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For Weijan Shan, chairman and CEO of Asia's largest private equity firm PAG, US president Donald Trump's trade tactics have been an "abject failure".
Pointing to China's booming economy and the 40% increase in America's trade deficit since Trump took office, Shan argues Trump's trade wars simply don't work.
"He [Trump] pulled TPP when he first became president, pulled out the Paris accord, the Iran nuclear deal, the WHO, he basically paralyzed the appellate court of the WTO, and has launched a trade war against not only China, Canada, Europe, Mexico, all outside of the WTO system," Weijan said. "Therefore, it has not really opened the door for American products. It has not really increased American production. I think that's just wrong policy".
Shan is chairman and CEO of PAG, a Hong Kong-based private equity firm with $40 billion in AUM. Born under Mao Zedung's China, Shan grew up a farm laborer in China's Gobi Desert. But after studying in Beijing, Shan was one of the first students from the People's Republic of China to attend university in the US, earning his MBA, masters and doctorate in business. Shan worked at the World Bank, before joining JP Morgan and then the American private equity firm TPG Asia as co-managing partner, prior to moving to PAG.
One of the biggest questions for investors once the outcome of the presidential election is confirmed is the future of trade relations between the US and China. Trump has imposed billions of dollars in tariffs on Chinese goods and services and targeted some of the country's biggest technology groups, on the grounds that they pose a threat to both security and competition.
Democratic opponent Joe Biden is seen as being more moderate. But fixing America's trade balance, and repairing some of the diplomatic relations that have been damaged by nearly three years of tariff wars with a number of counterparts, won't happen overnight.
So how do you fix a trade deficit, if not by protectionism?
"We have to realize that the trade deficit is a result of domestic consumption exceeding domestic production. It's very simple: if you don't produce as much as you consume, of course it will help exports and that is the fundamental cause of a trade deficit," says Shan, therefore economies must "increase production".
Since Trump launched his trade war on China in May 2018, US imports from China haven't really fallen, which means American consumers are picking up the cost of added tariffs, but exports have fallen with China's retaliation, hitting farmers and manufacturers hard and adding to the size of the deficit.
The total US trade deficit reached a 14-year high in August, in the face of struggling exports.
One of Trump's major complaints is China gets an unfair advantage thanks to its policy of allegedly controlling its exchange rate and keeping its currency weak. And it isn't just Republicans that hold this view.
"The reservation about China has bipartisan support. There's a weariness about China, and therefore I don't expect drastic changes when it comes to economic policies towards China," Shan said. "The fact of the matter is, that in the past few years, the American market for investments has become more and more closed… The United States has tightened its scrutiny of foreign investment in general, regardless of where the capital comes from."
China's answer has been the opposite.
"China has countered this move by opening its market to foreign investments, especially American investments… JP Morgan and Goldman [Sachs] have converted their joint ventures into wholly owned ventures in China. Vanguard and BlackRock have been allowed to operate mutual bonds in the country," he said.
"I think its leaders get that opening up the market is good for you, and closing the market is bad for you. I think I can predict what China will do and the rest of Asia will probably step up trade with China and they will remain rather open," he said.
Know your audience
Shan has seen his fair share of financial crises. His most famous PE-buyout,was the acquisition of the Korea First Bank following the Asian financial crisis in 1997-98, which is also the subject of his new book, "MONEY GAMES: The Inside Story of How American Dealmakers Saved Korea's Most Iconic Bank".
The deal took a winning of hearts and minds among government, regulators and the public. Therefore, trust is essential to investing in Asia and to do that foreigners must understand a country's culture, Shan said.
"Without understanding the culture, the history, and without making an effort to build trust, I think it makes getting a deal done very difficult. That's the lesson we learned in Korea, but I think that applies probably universally," he said.
But a "one-size-fits-all" approach won't work in Asia.
"In different countries, our strategies are different. In China, for example, we invest in businesses which cater to primary consumption because China is shifting... its growth model away from investment-led growth to consumption-driven growth," Shan said.
Chinese private consumption represents only about 39% of GDP, he explained, a steady increase from 35% five years ago, but not close to the world average of about 62%.
In 2009, China's retail goods market was worth $1.8 trillion, whereas the American retail goods market in the same year was about $4 trillion, he added.
Last year China's retail goods market exceeded $6 trillion. "From less than half of the United States 10 years ago, to more than the United States, shows how rapidly private consumption is growing in China. Therefore, we invest in businesses which cater to private consumption," Shan said.
"But in India we do the opposite," he said. With its higher inflation rate and the weaker rupee - which, unlike the yuan, trades freely - investing in businesses that cater to the domestic market can prove unprofitable if the currency falls and the cost of hedging that exposure is pricey too.
An investor in export-focussed, or outsourcing businesses will see their foreign-currency income rise if the rupee falls, while costs are in the domestic currency.
"You have to have a conversation on the macroeconomic conditions," he said.
One company's barrier is another company's moat
In light of the coronavirus crisis, some sectors are "probably permanently impaired" across the world, including brick-and-mortar retail, Shan said.
But where there are losers, there are always winners, which makes "all the surviving companies - almost by definition - pretty good targets," he said.
There's more to it; as the dust from the pandemic settles, one sector looks to be a clear winner.
"You have to invest in businesses which have identifiable, but also sustainable, entry barriers, or a moat as we call it. Whether it is technology, market share or intellectual property; there has to be something that protects you from the competition," he said.
"If you just look at the growth, that's a trap," he said adding that others will merely follow where money can be made. "You have to be able to identify companies which can sustain competitive advantage. I think that is critically important." he added
"Technology companies, if you pick the right targets, by definition, have sustainable competitive advantage - if the technology works," he said, adding that "the Warren Buffet style of investing - that is value investing - certainly has not paid... but technology and growth stocks have outperformed the index."
"I think the driving force going forward is really the technology, or technology-enabled business sectors," he said.
To be successful in private equity investment, just targeting a profitable business isn't the answer. It has to be scalable too, he said.
With its 800 million active monthly users, China's Tencent Music is a case study in scale that taps into a vast and growing consumer market, Shan said, noting that PAG are a major shareholder.
Tencent Music (NYSE: TME) is China's leading music streaming service, using four mobile apps: QQ Music, Kugou Music, Kuwo Music and WeSing. In 2017, the company did a share swap with Spotify.
"Where on earth do you find so many users in one single market?" he asks, "again like the United States, it [China] has the same language, same culture and the same market. That really gives you the scale that you can achieve by investing in a solid business model."
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