Can the gig economy be considered a “winner” from a strictly economic perspective in the context of the 2020 pandemic?

The sector as a whole most definitely outperformed compare to quite a few other sectors over the past few months but on the other hand, it is imperative to analyze the phenomenon at a more granular level as well before setting a verdict in stone. Let us leave the sector as a whole aside and analyze the gig economy from the perspective of the average individual so as to answer one important question: does it represent the Holy Grail of employment in light of 2020’s developments?

The answer, unfortunately, is a resounding “no” for the simple reason that we get stuck right from the very articulation of the question: what employment, exactly?

The overwhelming majority of gig economy opportunities revolve around the individual being an independent contractor rather than an employee and while things may very well look better when it comes to a strictly revenue-oriented perspective, there is more to a person’s career than revenue, for example:

1. Various benefits such as medical insurance are frequently left to the individual. When things are going well, the fact that one doesn’t have stellar medical insurance may not seem like that significant of a deal-breaker. Many gig economy enthusiasts are more than happy to lock in additional revenue and simply shrug insurance-related concerns off but unfortunately, they risk being only one debilitating accident away from a most unfortunate game-changer
2. Job security being oftentimes precarious and with various moving parts involved. From being banned from one platform or another due to various glitches or growing pains of the company in question to not being able to adapt to gig economy dynamics and standing by as your performance as well as ultimately revenue plummet
3. The situation of many platforms being shaky at best from a legislative perspective and as such, independent contractors (without being the least bit to blame) find themselves one legislative “paradigm shift” away from losing it all. An eloquent example to that effect is represented by ride sharing platforms such as Uber and the constant war they are in with taxi drivers, who were forced to comply with various regulations so as to conduct business and expect independent contractors who work with Uber and other platforms to be on the receiving end of the same treatment
4. Even leaving the legislative volatility dimension aside, “platform security” represents a major factor that generates concern among independent contractors due to the fact that company-specific changes can turn a previously profitable (for the independent contractor) platform into one that is no longer worth it. As such, independent contractors find themselves forced to diversify in many cases (for example switching to newer platforms that entice them with perks such as guaranteed hourly revenue) and while it sounds simple enough in theory, it can turn into a nightmare practically speaking and the overall climate is not necessarily conducive to peace of mind

These are just four examples of aspects that make it clear it is anything but sunshine and rainbows in the gig economy world. On the other hand, it is true that various platforms are trying to make improvements on these fronts by embracing a wide range of solutions, for example offering various deals on necessities such as medical insurance so as to make up for the lack of benefits discussed when mentioning issue #1.

Still, this much is certain: the gig economy is most certainly not for everyone and the limitations of various platforms become more than apparent upon closer reflection. While issues such as the ones we have mentioned are not necessarily deal-breakers for young and flexible individuals, the same cannot be stated about for example someone nearing retirement, someone with pre-existing medical conditions and the list could continue indefinitely.

Is the gig economy scalable?

It depends on how we define “scalable” in the first place.

If the definition is to simply encompass a business model that can end up working for millions upon millions of individuals, the answer is yes. On the other hand, those who state that the gig economy will turn “employment 1.0” into a relic of the past are being over-optimistic… to put it mildly.

This is especially obvious in countries with stark divides between social classes such as China, where there is a world of difference between highly-educated urban citizens who are both willing and able to adapt to the needs of the gig economy on the one hand and on the other hand, an equally significant segment of the population that is barely literate or even functionally illiterate and as such, does not possess the minimum skill set required for gig economy-related opportunities to make sense.

Is the gig economy an excellent option in China as well as elsewhere?

For a certain segment of the population, most definitely but certainly not for everyone due to reasons such as the ones outlined throughout this article and… at the end of the say, simple logic and common sense.

When it comes to losers, unfortunately, there are more than a few, from “the usual suspects” in terms of businesses such as airlines and restaurants to even cities themselves, for example New York City. Why cities themselves? Primarily because mega-trends such as the one which constitutes the topic of this article wreaked havoc on the very principles that kept them sustainable.

If people work from home, why should they continue paying exorbitant rent prices instead of simply moving somewhere more affordable? What happens to landlords in this “paradigm shift” situation and what about the various contractors and third parties that are also included in the equation?

On the lifestyle front, with optional as well as government/state-enforced social distancing measures, what happens to habits such as eating out and enjoying a complex social life, which yet again represented a major selling point of urban areas?

These two simple examples make it clear that… well, things are actually anything but simple because as great as mega-trends such as working from home may sound, our system wasn’t exactly built for this significant of a paradigm shift. Look no further than commercial real estate to understand that entire industries would crumble if in our case working from home would become a permanent rather than temporary endeavor.

Why would it become permanent?

Because things are never straightforward in the world of economics and even once the pandemic ends, it would be naïve to assume all negative consequences will go away, primarily because “negative” is in the eye of the beholder and something that represents a toxic trend for industries such as commercial real estate or cities such as New York City might represent a blessing for other businesses and individuals.

For example, there are already studies coming out which illustrate that when working from home, not only does productivity not plummet when it comes to quite a few occupations, it actually goes up. Furthermore, when working from home, there is no need for the oftentimes-complex infrastructure of an office workplace: no rental costs for the employer, no maintenance costs and the list could go on and on.

To put it differently, quite a few employers are now have compelling evidence (both studies and empirical evidence when it comes to their own work from home experiments with their own employees) that this approach enables them to both save money and increase productivity… a combination one doesn’t exactly come across often In the business world.

At the end of the day, we are forced to use a term so popular in the tech landscape that it ended up in cliché territory: disruption.

