171: China: Friend or Foe?

Welcome to The Invested Dads Podcast. Simplifying financial topics so that you can take action and make your financial situation better. Helping you to understand the current world of financial planning and investments, here are your hosts, Josh Robb and Austin Wilson.

Austin Wilson:

All right. Hey, welcome back to The Invested Dads Podcast, the podcast where we take you on a journey to better your financial future. I am Austin Wilson, Research Analyst at Hixon Zuercher Capital Management.

Josh Robb:

And I’m Josh Robb, Director of Wealth Management at Hixon Zuercher Capital Management. Austin, how can people help us with our podcast?

Austin Wilson:

We would love it if you would subscribe. If you’re not subscribed, hit that plus, follow, whatever button that is on your podcast player. And also love it if you would visit our website to sign up for our weekly newsletter to get notified each and every Thursday when we drop a new episode. So go ahead and do that, and you’ll also get a nice little description of what we’re going to be talking about with some notes on each week. So today, Josh.

Josh Robb:

Yes.

Austin Wilson:

We’re going to talk about China.

Josh Robb:

China.

Austin Wilson:

It’s the elephant in the room. It’s been all over the news for a long time, it seems like. And it’s no surprise that tensions have been high for the last handful of years at least. So we’re going to talk about four different things. We’re going to talk about kind of how China got to be the China we know today, we’re going to talk about China’s economy, we’re going to talk about demographic issues, and we’re going to talk about our thoughts on the geopolitical tensions between the U.S. and China, and the rest of the world and China right now.

Josh Robb:

All right. Before you do, you mentioned the elephant in the room.

Austin Wilson:

Elephant.

Josh Robb:

There’s Asian elephants and there’s African elephants. Do you know the difference between those two?

Austin Wilson:

Little ears?

Josh Robb:

Yes, you are correct. It’s crazy. Asian elephants-

Austin Wilson:

Very much smaller.

Josh Robb:

… smaller ears.

Austin Wilson:

Were you the one that showed me that video a while back of the elephants that just took off through a town?

Josh Robb:

Yes.

Austin Wilson:

Wild.

Josh Robb:

Well, in China, there was that group that was just making this trip, doing their thing.

Austin Wilson:

It was like a pilgrimage.

Josh Robb:

And just destroying stuff along the way.

Austin Wilson:

Everything in their path.

Josh Robb:

I never knew what happened. I didn’t even follow that, what had happened to them.

Austin Wilson:

It was years ago.

Josh Robb:

Because the African elephants have larger ears and that helps them with cooling.

Austin Wilson:

Because they’re on the Sahara-

Josh Robb:

Yes, it’s warm.

Austin Wilson:

… in the desert where it’s very warm. So China.

Josh Robb:

Yes.

 

[1:59] – How Did China Become What It is Today?

Austin Wilson:

Let’s talk first about how it got to be the China we know today. So let’s go through a bit of a brief history, and I got this from a history documentary or whatever, where they had a great timeline. So we’ll link that in the show notes, but we’re going to go from all the way back from like 1600 BC all the way to where we are today, hitting some of the highlights. And there’s quite a few different things here, but they’re-

Josh Robb:

Year by year.

Austin Wilson:

Almost year by year, not quite. But there’s so much stuff that’s happened in China and a lot of the things that we know and use and have heard of today came from China, it’s pretty incredible. 1600 to 1050 BC, so we’re talking a long time ago. This was known as the Shang Dynasty in China. So this was the earliest ruling dynasty in China. The Shang was actually headed by a tribal chief named Tang, and they were marked by their intellectual advances in astronomy and math. And on testing scores around the world, Americans haven’t kept up with places like China in terms of math and in terms of things like that gone way back.

Josh Robb:

They were very advanced.

Austin Wilson:

Very advanced. So then step forward to a name that should sound familiar in 551 to 479 BC, Confucius.

Josh Robb:

I always mix him up.

Austin Wilson:

No, that’s what everyone says. Confucius say, the teacher, politician, philosopher, he was raised in poverty by his mother. In 501 BC, he actually got into politics as a governor and then got attention as a teacher. But in 498, he actually lived in exile because he had a lot of political enemies, and he came back to China in 483. So, Confucius was a real guy, but when you make all those Confucius say jokes, you should think Confucius was real.

221 to 206 BC was known as the Ch’in Dynasty, and that was where China really derives its name, was the first official empire in history. The ch’ins standardized regional written scripts into a single national one. So that was a big thing for China, because there were a lot of regional scripts, and they actually established an Imperial Academy to oversee all those translated texts. They also created the first Asian superhighway, which was a 500-mile straight road. Huge.

Josh Robb:

That’s a lot.

Austin Wilson:

And they started the Great Wall.

Josh Robb:

They started it.

Austin Wilson:

They started the Great Wall by expanding what was already kind of established, the Northern Border Wall.

Josh Robb:

So that was in the 200-ish BC?

Austin Wilson:

Yeah. Then in 125 BC, we start learning about the Silk Road. So following capture and escape during a mission for Emperor Wu Zang Chen, he returned after 13 years with a map of the ground he had covered. Now, that map reached all the way back to the Middle East, to Afghanistan, and his maps were very accurate. They used those maps to create the international trade route, the Silk Road, where China traded a lot of things they made like silk, for example, hence the name, for things from really the Middle East and Europe at that point, which was pretty cool. And we’ve all heard about the Silk Road, and we’re not talking about the illegal drugs.

Josh Robb:

No. Totally different.

Austin Wilson:

Not even Website, that’s illegal.

Josh Robb:

Nope.

Austin Wilson:

In 105 AD, so we’re flipping to the ADs.

Josh Robb:

Now we’re counting up.

