RV Capital Gathering 2025: China Panel
I was honoured to speak at investor Rob Vinall’s annual gathering (link) on a panel about China.
I’m not a China specialist but my experience investing there shaped the framework I apply globally today - namely, to focus on supply (not demand) and good capital allocation. Living in Hong Kong also puts me astride competing narratives about China, allowing me to see more shades of grey than partisan observers elsewhere. This often leads to a different assessment of risks and opportunities.
Rob’s original question to the panel was, “Is China Investable?”. My answer is a resounding ‘yes!’ - but with a caveat: is China investable by you? Allocators have the privilege of working with specialists. Stockpickers, however, should be humble about the nuances of the Chinese economy, particularly the role of the state, brutal competition and imperfect capital allocation. Will the return on your time be sufficiently high to justify the work required? I have spent twenty years studying China and feel like the more I look, the less I know.
I hope my fellow panellists and I offered some helpful insights. You can watch the full discussion on YouTube (below) or listen on Spotify (link).
The Longriver Partners Fund currently has four investments in Greater China, including one in Taiwan. For your interest, below is a passage I wrote in January 2022 to explain why I invest in China. A lot of water has passed under the bridge since then, such as Russia’s invasion of Ukraine, the COVID lockdowns, America’s semiconductor bans and the collapse of the real estate market. Nonetheless, I believe my core arguments still hold true today. Time will tell!
Why Invest in China? (JANUARY 2022)
I write these letters – and my ad hoc blog posts – to allow you to make an informed assessment of my performance, my investment process and the prospective returns of our portfolio. What I’d like to emphasise in this letter is that we are substantially invested in China, with Tencent now one of our single largest investments. Why invest in China, I hear you ask, given the policy risk, slowing growth and the high degree of information asymmetry? Not to mention how business growth has not translated historically into share price performance for minority investors in public equities like us, at least as measured by the Chinese stock market indices.
Well, as my wife Lizzie likes to tell me: there is no such thing as a perfect relationship, you just choose your set of problems. And what’s true for marriage is true for investing!
For me personally, Hong Kong is home and our family has deep roots here. Sovereignty of Hong Kong was returned to China in 1997 and our future lies in an ever-closer union with the mainland. So, I have a natural interest in studying Chinese entrepreneurs and the world-class businesses they are building. But is this time well spent? Can I generate good investment results? Given the increased politicisation of the economy and how abruptly the playing field changed this year, I really had to ask myself this question.
So far, the answer is yes: our investments in Alibaba, Gree Electric Appliances, Tencent and Wuliangye have all contributed materially to our gains over the past six years. The thing to note is that these are all large companies with long histories as public companies. Competition in this space is less based on an information or analytical edge, and more based on a behavioural edge. That is, the ability to weather storms and look beyond near-term headwinds.
But that’s backwards looking. What about the future?
I think carefully about where we invest using two frameworks. The first is that the world is complex and uncertain. When I invest in a company, I am essentially outsourcing the responsibility to management to profitably navigate that complexity and uncertainty on my behalf using their ingenuity and the assets at their disposal. This is why I believe it’s so important to study a company and management’s history. It’s the opposite of the warning label put on investment products: past performance is a great guide to the future.
The second is that companies do not exist in a vacuum; they are part of a system. Like fish swimming in water, it’s easy for American investors to not realise how perfectly designed their system is for capitalism to flourish: there are clear property rights; the rule of law and independent courts; a large and unfettered domestic market; easy access to finance; abundant human capital; supportive government policy; and a Horatio Alger spirit of working hard to get ahead. On top of that, America Inc. enjoys a technological advantage, clusters of expertise and institutions which can leverage resources far more quickly and efficiently than elsewhere. So, when Buffett says he was lucky to be born American, I read that as meaning there’s simply no better place to be a capitalist – that is, to sustainably earn high returns on your capital.
Less perfect systems can still create opportunities for clever entrepreneurs too. Spotify’s CEO Daniel Ek has said, "The value of what you are building is the sum of all the problems that you solve". In some sense then, more problems can mean even more opportunity to create value. I had this epiphany when thinking about Tinkoff, the Russian bank, which would almost certainly trade at a higher multiple if it wasn’t Russian. But it’s precisely because it’s Russian and the frictions that exist in the Russian economy that Tinkoff has the opportunities it does. A system shapes a company’s opportunity set and even its competitive advantage.
The same is true for companies in China. Yes, the Party and State are central actors and the directors in all aspects of life, politics and the economy. Yet they preside over an incredibly vibrant economic machine with an unprecedented track record of wealth creation. And China is not short of problems to solve, from avoiding the middle-income trap as costs and wages rise; to technological self-sufficiency; to the urban/rural wealth gap; to its declining birth rate and ageing population; to its over-leveraged balance sheet etc. Not to mention the simple and universal desire of a sophisticated and affluent people to enjoy a better and more fulfilling life.
If an economy is the aggregate of its companies, and the companies the aggregate of their people – then Chinese entrepreneurs give me very good reason to be optimistic about the future. And I believe the system will continue to reward entrepreneurs for marshalling physical and human capital to make China better. I also believe that China will increase its economic productivity, allowing more and more to be had from those resources. As Himalaya Capital’s Li Lu would say, China is firmly on the path to Civilisation 3.0 and becoming a continuously compounding social and economic machine.
Last year, Beijing formalised something they’ve been saying for a while: the age of growing the economy at breakneck speeds is over. And under the mantle of Common Prosperity, the age of higher quality growth with more fair distribution is hopefully just beginning. Yes, they have resolved that government intervention is required to address urgent social, economic, environmental and technological imbalances. Housing, healthcare and education are priorities to relieve the burden on Chinese families. And the market needs more competition to foster innovation and productivity growth – not just in the Tech sector, but everywhere. To a large extent, I think future returns on capital for many businesses will be lower under this regime, warranting a de-rating of their equity – and in the case of the after-school tutoring industry, a de-rating to zero.
Beijing could certainly have used some help with its PR. The onslaught of announcements over the summer hit the market like a tonne of bricks. But from a long-term perspective, isn’t reform exactly what a responsible government should do? And isn’t it a good thing that the Chinese leadership feel a sense of crisis and take nothing for granted?
As I write this, entrepreneurial spirits and offshore Chinese stock markets certainly feel down in the dumps. But it pays to understand that there is a policy cycle in China which amplifies the economic cycle as lower-level officials try to interpret and please their higher-ups. Right now, Beijing has put the brakes on the economy to tackle festering problems, particularly over-leverage in the Real Estate sector. Sooner or later though, it’s a safe bet that its focus will return to growth. We should also see Common Prosperity in context: Xi Jinping himself wrote that it is not the end of the market system and nor does it mean egalitarianism. Finally, let’s remember that old Chinese saying that the government has its policies and the people have their way around them (上有政策，下有对策).
So that is the Chinese system as I see it: a vibrant and intensely competitive market economy guided by the state; with abundant human, physical and intangible capital; which rewards entrepreneurs for contributing to the development of the nation. The Superforecasters among you will immediately recognise that these are generalisations and assertions, not hypotheses which can be tested. Nonetheless, I still think it’s important to make my framework explicit so we can kick the tyres and monitor for change.