Love it or hate it, the work from home mega-trend is poised to disrupt entire industries and, of course, China won’t exactly represent an exception. As such, it makes sense to think about this trend from the perspective of the Chinese economy and there are basically two very important perspectives that stand out:

1. The situation as far as China’s more developed regions are concerned does not look all that gloomy, with hyper-technologization already a given when it comes to anything from smartphone use to digital payments (with China, believe it or not, being among the leaders rather than followers when it comes to this trend) and with many sectors of the economy more than able to adapt or even facilitate the transition to a more heavily work from home-oriented paradigm. As an example, we have dedicated an entire article to the gig economy from a Chinese perspective and yet again, it’s quite remarkable in how many surprising areas China leads
2. When it comes to the less-developed regions of China, things tend to get a bit tricky in terms of anything from infrastructure (with China still having regions in which even the very basics by Western standards are lacking) to flexibility… let’s just say that for example remote education in a pandemic context is easier to implement in Shanghai than in one of China’s more rural regions. To put it differently, the work from home mega-trend represents yet another element which will make the significant gap between developed and under-developed regions more than clear

Of course, there are also issues that pertain to China as a whole, leaving the “developed vs. under-developed” gap aside, with commercial real estate and real estate in general representing a textbook example to that effect. In a “work from home” world, it will become even more obvious than it already is that a fair bit of malinvestment took place when it comes to pretty much everything real estate-related in China. As it was, China has proven to be over-zealous with respect to anything from creating new office spaces to building residential real estate and even in the absence of post-2020 trends, this isn’t exactly something that can be overlooked. The potentially reduced mobility and almost certainly reduced demand for office space would inevitably exacerbate and already systemic problem, so let’s just say the adaptability skills of the authorities will be put to the test.

All in all, it is fairly safe to conclude that in China as well as pretty much elsewhere, the previously mentioned “disruption” term is in the spotlight. It remains to be seen which countries will fare better in the long run if mega-trends such as the work from home one prove to be more than fleeting occurrences and as always, the ChinaFund.com team will keep readers and especially clients informed.

From China to the United States and from Japan to the EU, “more of the same” is being prescribed with each financial/economic calamity that emerges: lower and lower interest rates, direct injections of liquidity into the financial system (monetary easing) and (especially as of 2020) also direct injections of liquidity into the real economy.

Imagine a house of cards and think of the various developments which have taken place over the years as additional cards being added, with the elephant in the room being represented by the fact that sooner or later, the entire structure will most likely collapse. Will the post-2020 measures end up facilitating just that? Realistically speaking, as any intellectually honest economist can confirm, nobody knows and it ultimately depends on whether or not the market keeps accepting the status quo by maintaining its confidence in today’s currency framework.

After the Dot-Com Bubble burst, the market accepted the then-unprecedented measures implemented by central banking decision makers such as Fed Chairman Alan Greenspan, who lowered interest rates all the way down to 1% in the United States. The same way, markets accepted the even higher dose of “medicine” prescribed in the aftermath of the Great Recession, with interest rates further reduced (even into negative territory in some cases) and furthermore, a new central banking weapon added to the arsenal: direct injections of liquidity into the financial system.

Fast-forward to 2020 and once again, the market seems to be demanding an even more aggressive dose of medicine. Lowering interest rates is no longer enough and the same principle is valid with respect to injections of capital into the financial system… in 2020 and beyond, Main Street (small business owners, the average employee, etc.) wants a piece of the pie as well and governments along with central banks are left with no choice but to comply.

How have they done that? Through measures which result in not just the financial system but also the “real” economy receiving ample liquidity, from small business loan guarantees in the hundreds upon hundreds of billions of dollars to (arguably) the beginnings of Universal Basic Income for the average person, with individuals receiving cash payments over in the United States in an effort to help them cope with the economic consequences of the very aggressive quarantine measures which have been implemented, measures which essentially resulted in a complete shutdown when it comes to various key sectors.

An important question arises: will the market be satisfied with the post-2020 status quo?

Pretty much everything depends on the answer to this question because if the market will decide that no, it has nothing against these measures, we are good to go for yet another cycle. At the end of the day, whether we are referring to anything from currencies to society as we know it, far more than meets the eye revolves around one key term: confidence.

As long as confidence in the status quo remains intact and individuals keep being content with the idea of being paid for their time, products and/or services through the current monetary vehicles, absolutely nothing has to change. But what if, eventually, the market decides that enough is enough? That so much money keeps being thrown at whichever problems pop up that it is time to think about just how sustainable this modus operandi is?

In such situations, aggressive “paradigm shifts” are to be expected, with investment trends being quickly altered. To understand these trends, it is important not to allow yourself to be so caught up with whichever bias fuels your current narrative that you miss the big picture that is right in front of you. For example, like a gold investor who believes the end of fiat currencies is near and that the only asset that can protect them is gold… that is most definitely not true.

It’s not that gold isn’t a logical hedge in such situations but rather the fact that by choosing to be a one-trick pony, you are missing the big picture, which is not the allure of gold but rather the fact that fiat currencies have lost their luster. Pun intended. As such, investors quickly flock toward… well, anything else, especially assets that are considered scarce. Gold is indeed such an example but let us not forget about anything from real estate to bitcoin.

While individuals who invest exclusively in gold will most likely do considerably better than those who remain passive, they tend to under-perform in the long run compared to genuinely diversified market participants. There is a reason why we dig so deep here at ChinaFund.com and that reason does not revolve around us loving to hear ourselves speak or see ourselves type. Instead, the name of the game is meaningfully “getting” the realities that are shaping up so that you can be not one but multiple steps ahead of other investors. Predicting the future is impossible, as we keep explaining time and time again, but being prepared is anything but. Not only is preparing through a smart diversification strategy possible, it is downright mandatory, especially in key situations which risk bringing about one of the greatest transfers of wealth in the history of mankind. For reasons that pertain to pragmatism more so than hyperbole, the 2020 scenario might indeed facilitate just that… ignore this threat at your peril.

In other words, that the worldwide economic system can continue in a “business as usual” manner after the previously mentioned COVID-19 episode, with the average individual simply pressing the proverbial reset button and resuming the same consumerist pattern he has become (in)famous for. Furthermore, investors tend to strengthen this argument by also referencing the unprecedented levels of monetary as well as fiscal stimulus that have been embraced in China as well as pretty much everywhere else in the world.

Unfortunately, this perspective tends to be quite short-sighted.

Why?

