To understand China it’s important to understand their 5 year plan. In China the major players do the work of the government due to what is incentivised. Local officials, banks and big companies, both state-owned and private—change their strategies to be in line with the 5 year plans. It’s an outcome of Chinas “Pluralistic Society”.
In the 13th 5 year plan there is an emphasis on innovation, so that Chinese jobs move up the value chain. Sectors including science, technology and culture are a focus for innovation. There is a strong emphasis on reform and rebalancing of the economy.
Our belief is that China is staging a deliberate slowdown to maintain the longevity of its growth. There are many benefits to taking the heat out of the economy whilst still maintaining significant growth.
Wealth Creation of the Past
In the highly expansionary years, a great deal of individual wealth has been made in China through fairly mundane, simple but effective ways – particularly in heavy industry. This is not what China wants to be known for. The design of the slowdown means the simple and mundane ways of the past won’t create the wealth it once did – this is clear and purposeful.
Innovation is now central to China’s development in the following 5 year Plan. China is shifting the economic structure into a higher-quality growth pattern through Innovation. They have seen what occurred in other countries where wealth is made in basic ways. The Chinese believe they are great innovators – this is supported by a lot of history. China is re balancing and re orientating itself and wants to be known for its intellectual excellence – hence Mr Trumps Trade War was prompted.
New Captains of Industry to Emerge
Fostering innovation is the broader reason to slow the economy. Necessity is the mother of invention and a slowing will draw the innovative and clever people to the fore. The Government are encouraging a change to a smart society and they are incentivising smart people to drive it – new leadership needs to emerge. In this way there is pressure to work smarter for their wealth, therefore achieving the goals of the government .
Building a Nation
Western analysts find China troublesome to fathom. This is due to the ‘free market’ prism through which they look at the share market. It is a fundamentally flawed starting position if you want to understand China!
Any company which competes with China or any analyst who commentates on China, must understand that in a Pluralistic society economic rationality is NOT an imperative – Western business logic is irrelevant when the players operate at the behest of the government. China’s motivation is unlike any Western logic – simply because they are building a nation – for the people.
Where economic rationality is expected and not delivered due to reasons such as these it leads to investment mistakes. This is a key area maths has a role to play – seeing through the noise and getting to the heart of the share price behaviour. This means we are able to buy when people are most fearful – mathematically taking advantage of the opportunity created through panic. Pythagoras is based on our Volatility Index which changes ahead of share price changes. This allows Pythagoras to recommend buying and selling accordingly – in advance of the share price behaviour. The returns are remarkable.
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