Page 21 - DIY Investor Magazine | Issue 31
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    You can on paper buy some, what look like, very interesting companies, for example some technology performers in China that have very rapid growth and excellent long-term growth prospects on really attractive valuations now, and so that’s potentially an opportunity. But you’ve just got to decide how much of a discount you want to place for these issues. JL: So how much of a discount would you give, for example, the property company Evergrande? MT: Evergrande is slightly different and of course is the other issue happening in China at the moment. It is a very big company in terms of its balance sheet and the impact it has on the economy, because it’s the largest real estate developer, but the equity is enormously financially leveraged and it will almost certainly need some sort of complicated financial rescue from the government to get it out of the situation that it’s in. Evergrande illustrates the conflict that has existed within the Chinese growth model for probably 10 or 15 years now; on the one hand the government has this tacit agreement with the population to basically double living standards every 10 years, and that needs maybe 6 or 7% economic growth, but at the same time the government also wants growth to be ‘reliable’ – that’s the term they use, we call it ‘sustainable growth’ in the West – which is growth driven by consumption, increases in consumer wealth and spending, and technology as well, as opposed to just building more bridges or apartments. However, economic history tells us it’s very, very difficult to achieve that sort of growth at rates at more than 2 or 3%; so every time they look like they’re not getting near the 6 or 7%, government relaxes the rules and you get these property and infrastructure booms, but then they row back on it, as they have recently, when they want to stop it, which creates problems for companies like Evergrande. It is an inherent conflict, and can’t go on forever; at some point the country will have to move to a lower growth path - that’s my view. JL: The danger with that is that the West has become addicted to Chinese investment and Chinese growth; what will the realignment I spoke about mean for the markets and what will it mean for the West? Could the decoupling of China from the West – if it is a decoupling – lead to a surge in inflation, for example? MT: I guess it depends to what extent it happens. If you’re talking about Evergrande being the catalyst for China’s growth to decelerate from 7% to 1 or 2% forever, that’s a very significant event for financial markets, because it would have significance for everything from commodity prices and commodity markets, to luxury goods and industrial companies that sell into China; it’s just such a big market that everyone’s assuming is going to grow more than all the other markets around the world. I’m not sure Evergrande is the catalyst for that; I suspect the government has a plan of some sort of rescue, getting other private and public property companies to take on the liabilities. But you cannot keep on piling on debt forever, eventually the growth rate does have to slow, and we need to be prepared for that as investors; I’m not sure Evergrande is the catalyst for that to happen right now. Inflation is definitely something to be aware of; if you look at the low rates of inflation we’ve had over 20 or 30 years, a chunk of that is a result of globalisation and in particular the entry into the workforce of hundreds of millions of Chinese labourers who moved from the country into the city, which really started happening in the ‘90s and then carried on.   21 Diy Investor Magazine · Nov 2021 

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