Simply because unlike with the Great Recession, the 2020 situation has made it crystal-clear that no, money cannot fix absolutely everything. A textbook example to this effect was represented by the fact that some of the world’s richest nations on a per capita basis (the United States, Italy and especially the wealthy Northern Italian region, France and so on) found themselves in an unprecedented situation (in modern-day terms, at least) when tackling or better stated trying to tackle the COVID-19 threat: realizing that they have a lot of money to deploy but not nearly enough in the way of supply when it comes to much-needed medical equipment.

As such, the much poorer (on a per capita basis) China was able to implement containment measures far better than the previously mentioned wealthy nations for the simple reason that it is a major producer of medical equipment. In stark contrast, other countries found themselves realizing just how overly dependent on China they are and precisely when medical supplies were most needed, China was facing major bottleneck issues due to a combination between domestic demand and a prudent or even excessively prudent approach to exports (limiting them for a considerable amount of time in case a second infection .wave becomes a problematic threat).

The “Western abundance” mantra was essentially shattered and make no mistake, the implications of this paradigm shift are generation-defining. From the perspective of the average Western citizen, it was always assumed that as long as you have the monetary means to acquire products and services, finding them is anything but problematic, with supermarkets being always full, pharmacies always well-supplied and the list of stereotypes can go on and on. In 2020, it was revealed that the stereotypes in question are in “the emperor has no clothes” territory and that there are major supply chain fragility issues that need to be tackled in the West.

Therefore, both consumers and businesses find themselves more and more compelled to switch from the pre-2020 “ultra-optimization” consumption models which defined their way of seeing the (economic) world to more… let’s say resilient ones. In other words, it has become abundantly clear that there is indeed such a thing as over-optimization, that not everything has to be “on demand” and that yes, that it even makes sense to build a robust stockpile of at least essentials.

On a similar note, consumers have also understood to a significant enough degree that they can be just one exogenous shock away from losing their job, either temporarily or permanently. As such, it has been pretty much proven that the “optimized consumer” who was feeling good about himself due to the ability to juggle multiple loans (mortgages, credit card debt, student loans, auto loans and so on) is little more than an individual who is living paycheck to paycheck and therefore far closer to being insolvent than one would have thought prior to 2020.

Is consumerism under attack?

Most likely not, at least not consumerism as a whole.

Pre-2020 consumerism however is.

To make things sound less confusing, we firmly believe that no, the idea of consumerism will not be eliminated from the equation. Instead, less robust pre-2020 consumerism will be replaced with the post-2020 version, with the many consequences that derive from this. It remains to be seen if the worldwide economy will be able to adequately absorb such a colossal shock because make no mistake, some of the characteristics of post-2020 consumerism will be difficult to digest:

1. Less of a willingness to take on additional debt
2. An increased willingness to pay down debt
3. A greater degree of attention paid to the let’s call them bare essentials
4. Less attention paid to “expendable” products and/or services

At the end of the day, a valid case could be made that the post-2020 model revolves around a greater degree of common sense but as mentioned in other articles as well, this risks bringing society in “paradox of thrift” territory because our current model needs perpetual credit-driven growth to sustain itself and in the absence of just that, it remains to be seen whether or not some form of balance will ultimately be reached.

More so than other sovereigns, China has no choice but to adapt but truth be told, it has been transitioning to a different model well before the coronavirus became a threat. To put it differently, we are dealing with yet another (generation-defining) context which makes it clear that China has no choice but to continue with the transition from an “export powerhouse” model to one which involves a greater and greater role being played by domestic consumption and sustainability. Yet another argument in favor of the idea that the pre-2010 double-digit GDP growth days are long gone and that might not necessarily be the worst thing in the world (with China being criticized time and time again for its “growth at all costs” model which was hardly the epitome of sustainability)!

This is, to pretty much nobody’s surprise, precisely what happened.

What was more than surprising, however, was the fact that few economists would have expected central banks as well as governments to be this aggressive, this coordinated and this quick to throw the proverbial kitchen sink at the problem. The Federal Reserve for example almost immediately cut interest rates by 50 basis points and then shortly thereafter brought them all the way back to zero again, with them also providing trillions in the way of financial system liquidity as well as a wide range of other solutions. Other central banks followed suit, with governments also putting their foot firmly on the pedal with respect to the fiscal stimulus dimension.

When it came to Keynesian economists, they have continuously criticized various administrations from all around the world for not being aggressive enough. In other words, for now lowering interest rates enough, for not being aggressive enough when providing liquidity (which led to a lot of it essentially being “hoarded” as banking system reserves), for under-performing on the fiscal stimulus front compared to the monetary stimulus one and so on.

Today’s situation should therefore be considered the ultimate let’s call it aggressive Keynesianism test. While there are most definitely Keynesian economists who are more reserved when talking about how low interest rates can actually go, other colleagues tend to be aggressive to the point of explaining that there is absolutely nothing to worry about because central banks still have plenty of ammunition left in this respect.

Are the latter economists correct?

As always, nobody knows because answering the question above would involve predicting the future, something human beings tend to be remarkably terrible at. Therefore, time will ultimately tell. What we can and in our opinion should do, however, is try to tackle this issue from a let’s call it game theory perspective by putting ourselves in the position of perhaps the most neglected to the point of pretty much hated (or so it seems) category of citizens: savers.

Even well before the 2020 developments, interest rates were low almost everywhere and, indeed, there have been economists who were concerned right from the beginning of the Great Recession response days that excessively low interest rates might lead to the banking system facing massive capital flight. In other words, that the average depositor would not be willing to accept letting the bank handle his money in exchange for a paltry interest rates and as such, demand cash. Needless to say, if that would have occurred at scale, the banking system as we know it would have collapsed due to the fractional reserve nature of it.

Fortunately, as we now know, it… well, didn’t.

Why?

