It was the greatest – and longest – period of wealth-creation in recorded history.
From a GDP of just US$147 billion in 1978 – about 1/15th that of the U.S. back then – China’s economy has exploded to nearly US$13 trillion today.
That’s an average annual growth rate of 11.8 percent… for 40 years.
If China’s economy was a stock market, it would have been the best-performing stock market in the world… outperforming the S&P 500’s 11.6 percent return over the same period (including dividend reinvestment).
So Chinese President Xi Jinping had a lot to be proud about when he gave a speech on December 18, marking the 40th Anniversary of China’s social and economic reform.
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What he said that mattered
With the U.S.-China trade war on pause until March 1, investors are looking for any indication that Beijing will take a more conciliatory approach with its largest trading partner.
But, as expected, Xi did not mention anything specific about government, the economy or international trade.
Instead, he said that China faces “unimaginable” perils and dangers. He also said the China must rely on Communist Party rule and economic reform to prevail.
That’s political speak for, “There could be trouble ahead, and if you want to survive, trust your leaders without question.”
Xi went on to say, “Only by improving the party’s leadership and governance… can we ensure the ship of reform and opening up will sail forward.”
In short, China will only pursue a path to continued reform as long as the Communist Party is also able to strengthen its ability to control its people and economy.
It’s no secret that China’s government has been increasing its ability to monitor and police its people using technology.
So Xi’s words matter because they essentially tell the world that Beijing will continue to throw its full support behind the development of China’s tech industry, which helps the government achieve its goals.
There are now 900 million Chinese with WeChat accounts that they use to pay for everything from a pack of gum to a bullet-train ride. Hardly anyone in China (except for tourists) carries around a wallet nowadays.
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The number of Chinese with social media accounts, like Weibo (China’s version of Twitter) or YY (a leading video-based social network service), already outnumber the entire U.S. population of 304 million twice over.
So there will be likely many more success stories like WeChat, Weibo and YY to come out of China in the coming years.
China is also now the world’s largest and fastest-growing market for Internet of Things (IoT) devices. IOT devices include everything that’s connected to a network and accessible online – from digital surveillance cameras and light bulbs you can control with your smartphone, to electric cars and smart TVs.
What Xi didn’t want to talk about
China is facing problems.
The economy has been slowing since the second quarter of 2017. The full impact of the trade war hasn’t yet been felt in the economy, and stock markets have already reacted.
Meanwhile, the country’s real estate sector is undergoing a major correction after years of high growth.
A lot of people were expecting Xi to give a hint of an economic stimulus during his speech. That didn’t happen.
Xi didn’t announce any new policy initiatives, nor did he unveil any financial stimulus to boost the economy’s slowing growth.
As we’ve written previously, Beijing is determined to deflate the country’s overheated real estate market. It won’t do anything to derail its recent efforts to limit access to capital among real estate developers.
So it’s probably still too early to think about bargain hunting in China’s property sector.
Beijing also won’t rush into another multi-billion-dollar economic stimulus programme if it can manage to fend off new tariffs against its goods.
Take Xi’s cautious approach
We’ve been writing for months now about the negative impacts of the trade war, both on China and the global economy. And anyone expecting a swift resolution come March 1 (when the trade war truce ends) will be sorely disappointed.
We’ve also written about the high valuations across developed markets… and how that could be trouble for the longest bull run in U.S. stock market history.
So in this uncertain environment, it pays to be a little more cautious.
Watch your stop-loss levels. Occasional losses are a reality of investing, especially when markets are falling. But many investors suffer larger losses than necessary because they hold on to their losers. The key to not losing money is to sell before you feel the need to wait for a rebound. The best way to do this is to use a trailing stop (which we explain here).
Hold cash. Holding cash is one of the easiest ways to hedge your portfolio. It allows you to pick up “money lying in the corner” from opportunities that arise from market selloffs.
Look for value. When it comes to investing, buying the cheapest markets is almost always better than buying expensive ones. And it offers a good hedge to risk during times of volatility. Right now, the emerging markets are looking cheap.
Editor, Stansberry Pacific Research