Is China too big to ignore?

In 1987, China’s gross domestic product, or GDP, was just shy of $273 billion. Sounds like a lot, right? Fast forward to 2017: GDP was over $12.2 trillion. That’s a greater than 4,000% increase. In the same timeframe, U.S. GDP increased roughly 300%.

In our recent podcast, “China: too big to ignore,” moderator Oscar Pulido quizzed me on the drivers behind China’s rapid growth, and the new opportunities for investors with the opening of China’s domestic markets. Below are some highlights from our conversation.

Pulido: Let’s talk about China’s growth. It’s actually really impressive when you think about what they’ve been able to accomplish over the last 30 years. What’s been the catalyst of that?

Shen: When we think about China, I tell people there are three things that are most important. It is government, government, and also … government. Ninety percent of the population lived below the poverty level back in 1979, earning less than $1.19 a day. Fast forward to 2019: Less than 1% live in this kind of extreme poverty. Policy has certainly been the most important driver. The second driver is that China joined the World Trade Organization (WTO) in 2001, which allowed China to open up to the rest of the world. China has transformed from a country in the ’60s and ’70s that was actually quite isolated from the rest of the world, to coming onto the world stage, whether it’s trade or investment. We’ve certainly seen extraordinary economic growth that we haven’t really seen in any other countries or at this type of scale in human history. So it certainly has been pretty phenomenal.

Pulido: Back in 2015, China’s President Xi Jinping unveiled the Made in China 2025 plan. What exactly are the details of that plan and is this also one of the reasons why we continue to see this extraordinary growth?

Shen: The mindset in China is that what got you here won’t get you there. So every five or 10 years, you have to do something that is fundamentally different. Made in China 2025 has emphasized that the country has to move from an emphasis on the quantity of the growth to the quality of the growth. And to go for quality, you need to have a lot of technology to enable you to swim up the value curve. There is quite a bit of discussion around electric cars, artificial intelligence, robotics and big data. But I don’t want people to get the impression that this is a new thing. China is actually pretty regimented about coming up with these five-year plans, 10-year plans, 20-year plans. And technology certainly has been in the DNA of the country. China produces one of the largest groups of science and engineering graduates in the world. I think it’s important to consider how this is actually not that much different from what the country has been doing for the last 30 or 40 years.

Pulido: When you think about the investment opportunity in China, actually buying companies in China, is there a compelling case there, similar to the one you’ve made around the economy?

Shen: The exciting thing that happened in 2018 was the MSCI inclusion of the Chinese A-shares market into the global equity market. Historically, this is certainly a market that international investors have had very little access to. Most of the holdings have been through domestic institutions, and importantly, domestic retail investors. And so that is a big deal in my mind. This represents around $8 trillion in market cap, give or take. That’s a big market that is opening up to the rest of the world. There are 2,000-plus stocks listed, and the market trades around $40 billion to $50 billion a day. For investors who want to tap into the growth story of China, I think it certainly presents a pretty rich opportunity set.

Pulido: In your role, being able to access consumer data is an important part of how you analyze the investment opportunity set. How do you use big data to understand investment opportunities in China?

Shen: China certainly is a great playing ground for using big data and artificial intelligence to gain a bit of investment insight. Through social media, you can get a sense of sentiment among the 130 million retail investors: Are they loving the stock market? Are they worried? This information historically was never available because people never blogged or Tweeted about what they like. But today, in aggregated form, you can get a sense of overall market sentiment. We can use some of this new, alternative data to enrich our understanding of the market. But I also think a lot of it is about asking the right questions, and making sure that alongside the new set of data, we ask interesting and relevant investment questions. Hopefully, we can use these new data and tools to gain a bit of an edge.

Listen to the full podcast here, and don’t forget to subscribe wherever you listen to your podcasts.

Jeff Shen, PhD, Managing Director, is Co-CIO of Active Equity and Co-Head of Systematic Active Equity (SAE) at BlackRock.

Oscar D. Pulido, CFA, Managing Director, is the Global Head of Product Strategy for Multi-Asset Strategies (MAS) at BlackRock.