For the most part because the average depositor is complacent. No, nobody likes receiving nothing in return as a depositor but as the joke goes, people are more likely to change their wives than their bank and as such, the overwhelming majority of depositors remained passive. The same principle is valid when it comes to negative interest rates because, and therein lies the nuance worth highlighting, they are only MARGINALLY negative. In other words, even “worst case scenario” depositors who are essentially forced to pay the bank to keep their money are only in marginally negative interest rate territory and therefore, for reasons which mostly revolve around a combination between being complacent and being scared of keeping too much money literally under the mattress, depositors didn’t exactly demand their money in cash form en masse.

However… game theory time.

We have already established that with interest rates at zero or even slightly negative (let’s say -0.1%), nobody is panicking.

What if they were lowered to -0.5%?

More likely than not, additional depositors would complain but a panic significant enough to bring about a bank run is hardly probable.

What about -1%?

In that case, let’s say (for the sake of our little thought process) that 5% of depositors would finally decide that enough is enough and ask for their money.

-2%?

Maybe 8% would decide to leave in the scenario in question, once again for the sake of our example… a percentage which would give bank managers jitters but not enough, at that point in time, to turn banks into essentially insolvent entities.

-3%?

This is where things get tricky because if 10% or more of depositors decide to leave the banking system, the equation stops working. Reserve requirements differ from jurisdiction to jurisdiction but all in all, the message should be crystal clear: as of a certain point, sooner rather than later, the percentage of depositors who decide they have had it becomes significant enough so as to put serious strain on the banking system.

The tolerance in question differs from country to country. In China and let’s say non-Western economies where inflation rates are higher than in the US or EU nations, depositors would definitely be far less likely to tolerate negative interest rates because aside from the rates in question, they would be “punished” by inflation as well. Again, it depends but as a bit of a conclusion, the ChinaFund.com team wants to make it crystal clear that yes, there is a limit as to how low central banks can go interest rate-wise and while that limit differs on a country to country basis, it isn’t that significant of a stretch to state that it might be wise to assume the tipping point in question is quite close. Wouldn’t it therefore be wise to act accordingly by no longer assuming that central banks have economic “super powers” that enable them to defy the limits of game theory and ultimately common sense?

A textbook deflationary scenario, correct?

In theory or if you will on the surface, yes.

Practically speaking, however, we need to take a major step back and look at the broader picture. More specifically, at the fact that the economic crisis came in a context where interest rates had been very low for an extended period of time (even negative in the European Union and Japan) and credit very easy to come by. This, among other things, also led to asset price inflation with respect to anything from stocks to real estate.

It also lead to other let us call them unintended consequences: a lot of capital on the sidelines.

Think of this as observation number one.

As far as observation number two is concerned, we fast-forward to 2020 and take a look at the various measures which have been implemented all over the world by governments as well as central banks, from China to the United states and from the European Union to Japan: stimulus, stimulus and more stimulus. From lowering already-low interest rates to flooding the financial system with liquidity and even sending checks to the average citizen (the Universal Basic Income concept in its infancy, if you will).

Those who had been preparing for another financial calamity “suspected” that when another financial crisis would manifest itself, central banks would resort to… well, more of the same, lowering interest rates on the one hand and providing liquidity on the other. The same way, fiscal stimulus measures were included in the equation but for the most part, the average observer expected central banks to remain in the spotlight. In the opinion of the ChinaFund.com team, however, it is fairly safe to state that not even the most pessimistic “bears” would have expected a response of 2020’s magnitude to come so quickly.

Instead, many would have expected debates upon debates among decision makers, with right-leaning ones stating that perhaps the government and central bank shouldn’t intervene very aggressively, whereas left-leaning ones would demand status quo Keynesian action. Strangely enough, that didn’t happen, with the United States representing a textbook example to that effect. A United States run by none other than the Donald Trump REPUBLICAN administration, most definitely a right-leaning one. However, instead of manifesting skepticism and giving let’s say credit to the free market, Donald Trump did the exact opposite by encouraging significant stimulus on the government as well as central bank side, to the point of even criticizing Federal Reserve Chairman Jerome Powell for not being aggressive enough at the very beginning, with Trump clearly stating that he expected the United States to “lead” (to use his exact expression) rather than follow by “out-stimulating” its competitors.

The same principle was valid in other jurisdictions and as such, fear compelled pretty much everyone to agree that an aggressive combination between monetary and fiscal stimulus (because early on, by crashing after “central banking only” responses, the market made it clear that this time around, it demands extremely strong fiscal stimulus as well aside from more aggressive monetary stimulus) is the way to go.

Libertarians agreed with Keynesians. Fiscally conservative Germans agreed with their more lenient French counterparts, the list could go on and on but this much is certain: among mainstream economists and politicians at least, it seemed that nobody dares question the fact that being aggressive is the only option.

We will now take a step back and look at our two observations: the fact that there was already quite a bit of money on the sidelines to begin with (observation one) on the one hand and the fact that unprecedentedly aggressive monetary as well as fiscal stimulus is being prescribed (observation two) on the other.

Needless to say, what was first described as a textbook deflationary scenario now seems… well, anything but. For this reason if nothing else, the “money on the sidelines” argument, it would perhaps be wise not to rush into comparisons to the Great Depression, simply because market and political conditions differ dramatically: from President Hoover who listened to his advisors and let the free market sort itself out in the aftermath of 1929 (a decision that proved to be less than ideal in hindsight) to today’s politicians, who are doing the exact opposite.

In light of the fact that Hoover’s decision has proven to be less than ideal and that today’s political decision-makers are doing the exact opposite, can or should we conclude that everything will be “fixed” properly this time around? Of course not because as we have mentioned repeatedly to the point of obsessively on ChinaFund.com, nobody can predict the future and time will ultimately tell. Therefore, no, it would be hazardous to jump to quick conclusions with respect to the glorious new paradigm of central banking and fiscal stimulus we will find ourselves in, it remains to be seen if the results will be positive or negative in the mid to long-term. What we can be close to certain of, however, is that developments will most likely be DIFFERENT this time around and as such, resorting to simplistic comparisons with the Great Depression might not be the best idea in the world. Instead, it would be wise to keep your ear even closer to the ground than usual so as to be quick to adapt to events, as they unfold. As always, the ChinaFund.com team will gladly be of assistance with just that and is only a quick message or email away.

