China: Danger and Opportunity

WHEN I last wrote about China— five years ago, in the midst of COVID—some readers were critical. Why encourage us to invest in an adversary? China has certainly been a bad actor, threatening Taiwan, supporting the Russian invasion of Ukraine, suppressing dissent, oppressing ethnic and religious groups. But the U.S. is not at war with China, we allow Chinese firms to list on our exchanges, and we encourage Chinese investors to buy U.S. Treasuries (current holdings: $757 billion).

- STREET SMART BY JAMES K. GLASSMAN

The Trump administration's official position on China, according to the State Department's website, seems reasonable: “The United States seeks a constructive, results-oriented relationship with China.... The United States uses a range of exchanges, dialogues, and people-to-people ties to pursue its goals.” I would argue that one of those exchanges involves stocks. But if you feel strongly about not investing in Chinese companies, then don't. As Warren Buffett says, you don't have to swing at every pitch.

Still, I find it hard to ignore China. It is the world's second-largest economy in nominal terms (gross domestic product not adjusted for inflation) and first in purchasing-power parity (that is, based on what people in different countries can actually buy)—$10 trillion ahead of the U.S., according to the International Monetary Fund. The Economist projects 4.4% GDP growth this year, compared with less than 1% each for the U.S., Europe and Japan. Also, China has become not just an imitator but an unquestionable innovator.

China now accounts for 29% of the world's manufacturing output, up from just 9% in 2004 and greater than the next four countries (U.S., Japan, Germany, and India) combined. According to the World Economic Forum, China's “culture of techno-optimism, coordinated institutions and economic readiness has allowed artificial intelligence to scale with unprecedented speed.” Cutting its coal dependency by one-fourth and boosting renewables, China increased its electricity-generating capacity—essential for AI and advanced manufacturing—two and a half times from 2010 to 2024, while the U.S. and the EU practically stood still.