That’s the question that was thrown at Ray Dalio (Raymond Dalio). This gentleman needs no introduction to investment professionals. He is an American billionaire investor, biggest hedge fund manager, and philanthropist. He is a master of macro-economic trends and has been perhaps the most successful investor, second only to Warren Buffet.

Here is what he replied:

I have been travelling to China since 1984. The Chinese cities were characterised by small neighbourhoods at that time. The cost of labour was way too low in comparison to US and other developed nations. On a basic assessment, I advised the entrepreneurs that these small houses can turn into skyscrapers. There is so much potential in this country, It has been nearly 35 years, since then. The creativity and hard work of Chinese has pulled off an economic miracle of all times. During the period, their per capita income has grown to 26 times. Share of Chinese GDP in the global GDP has shot up from less than 2% to 22% now. On technology front, China was a backward nation. In 1984, I would carry a $10 calculator as gift that was an amazing thing for the citizens. But, now, China has technology comparable with the best of world.

US – China trade war is normal and perfectly in order as we learn from history. Over last 500 years, there have been conflicts (and often wars) between nations / kingdoms to suppress each other. Any country or a region rising in economic status is seen as challenger to the already established world leaders. Over last 500 years, there have been 16 wars on similar grounds involving countries like Dutch, Britain, US, Russia, Japan, Germany, France, among smaller ones (See Chart 1 below). This is not to say that we are likely to witness a war between US and China with military forces. I don’t see it happening at present.

Chart 1.

Many people are getting wary of investing in China because of ongoing trade war. However, I would advise that they shouldn’t ignore China in their portfolios. China is rising and has a lot to rise fro here. It is like investing Dutch in 1600s when they used to build best ships that could travel to anywhere in the world, or like investing in 1800s in British stocks when the industrial revolution was underway, or like investing in 1950s in US stocks while it was shaping up as world’s leading economy.

Over last 10 years, Chinese stock market capitalisation has gone up by 4 times, and bond market size has gone up by 7 times. According to me, China is a very good diversification beyond USA. Current trade war does hinder clarity to future outcomes. But, if I wait for crystal clear vision, I will eventually be buying at very high prices. At present, the stock markets have already discounted the worst and are available at reasonable price. This call can go wrong only if there is all out war between US & China. Otherwise, it is ok to invest now.

Many people consider China and other emerging market risky. According to me, Europe is more risky than any other region. The central banks have limited bandwidth to stimulate the European economy as their interest rates are already hovering near Zero. It will be a disaster if interest rates actually become zero without lifting the economy. There will be no room left for monetary policies. Europe is also suffering from political fragmentation on EU zone. According to me, USA also has its own sets of risk. Therefore, not diversifying beyond EU and USA is actually more risky than diversifying.

Coming back to China’s fundamentals, it is rated very high on Fintech innovation, Artificial Intelligence ranking, Wearable Technology, Virtual Reality, Education Technology and Autonomous driving. Check these charts below:

Chart 2

By count, China accounts for 34% of global Unicorns (any tech start-up that has reached US $1Bn in market capitalization), US accounts for 47%, and only 19% for rest of the world. By value, 43% of Unicorns are in China, 45% in US, and only 12% with rest of the world. See chart 3 below:

Chart 3

China has advanced legal and regulatory framework. It may not be as advanced as developed nations, but it certainly is better than any emerging market. There is a never ending debate on Chinese Autocracy vs US Democracy. I think each system has its pros & cons. We need to look at complete picture before making any assessment. Overall, I believe risk adjusted returns in China stock markets  would be better than US and Europe. Next 10 to 15 years are going to witness China overtaking US in multiple arenas. You can see the chart 4 below:

Chart 4