“The stock market is a tool that’s designed to transition wealth from the impatient to the patient”

If you frequent our blog then you know that we are very bullish on the potential of China as the next big investment opportunity. Even though their economy has been growing at unprecedented rates since 1980, we don’t think that they’re done yet. Over the next couple of decades, their country and economy will most likely continue to see amazing growth and those who position themselves aggressively are poised to do quite well.

We want to help you make informed decisions on how you can invest in China over the next few years. Since we just started a new decade, we thought it would be a good time to focus on 5 trends that we expect to see in the business landscape in China over the 2020s.

These are 5 China trends to watch out for the 2020s:

Increased Free Market Activity

In 1978, China implemented changes to their economy that allowed them to transition to more of a free market. Citizens were given the freedom to create their own enterprises and the government retracted their control (slightly). Prior to these reforms, things like production levels and prices were mandated by the government. This meant that business owners had no control over price, quality or how much of their product they could build and sell. These changes were clearly very good for China and allowed their economy to grow an unprecedented rate. In fact, their economy has been doubling every 8 years since the 1980s.

It’s worth noting that these same types of free-market regulations were exactly what lead to the United States becoming the economic powerhouse that it is today.

Even though China is still very much a communist* country, you’re likely to see more of a transition toward free-market policies. During just the short time from 1980 to now, China has had an unprecedented number of people escape poverty and is now the world’s #2 economy. This economic success shows the power of capitalism and will encourage leaders to deregulate the economy even further.

According to Chinese economist Zhang Weiying, China’s success in recent years has “not been because of the state, but in spite of the state.” It’s most likely clear to many citizens that free markets are what have allowed China to grow at the rate they have. They will likely pressure the government into deregulating the economy and allow more and more entrepreneurs to stake their claim.

The Chinese government has also come out (in the wake of the coronavirus) and stated that they want to attract more foreign investment. One of the main ways to do just that revolves around open policies and fewer regulations.

That being stated, China is still a communist country and their government will most likely always have a hand in what is being done in the private sector. That brings us to our next trend:

More Governmental Control

Despite a more deregulated business environment, expect more government control over their private enterprises. These may seem like two conflicting statements but here is what we mean: although the landscape will be open for more people to start their own business, the government will take a stronger role in monitoring the private sector (as the private sector continues to grow).

For example, we have already seen this a little bit with things like:

1. The government’s decision to place government figures on the boards of hundreds of private companies. It can only be assumed that this is to make sure that private companies are acting in the best interests of the country
2. The introduction of China’s new cybersecurity infrastructure. This new infrastructure will offer private companies no privacy or if you will, no place to hide information from the government. Everything that gets put online, gets offered to the government on a silver platter

The Chinese government and the U.S. government are both also interfering in open trade between the two countries in response to the trade war. Both countries have imposed tariffs on one another and just reached Phase One of a deal.

Despite opening the economy for private enterprise, the Chinese government will still want total control in regulating what those businesses do and how they do it. This is true for foreign companies looking to enter China as well (many U.S.-based companies are still banned from doing business in China).

Transition Toward eCommerce

This is a worldwide trend but will be particularly true for China. This is because China is already the world’s leading manufacturer and exporter. They’re also already home to Alibaba, one of the world’s top eCommerce companies. The two companies JD.com and Pinduoduo are also growing rapidly and are even projected by some to become larger than Alibaba.

This trend toward eCommerce will most likely be accelerated by the coronavirus. Now that people are being forced to stay at home and quarantine, they will have little choice but to order things online. Companies that do not offer eCommerce options will be forced to either adapt or go out of business.

ECommerce is also projected to venture into other industries aside from just retail. In the U.S., grocery and food delivery is gaining steam fast. Undoubtedly, over the next 10 years, other companies outside of retail will do what they can to introduce eCommerce into their own industry.

Long-Term Effects of COVID-19

Speaking of the coronavirus, the spread of the disease will most likely have a lasting impact on China’s economy for at least a few years to come. Already, China’s GDP has shrunk in Q1 of 2020 by 6.8%, which was the first contraction in 40 years. China recently reported that their GDP grew by 3.2% in Q2 of 2020, which would imply that they are already recovering from the damaging effects of the pandemic. However, many are skeptical of these numbers.

The country (as well as the U.S.) is at a critical point in handling the virus as well. In the United States, the virus isn’t contained very well and government aid is starting to run out. China, since they have been somewhat coy about releasing their economic data, could be in a similar position when it comes to:

1. Government aid – There may need to be more aid in the form of bailouts or increased unemployment benefits, as explained through another article
2. Potential layoffs – China has already made it clear that private companies are to avoid layoffs at all costs. This means that more bailouts could be on the way so that companies can avoid laying off employees

Additionally, some doctors believe the coronavirus is something that could turn into a seasonal event, similar to the common flu. During some months it will be dormant, only for cases to surge again when the seasons change. If this is the case, it will be doubtful that countries will go into full quarantine every time the virus emerges. However, productivity could still suffer during times of the year when the virus is more prevalent.

More Pressure on the Global Stage

As China has now grown into the world’s second-largest economy, there is more pressure for them to conform to the whims of other countries. This has become increasingly apparent with aspects such as their trade war with the United States, the pressure to stop currency manipulation and pressure to curb their country’s carbon emissions. When it comes to their private sector, there are a few companies which are coming under a global microscope as well, such as:

1. TikTok – Although this situation is ongoing, TikTok is a social media company (one of the fastest growing social media companies of all time, in fact) that allows users to record and post short videos. However, they are now coming under scrutiny due to allegedly being used by the Chinese government for surveillance
2. Huawei – The same is true of the microchip company Huawei (this is another situation that is ongoing). They are expected to play a major role in creating the 5G infrastructure that is going up around the world. However, many countries are skeptical that they send information to the government. Some countries have even gone so far as to ban doing business with Huawei

As China continues to grow, there will be more and more pressure on them to be wary of their actions and how they are viewed by other countries. This is both a good and a bad development because it means that they are in a position of economic power but also need to adhere to global requirements.

