China's cunning plan to become integral to Western growth

'Chris Johnson is the best expert on China the CIA has ever had'. That's the view of former CIA Deputy Director Michael Morell.  And if Johnson's views on his country of expertise can be summed in a few words, it's don't bet against them.

Working as a senior analyst at the CIA, advisor to multiple US administrations and now President and CEO of China Strategies Group, Johnson has cemented himself as one of the Western World's foremost experts on China. His views carry weight, and for the public to gain access to them is a rare treat.

So it was great to listen to the latest episode of Magellan's podcast 'In The Know', in which co-founder and CIO Hamish Douglass spoke to Johnson in-depth on China's rise, the challenge it faces, with a special focus on:

• China's strategy for the next 10 years
• How the Biden administration will approach China
• Why Alibaba will survive but Jack Ma won't 
• What to consider when investing in China. 

In this wire, I lay out the detail on these 4 key takeaways from their discussion. For more information, the full interview is available here.  

China's strategy for the next 10 years

Asked for his outlook on China over the next five to ten years, Johnson said the Chinese Communist Party (CCP) is largely betting on two main avenues of growth:

1. A transition of the economy
2. The dual circulation strategy

Economy shift

First, the Chinese administration is betting big on a transition from their "old dirty economy" to the "knowledge-based economy" of the 21st century. 

They're not only keen to participate, they want to own it if they can.

The industries China is looking to shift into include integrated circuits, technology, and biotech/biopharma products. The leadership is convinced of the power offered by what Johnson refers to as 'platforms' that the US has dominated for so long. These areas are seen as bases upon which layers of value can be continually built over time.

Dual circulation strategy

Second, Johnson highlights that the dual circulation strategy is the nation's key to bend the Western world into relying on China. President Xi has been open about this strategy since May, revealing the plan in a speech last year as the key to the nation's five-year plan. The strategy is poised to cut China's dependence on overseas markets and instead turn its economy into the hub for the rest of the world.

The pair do not explain the strategy in-depth in this podcast but the growth strategy has been the subject of much expert analysis. The strategy for growth uses 'internal' and 'external circulation' and explained by research from Hong Kong-based South China Morning Post (SCMP).  

Internal circulation involves an increased emphasis on the domestic market and self-reliance across many sectors, seeking to fuel growth through 'home-grown' innovation. 

Beijing will also push for technological self-reliance, having already provided incentives to build up a domestic development and the production of semiconductors and other cutting-edge technologies, particularly in areas that have been and could be strangled by Washington - SCMP.

On an external front, the SCMP identifies that the plan involves lowering barriers for investors and a motivation to secure regional trade pacts according to economists and advisors. 

Johnson believes Xi's goal is to turn China into a champion of local innovation who's technologies will be integral to Western businesses, effectively tieing Western Capital into its economy. 

How the Biden administration will approach China

On how the new administration will handle US-China relations Johnson expects more continuity than change. While he expects Washington to be less erratic, the Biden administration will enjoy a few 'goodies' secured during Trump's time in office.

Biden has been left with leverage that he is unlikely to give away without return. Johnson fears that the relationship between the two nations may be strained in the short term, as both governments expect the other to make concessions based on mismatched expectations. However, he believes that these tensions can be solved in an early dialogue between the leaders. 

Johnson also stresses not to underestimate Biden's understanding of President Xi. He notes that for a long time, Biden had spent more time with Xi than any other foreign leader. 

Biden is definitely not unaware of what he's dealing with, in terms of Xi's goals, desires, political acumen and cunning.

US-China relations do not appear to be the first priority of the Biden administration, as Johnson identifies that handling Covid-19, tensions with Iran and action on the Solarwinds hack will likely take priority before a meaningful dialogue with Bejing begins. When they do meet, Johnson believes it is up to China to make the first move. China is much more powerful and influential than the last time the Democrats held office and the Chinese have much more leeway in their ability to get a relationship going.

Mixed approach to Chinese Tech

On Chinese tech, Johnson believes Biden will be hard on genuine national security threats but more relaxed on Chinese companies generally, drawing on the previous administration's stance against video-app TikTok. Threats to security like Huawei will likely be met with the same approach as Trump's team, foreseeing it unlikely that these regulations are wound back. Jonhson does, however, foresee certain licenses to be given to low-threat Chinese companies. 

Why Alibaba will survive but Jack Ma won't

Regarding whether the recent action against Alibaba, Ant Financial and Jack Ma's disappearance was genuine anti-trust regulation or a political power play, Johnson believes the motive is mixed.

The former analyst highlights the pair's complicated relationship over the years and makes a crucial point - most in China would be lucky to cross the leadership once without being sent away, no one does it twice.

The state banks had been feeling the pressure of the FinTechs for a long time. Ma publically breaking ranks with Xi gave the green light to regulators to take aim at both the Fintech and e-commerce industry before the year's end. 

I think we’re going to see an Alibaba that looks very different than it does today. I don’t think we’re going to see the company destroyed like others in the past, it's too central to the Chinese economy. However, I do think Ma is finished in any terms of practical relevance. 

Advice for investing in china

Asked for advice to listeners looking to invest in China, Johnson repeats his "bumper sticker" phrase, "don't bet against them."

To a company entering China, Johnson highlights that investors have to assume that the long game is to eventually push you out as the nation looks to expand indigenous growth. He notes that there is still money to be made in the interim so long as investors are aware of the long term view. 

To financial investors, Johnson's advice is "why not". Bejing is forecast outpace the US economy in next decade and Johnson sees no reason why the nation would not experience robust growth over the foreseeable future.

Ultimately, he concludes with his final sentiments on Chinese investing:

I'm shocked sometimes at the number of zeros that people might have invested in a place and know very little about it. The reality is it is an opaque system and due diligence needs to be focused on. It's inescapable that it will be a prime investment destination for at least the next 10 to 15 years, if not well beyond that. 

Summing it up

These highlights only comprise four of the many points of discussion from the discussions between Hamish Douglass and Chris Johnson. For more, the full interview is available here.