The great Chinese book on strategy, Sun Tzu’s The Art of War, was written 2,500 years ago and its wisdom has stood the test of time. Whether Donald Trump’s The Art of the Deal is as enduring remains to be seen.
In his book Trump boasts that he understands the Chinese mind. But he might have benefited from a quick re-read of The Art of War before announcing his astonishing tariffs. Sun Tzu cautions: “Who wishes to fight must first count the cost”.
China’s president Xi Jinping understands short-term pain for long-term gain and Trump seems to have given him a unique opportunity that he will undoubtedly attempt to exploit.
Trade grievances between China and the US are not a new phenomenon. The first treaty between the two countries was as far back as 1844. The Treaty of Wangxia was a lopsided deal that gave the US better access to Chinese goods, like tea, silk and porcelain.
Even back then, Americans desired more of what China could produce than the Chinese wanted in return. America found a way to balance trade – by exporting opium.
Over the past few decades there has been a fairer balance underpinned by a stable US that forged alliances, particularly in Asia, to counter Chinese aggression.
It now seems we are entering a different world order with a more volatile US trampling over long-standing partnerships and a China attempting to step into the void as the ‘reliable’ alternative.
What that means for investors is uncertain but there is one thing on which Trump and Sun Tzu agree. “The worst of times often create the best opportunities to make good deals,” wrote the US president’s ghostwriter. “In the midst of chaos, there is also opportunity,” proclaimed Sun Tzu. And maybe the better opportunities currently lie in China.
Investors in global equity trackers will have around two-thirds of their assets in the US and only 3% in China. There is some justification for that. The most profitable companies in the world are American. It’s the world’s biggest economy – add up all the goods and services it produces in a year and it comes to $30trn; China comes second at around $18trn.
No other country is close. But a better figure for comparison is economic output per person. Here the differential is much greater. The average person in the US produces an astonishing $69,000 in economic output each year – nearly five times as much as in China. (In the UK the figure is nearer $50,000, which might surprise some people.)
Of course, China is a controlled economy and presents political risk. But given what has been happening in the US in the past few months, some would argue that the US is not without political risk either.
US stocks still looks richly valued, even after recent falls. China looks cheap. And there are steps that China can take to close the productivity gap quite substantially and to power its economy forward.
Around 2.3% of China’s GDP is subject to US tariffs, which is not insignificant but not as great as it was. The US share of Chinese exports has fallen to under 15% from 19% in 2017. This trend will continue.
In the short term, Xi needs to accelerate his drive to transition the Chinese economy from a manufacturing powerhouse to a consumption powerhouse – where the Chinese themselves buy the goods they are producing.
There is plenty of scope to do this. Private consumption accounts for just 40% of GDP in China – much lower than most countries. It is nearer 70% in the US.
In the West, consumers save around 7% of their income; in China it is nearer 35%. Unleashing household excess savings is clearly a focus with the equivalent of $6trn in pent-up savings.
The government is making the environment for businesses and consumers more supportive. Whilst the US is entering a period of extreme policy uncertainty, China has been taking steps to reduce the regulatory burden. It has reduced the number of industries closed to foreign investment. It has announced its commitment to delivering stimulus packages to offset the impact of tariffs and is expected to reduce interest rates.
The Artemis SmartGARP program has been pointing us towards Chinese equities and away from the US for some time. They are less than half the price of their American counterparts and, as we have seen with the rise of the Chinese electric car producers, this is now a country that offers plenty of tech opportunities as exciting as those in the US.
The Chinese economy is expected to grow by about 4% this year – twice that of the US, where the risk of recession has increased substantially by most accounts. Few economists doubt the threats that tariffs pose to Americans themselves.
Inflation is expected to rise to 3% this year, compared with less than 0.5% in China, where the government is actually looking to increase inflation.
This feels, then, like fertile ground. As more people come to realise this and tilt their asset allocation – even if only gently – from the US towards China we could see both its economy and its equities market flourish. As Sun Tzu wrote: “Opportunities multiply as they are seized."
Raheel Altaf is manager of the Artemis SmartGARP Global Equity Fund and the Artemis SmartGARP Global Emerging Markets Equity funds. The views expressed above should not be taken as investment advice.