We hope that you’ve found this article valuable when it comes to understanding some trends to watch out for in China for the 2020s. If you’re interested in reading more, please follow the ChinaFund.com blog and take a look at the “New Here?” section of our website if you haven’t by now.

While few market observers are surprised that the authorities are doing “more of the same” (monetary and fiscal stimulus) but in stronger doses and from Keynesian to even libertarian thinkers, most economists are encouraging stimulus at this point in time, there is a looming question which cannot and should not be ignored: are we not transitioning to an age of so-called corporate socialism?

In other words, is this not an extreme form of moral hazard (a topic which has been covered through a dedicated article, one we encourage you to read by clicking HERE)?

First of all, it makes sense to explain the concept of corporate socialism and to put it in plastic terms, think of it as essentially a system that enables corporations and those that run them to take advantage of the best of both worlds: when times are good, they take advantage of capitalism and reap impressive rewards and when things turn sour, “socialism for corporations” takes over and they are rescued. The privatization of profits and socialization of losses, in other words.

A popular counter-argument tends to be this: but aren’t households bailed out as well?

While it is true that for example the $2 trillion US bipartisan fiscal stimulus package also includes assistance to the average person, with the government even mailing checks of $1,200 per citizen, a valid case could be made that such “individual-level bailouts” are more of a short-term buffer until economic activity resumes than an actual bailout, especially in light of the fact that the average US citizen tends to be too indebted to withstand even short-term status quo shocks.

The same cannot be stated about corporate bailouts.

To illustrate this and why “corporate socialism” tends to be extremely frustrating to come to terms with for the average citizen, let us see things from the perspective of a top executive. When the economy was going well, these companies invested copious amounts of capital in share buybacks, with the end result being impressive share price growth. Needless to say, executives who usually sit on a fair number of shares themselves were significant beneficiaries of this state of affairs. Add impressive salaries and remarkably high bonuses to the mix and we have a scenario which revolves around the enrichment of a select few despite them not having enough skin in the game.

The “not enough skin in the game” component becomes obvious when we move on to the post-pandemic measures, which involve the same executives begging for bailouts and governments all around the world complying. Did these bailouts come with strings attached? Yes, but only marginally so, for example corporate pay/bonus caps which lead to scenarios which (at best) involved the executives in question earning slightly less than before, with them keeping absolutely everything they accumulated when times were good and many being “in the know” to enough of a degree to have sold their shares prior to the crash.

Needless to say, things seem anything but directly proportionate when comparing the effects of bailouts on the average individual and on the proverbial one percent. During times of crisis, few people pay enough attention to this dimension in light of the fact that the average market participant tends to be in survival rather than contemplation mode.

After the dust settles, however, frustrations inevitably build up.

In the aftermath of the Great Recession, these frustrations led to movements such as the “Occupy Wall Street” one but which eventually fizzled out. However, lingering anger remained, anger which led to increased polarization across the board. In the United States for example, this anger led to the ascension to the spotlight of populist candidates on the right (Donald Trump, who became the President of the United States in 2016 and is up for re-election in 2020) as well as left (Bernie Sanders, who ultimately lost the internal competition to Hillary Clinton in 2016 and to Joe Biden in 2020).

Make no mistake: more or less unintended consequences abound.

The post-Great-Recession measures ultimately benefited wealthy asset-rich individuals much more so than the average household and in the post-2020 framework, the same principle will most likely continue being valid and even exacerbated.

Will there be another but this time more robust “Occupy Wall Street” movement in the US and equivalents elsewhere?

Most likely.

We are already seeing examples to this effect, with widespread protests despite the anything but under control COVID-19 situation in the United States.

Will politicians on the even more populist side emerge?

Perhaps.

As always, the ChinaFund.com team never tries to predict the future and on the contrary, makes it clear time and time again that human beings tend to be remarkably terrible at that. Instead, we firmly believe in being thorough on a risk factor to risk factor basis. In other words, unlike many of our colleagues, we choose not to remain stuck in short-term narratives and on the contrary, always try to analyze current events with the big picture in mind.

This tends to be a very difficult endeavor when the entire world is in full-on panic mode but for those interested in not just wealth preservation but also wealth enhancement, there is simply no other way. In our opinion, those who underestimate the seriousness of the corporate socialism situation we find ourselves in and the severity of its long(er)-term manifestations are making a grave risk management mistake. In the spirit of helping (potential) clients avoid just that, the ChinaFund.com team is only a quick message or email away and will gladly do its best to be of assistance with respect to putting together a robust risk analysis as well as management framework.

To help give you a few potential starting points, we’ve gone ahead and selected our three favorite Chinese investments as well as a few reasons why we like them. Each investment will feature a few qualitative reasons why we like them (such as industry or consumer trends) as well as quantitative reasons (numbers pulled from their annual reports).

Without further ado, let us move on to our three favorite Chinese investments.

NOTE: This article is for informational purposes only and is not meant to act as financial advice.

JD.Com

It’s no secret that the world has been transitioning toward eCommerce for years now.

First, there is a very well documented decline when it comes to traditional retail businesses (formally known as the retail-pocalypse). While not all of these bankruptcies are 100% attributable to the rise of eCommerce, that has definitely played a major role. By “retail-pocalpyse” we just mean that consumers have been shifting toward online shopping. They like to buy products from the same store online or from a site like Amazon as opposed to actually going to the physical location and buying things.

Companies that don’t have a seamless online shopping experience have been falling behind or closing up shop altogether.

Some of the most recent store closures have been from:

➢ Neiman Marcus
➢ Diesel
➢ Toys R Us
➢ Forever 21
➢ J Crew

Click here to read a more exhaustive list.

An important question arises: if most or even all of the retail businesses are (eventually) closing, does that mean that people aren’t buying as much stuff anymore? Or does it mean that people are still buying stuff, just that they’re buying it online?

As common sense most likely dictates, people are still buying (at least) the same amount of goods, they’ve just been transitioning to eCommerce for the bulk of their purchases. Some people have even started to order things like their weekly groceries online and get them delivered straight to their homes.

