of Hong Kong Island is an easy one with a beautiful view of the island and the pacific ocean.

Simply take bus 9 from Shau Kei Wan Bus Terminus or hail for a cab for Shek-O. Enjoy the stroll and more importantly, the view!

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