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Why Warren Buffett Is Right About China

Why Warren Buffett Is Right About China


Warren Buffett. (Photo by Daniel Zuchnik/WireImage)

At the recent U.S.-China Investor Forum, Warren Buffett discussed how China has “unleashed the potential of their citizenry.” In 2017, China accounted for more than 18% of global GDP, adjusted for purchasing power parity, according to Statista.

“What they’ve done in the last 50 – 60 years is a total economic miracle,” added Buffett. “I never would’ve thought it could have happened. But the truth is they’re as smart as we are, they work as hard as we are, and they can have growth in the economy from a lower base that will exceed ours percentage-wise for a long time. They’re destined for a fine economic future, just like we are.”

One of China’s key initiatives is investment in clean tech and renewable energy. According to the IEA, China accounted for 40% of global renewable capacity growth in 2017 – the same year that China’s National Energy Administration announced a plan to spend more than $360 billion on renewable energy through 2020, including wind and solar power. This will create upwards of 13 million jobs in the sector, according to Reuters.

China isn’t just looking to dominate in its domestic market – the country is implementing a strategy to gain a foothold in renewable energy across the globe.

Pioneers in clean technology

The Sage of Omaha has made only one bet on China. In 2008,

Berkshire Hathaway
invested $232 million in

BYD
, a Chinese automotive and energy technology company that looks remarkably like

Tesla
.  Both Tesla and BYD are electric vehicle manufacturers, although the latter does also produce fuel-based vehicles. If BYD sold 108,000 electric vehicles in the Chinese market, and under “Made in China 2025,” by 2025, 70% of vehicles produced in China will be hybrid or electric.

But, BYD is even more interesting as a clean energy investment play.

BYD sees its solar energy generation and energy storage business as a strategic area of growth and investment. Having weathered a ferociously competitive solar industry – with many soldiers no longer standing — today it is focused on its combined solar energy and storage solutions. Solar alone is just a source; solar and energy storage together make independent energy grids. This is a powerful transformation in how people will power their homes in future.

BYD’s Gigafactory came to market three years before Tesla’s, and is 8 times larger. For instance, BYD now has an 8-10 percent share of Australia’s battery storage market, targeting homeowners with smaller, more affordable batteries than Tesla. And in July, the company formed a joint venture with Generate Capital to establish a leasing program for electric buses in the U.S. that will be available to cities, schools and corporations.

Since Buffett bought BYD stock in 2008 for HK$8 per share, its value has rocketed, soaring to HK$80.45 in October 2017, according to CNN.

Global trade dominance

We have to put stories like BYD in the context of the dominant role China is carving out for itself by aggressively stepping up its investment in infrastructure the world over.

China’s “One Belt One Road” initiative will be the world’s largest networked infrastructure to connect 68 countries that make up 65% of the world’s population and 40% of the world’s GDP (as of 2017). The initial phase consisted of investment in infrastructure, construction materials, railways, highways and the power grid. By some estimates, the Belt and Road Initiative is already one of the largest infrastructure and investment projects in history.

These trade routes will create significant linkages from east to west, which could create a prosperous and dominant position for China for decades, if not centuries, to come.

Belt and Road Initiative Map, 14 May 2017.Lommes/Wikimedia Commons

A focus on Africa

China has also set its sights on rapidly developing markets, such as Africa, where it is overtaking the U.S. in terms of investment. Africa’s population of 1.2 billion people is one of the largest sources of future wealth growth in the world. It will account for 25% of the world’s population by 2025, and the majority of them will be under the age of 30.

President Xi Jinping announced in December 2015 that China would be investing $60 billion in capital projects aimed at local economic growth. But China’s approach is not just one of big investment dollars — its success also depends on the focus they have taken on specific types of investment and growth.

Look at the trade statistics. In 2009, China and the U.S.’s trade with Africa was equal in size. Fast forward nine years, and China’s trade with Africa is now three times that of the U.S. And when broken down into segments, U.S.-Africa trade is still predominantly mining (68%), whereas China’s trade with Africa has evolved to the point where only 28% is in base metals and mining, while the remaining 72% is in infrastructure, construction and finished goods, according to the Financial Times.

This bodes well for China to reap the benefit of wonderful annuity streams both directly, as returns on investments, as well as indirectly through value-added trade.

Future potential

China has a long-term investment horizon. As a country, it has seen the GDP growth that can be achieved when millions of people move into the middle class and become consumers of a wider range of products and services.

Now, China is seeking to gain a foothold in renewable energy, which promises to be a sustainable industry for future economic growth. It is achieving this by tapping into that pattern of growth beyond its own borders, through investment in infrastructure in emerging and frontier markets, namely Africa.

The U.S., currently engaged in tit-for-tat trade wars with its global allies and adversaries, should instead be focused on the same strategy of investing in the industries and regions that will see substantial growth in the next few decades.



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