Let’s take a look at a few stats behind eCommerce:

1. The global eCommerce rate for 2020 is expected to come in at 19%, to bring total eCommerce sales to around $4.206 trillion globally
2. ECommerce market share of total retail transactions is expected to double from 10.4% in 2017 to 20% in 2023
3. Over 15% of all sales are expected to take place online over the next year

Not only are these numbers impressive from a global standpoint but the best part is that Asia-Pacific is by far the largest region for eCommerce (according to Oberlo.com).

If you think eCommerce is popular in the U.S., it should represent great news for you that it’s far more popular in Asian countries.

Additionally, with the introduction of the Coronavirus earlier this year, this trend toward online buying/selling will only be accelerated over the coming years. People are being forced to stay home and quarantine themselves while businesses (which aren’t considered essential) are forced to shut their doors down. This means that for lots of people and businesses, there is no alternative except resorting to doing things online! It’s the only way that they’ll be able to continue functioning.

Companies that have been holding out on transitioning to eCommerce will be forced to adapt in order to stay relevant.

For just these reasons alone, any company that dominates in eCommerce could be considered a solid investment. With that being stated, let’s take a look at one of the top players in China when it comes to eCommerce: JD.com.

JD.com is a leading technology-driven e-commerce company that wants to become the number one supply chain based technology and service provider. They’re the second-largest eCommerce company in China (after Alibaba) and pride themselves on their cutting-edge retail infrastructure that offers what they call Retail-as-a-Service (offering to let other companies use their platform to sell products). They’re currently the largest retailer in China and a member of the NASDAQ100 as well as Fortune Global 500.

After taking a quick look at their 2019 Annual Report:

➢ Net revenues have been steadily increasing since 2015
➢ 2019 was the first year that they operated at a profit
➢ They’ve been investing heavily in research and development

At a glance, JD.com is a company that could be poised to drastically grow their business over the coming decade. They’ve been making more and more money each year, have the capacity to earn a profit and are investing money back into their business.

Our next company is another eCommerce player:

Pinduoduo

We feel so strongly about the rise of eCommerce that our second company is another eCommerce sector entity. The reason why we have decided to put two companies in the same industry in the spotlight primarily revolves around the coronavirus. Over the next couple of months/years, late adopters of eCommerce will be forced to make the jump. This will be good for companies such Pinduoduo which help other companies sell online.

The same information from the previous section is going to apply to this one.

However, Pinduoduo has a distinct advantage built into their platform, which is why we like them as opposed to other companies.

Competitive Advantage: Pinduoduo’s platform encourages users to invite their friends to purchase the same products. In this sense, they encourage “group buying”. This is a huge advantage when it comes to driving growth because people want to do what their friends are doing. This same mentality is what helped companies like Facebook and TikTok achieve their amazing growth.

Let’s take a look at their 2019 annual report.

Key takeaways:

➢ Their revenues are growing exponentially (growing by 6 times in just 4 years)
➢ Their top expense by far is marketing. This is a good thing because they’re putting a lot of money into gaining customers over competitors and this expense can be cut at any time

Additionally, highlighted in their annual report were the following advantages:

➢ The ability to attract and retain merchants
➢ The ability to seamlessly connect with social media networks
➢ The fun and interactive shopping experience of their platform

Just like JD.com, Pinduoduo is an exciting company in a rising industry that is poised to take advantage of what should be a fruitful decade for their company. We wouldn’t be surprised if they dethrone Alibaba or JD.com to become the region’s top eCommerce player over the next few years.

iQiyi

IQiyi is a leader in streaming content online and has often been referred to as “the Netflix of China”. They’re poised to take advantage of the growing trend among consumers to stream content from home as opposed to going out to theaters. This is another trend that will likely be accelerated because of the closing down of traditional theaters due to the coronavirus.

Although this trend is already pretty mature in the United States, it still stands to grow because people are being forced to stay home due to the pandemic. This could lead to more people picking up streaming when they were previously holding out.

In fact, you could argue that streaming was already becoming more popular over the past couple of years with companies such as Disney and Amazon launching their own services fairly recently. Media companies have seen how popular it has become and want to lure users to their own platform. What we are seeing now is a battle for popular content.

We took a look at their annual report from 2019 and here are a few takeaways:

➢ 100.5 million users
➢ $1.1 billion in revenue
➢ Membership increased 21% year over year
➢ Looking to expand out over SE Asia

IQiyi is currently operating at a loss but much of that is attributable to its expenses in creating new content and attracting new users. Creating new content, just like the current streaming wars in the United States, will ultimately be one of the deciding factors of who succeeds in this market. Netflix realized this early on when Disney reported that they will be launching their own streaming service (and taking content/users away from Netflix). IQiyi seems to be doing the same thing.

In Summary

If you’re looking to invest in China but aren’t sure where to start, a good starting point is to pick industries that you’re already familiar with. ECommerce and streaming are two of the fastest-growing industries in the United States, so it makes sense that they would be growing in China as well. Additionally, these industries will not be negatively impacted by the effects of COVID-19 and, if anything, their businesses will be better off.

We’ve looked at 3 stocks:

1. JD.com – The 2nd largest eCommerce platform in China
2. Pinduoduo – One of the stickiest eCommerce platforms in China
3. IQiyi – One of the fastest-growing streaming services in China

Your investment decisions are your own but if you need a good jumping-off point, we’d recommend taking a closer look at these three companies!

We hope that you’ve found this article valuable when it comes to understanding 3 Chinese investments that you could potentially take advantage of. If you’re interested in reading more, please check out our blog as well as the “New Here” section of ChinaFund.com.

• “China has been growing at an unprecedented rate”
• “The Chinese economy has been growing every year for the past 40 years”
• “China is projected to keep growing and overtake the U.S. as the world’s #1 economy”

While all of these statements are true, it’s important to understand why they’re true. What did China start doing differently that allowed them to grow at such an amazing rate? Through this article, we’ll take a look at some of the reforms that China passed to jump-start their economy as well as bring them to where they stand today.

This is how China achieved their amazing economic growth:

Free Markets and Why They Lead to Growth

One of the first aspects we want to talk about when mentioning China’s growth is the role of free and open markets when it comes to economic growth. It’s been proven historically that open, competitive markets have resulted in the fastest economic growth for countries that implement them. This is the main argument in Yuval Harari’s Sapiens and it could be argued that this transition was the leading factor for China to start growing their economy.

If you’re not familiar, a free market is defined as “an economic system based on supply and demand, with little or no government control. It requires that all decisions made in a given economic environment are voluntary. In other words, it’s an economic system where people make decisions instead of the government. People are free to:

1. Start new businesses based on societal needs
2. Make decisions on what to do with their profits. They can either keep them or invest them back into the business
3. Create their own production goals. If they want to grow, they can produce more or if they just want to sustain, they can maintain current production levels

In addition to an open market, minimum regulation from the government and a population focused on entrepreneurship are two other keys to growing the economy of a country.

Let’s take a closer look at entrepreneurship and how it plays a role in creating economic growth.

Entrepreneurship

If free markets are the car that drives economic growth, then entrepreneurship is the gas that goes in the tank. When an entrepreneur has a new business idea, he fills up the tank and the car of economic growth moves forward.

More often than not, entrepreneurs are responsible for the growing economy of a country. They solve societal problems, create new industries and put the population to work. One important aspect to note is that innovation never stops. Entrepreneurs can (and will) keep coming up with new business ideas that drive a country’s economy forward. For example, some of the United States’ top companies were founded in the past 20 years:

1. Facebook (2004)
2. Uber (2009)
3. Google (1998)
4. Bird (2017 – fastest company to reach a $1 billion valuation)
5. Airbnb (2009)

You can be pretty much certain that there are companies in their seedling stage now that will dominate the world in the next decade or so.

Here are a few more manners in which entrepreneurship spurs economic growth:

➢ Adding jobs to the economy – What’s the easiest way to lower unemployment? Create new and exciting companies that can hire people. One of the best examples of this is the recent creation of the gig economy. The gig economy is described as an economy of short-term freelancers and temporary jobs, we have dedicated an entire article to this topic that can be accessed by clicking HERE. The gig economy just recently came into existence but now allows people to make extra cash in incredibly simple ways. Not only has the gig economy put more people to work but it has also put more spending money in people’s pockets (which further spurs economic growth)

➢ Adding to the national income – Existing companies can sometimes hit a glass ceiling in terms of the amount that they can grow. The larger they become, the longer the decision-making process and the more stifled innovation gets. Start-ups, on the other hand, enter new markets and create new income where there previously was none

➢ Create social change – Due to the fact that entrepreneurs solve societal needs, they effectively improve the overall quality of life for humanity and increase economic freedom

There are clearly plenty of ways through which open markets and a plethora of entrepreneurs can drive economic growth.

So what does this have to do with China?

China Reforms

For the overwhelming majority of China’s history, they’ve been dominated by the state. There was no private enterprise and no entrepreneurship. Every company was more or less owned by the state and the government dictated things like production levels and management decisions. Remember how free markets thrive because people work in their own self-interest? China wasn’t doing that at all.

This all changed, however, when Deng Xiaoping initiated deregulation reforms in 1978 to allow capitalists to thrive in China. Since these reforms were implemented, China’s economy has been on a tear.

The following graphs do a good job of illustrating how quickly the country flipped and have been sourced from an article in Quartz:

Not only did the poverty rate plummet (first graph) but incomes also increased significantly:

One of the most meaningful initiatives Xiaoping proposed was that China should learn from other countries and let their citizens “vie” to get ahead. This type of societal structure will inspire workers with a lower standard of living to work harder and improve their situations. When this happens, society will be better off as a whole.

This is essentially the crux of laissez-faire economics implemented in the United States and other free-market countries. The United States, in particular, is known for their “American Dream” mentality. This is a mentality that anyone can become rich and successful, regardless of who they are and where they come from.

Individuals are inspired to work harder to improve their own lives instead of working hard to please the government. Additionally, the ability to work harder and earn more money means that people will have more money to spend on products/services provided by businesses, which means more money for the business owner and this creates a self-sustaining cycle.

We want it to be clear that China is still a communist country*. The state still dominates the country and gets the last say in all businesses. They just tweaked their laws so that people were allowed to create their own businesses.

So if these reforms happened in 1978 and have obviously been quite successful, where does that put China at today?

China Today

As mentioned previously, China’s economy has been on a tear and they are on the brink of overtaking the United States as the world’s largest economy. According to WorldBank data:

1. China’s GDP currently sits at $13.6 trillion
2. Annual GDP growth is projected at 6.9%
3. Their population sits at 1.4 billion
4. The average life expectancy has been steadily increasing and is now at 76

Although China’s growth has been amazing over the past couple of decades, nothing is certain. There are still a few factors that could change China’s projections. For example, continued escalation of the trade war between the United States and China could pit these two countries against each other even more.

Additionally, a change in ideology in leadership or within the Chinese population could also derail the country’s direction. For example, due to the coronavirus pandemic, the current generation is at risk of having a less easy life than older generations. This could lead to generational unrest and a search for an alternative to socialism with Chinese characteristics.

Speaking of the coronavirus, this is the final question mark for the future of China. This is true for most countries but especially China because ground zero for the COVID-19 virus is in Wuhan, China. The virus has crippled the economy during the first half of 2020, causing the first GDP contraction in 40 years and thrusting untold numbers into unemployment.

It can be difficult to tell how the county is handling the pandemic because China’s reports have been questionable. However, the future of the country will be determined by how they deal with the virus and how quickly they can return to business as usual. The same is true for most nations.

We hope that you’ve found this article valuable when it comes to understanding a little bit about how China achieved their amazing economic growth. If you’re interested in reading more related to China, keep an eye out for new blog posts or go through our existing ones. And, of course, do not hesitate to reach out if there is anything our team of experts can be of assistance with.