Austin Wilson:

We’re counting up. So, a guy named Cai Lun developed paper by pounding together ingredients like bamboo, hemp, bark, and spreading the pulp flat. So then paper use spread quickly because it’s like, “Hey, this is a great way to write things down.”

Josh Robb:

I bet you in 106 AD, the first paper cut happened-

Austin Wilson:

It probably did.

Josh Robb:

… and everybody’s like, “This is the worst decision ever.”

Austin Wilson:

“This is a bad idea.” Then there was the first Chinese dictionary, and then the first book on Chinese history, and just to kind of spiraled out of control after that, in about 105 AD, paper and books.

850 AD, which was skipping about 700 years here, gunpowder was invented in China. So alchemists, they were working with saltpeter for medicinal purposes, and they mixed it with charcoal and sulfur, and it created explosive properties. Now, initially, these were used in warfare to propel arrows, which that’s wild, and fireworks.

Josh Robb:

Fireworks.

Austin Wilson:

We know fireworks.

Josh Robb:

What could we do for fun with this?

Austin Wilson:

We’ve heard of Chinese culture using fireworks early on. We’ve seen fireworks, right?

Josh Robb:

Yes.

Austin Wilson:

That was a long time ago. That was fireworks. Flip forwards a couple of years, the printing press was created in China first. 868 AD, earliest known printed book, the Diamond Sutra was created during the Tang Dynasty. It was soon followed by calendars and educational material, and it kind of spiraled off from there. So, it was 700 and some years earlier you created paper, but they were all writing things down on paper, which was a great step forward. But then in 868, printing press, mass production of things-

Josh Robb:

Yes.

Austin Wilson:

… standardization started happening. That’s still 1200 years ago.

All right. Flash forward to 1557, China’s been trading at that point. So, the Ming Dynasty expanded China’s maritime trade to export silk and porcelain. That was really their main two exports there. The European presence was allowed within the Empire in China, and Chinese merchants were emigrating to other locations outside the realm for the first time in 1500s. And then we start getting into some conflict.

Josh Robb:

Oh boy.

Austin Wilson:

Flash forwards a couple of hundred more years, 1840s, we have the first Opium War. Now, this is something that China was not happy about looking back on, but Great Britain took advantage of the Chinese. Great Britain flooded the country with opium, which really created an addiction crisis, much like we see in around the world with other drugs right now, the drug was banned. Military confrontation actually resulted, and British forces shut down Chinese ports in retaliation. Hong Kong was actually handed to the British because of all of this. That was the first Opium War, it’s caused by opium. Britain kind of started it because they wanted to get the Chinese people hooked and take advantage of them. And they did, and they got Hong Kong as a result, right?

So then flash forward another 10 years, the 1850s, the second Opium War happened. So this was Britain and France demanding that China legalize opium. Those two countries together invaded Guangzhou and advanced into Beijing, and China was desperate to end the conflict. So they signed a treaty, which gave the West even more power and more control of the ports. Once again, using their power of opium provision really to keep their people hooked, Britain and France at that time then got even more power. After they already got Hong Kong, they had even more power in the region in the 1860s. Interesting.

So then in the 1890s, we learn about the first Sino-Japanese War, and this was where the Qing Dynasty clash with Japan over really who controlled Korea. Now, China’s regional dominance really took a hit after that. They lost a lot of ground. There were a lot of issues on this, and Taiwan, which we’re going to talk about more, Taiwan was actually handed over to Japan at that point. And then something we’ve probably all heard of, Boxer Rebellion. And this was really a discussion where an underground society essentially called the Harmonious Fist. This sounds like something from a Marvel movie. They began slaughtering foreigners, and they actually-

Josh Robb:

Not very harmonious.

Austin Wilson:

Not very harmonious. They actually won support from the Empress, and after eight European countries sent troops in retaliation for this, China lost the conflict, and the West put even more sanctions on that permanently weakened Ch’in rule at that point. So that was the Boxer Rebellion.

In 1912, the Republic of China was created, and that’s something that we’ve heard of because it’s kind of what they’re known as in a lot of ways right now. And that was different from the Ch’in Dynasty. And this was in about 1912. In 1921, the Communist Party of China, which is what is currently ruling right now, was created. This really was in retaliation to the Treaty of Versailles. The Communist Party of China was created in 1921. 1927, the Shanghai Massacre occurred. So this was millions of executions where Nationalist Party leader, Chiang Kai-shek, ordered massacre of communists, which is interesting. So the communist Party was there. They were trying to kill communists at this point, but actually caused a different communist party to be created at the same time. It was a whole big thing. In 1928, China was reunified. In 1931, they had their own civil war, which was 18 year conflict. Not good.

1937-1945, so leading into what we think of as World War II, there was the second war with Japan. And if you think about the history of China and Japan, it’s been really bloody, and a lot of people in the West don’t really understand that. But it was horrific things happened. And actually there was a lot of internment camps. Some of the things that happened in Europe with the Jews, some of those similar things were happening when China was being controlled by Japan, and it was just very ugly. So that was going on-

Josh Robb:

That was going on during the Civil War.

Austin Wilson:

No, that was going on during World War II.

Josh Robb:

If you look at the timeframe, the Civil War started in 1931 for 18 years.

Austin Wilson:

Yeah.

Josh Robb:

So the second Japanese war-

Austin Wilson:

I thought you were talking about our Civil War.

Josh Robb:

No. They’re fighting an internal civil war between these two parties, the Nationalist Party and the Red Army. And they’re in a conflict with Japan. That’s crazy.

Austin Wilson:

Which means they were already divided.

Josh Robb:

Right.

Austin Wilson:

So Japan took an opportunity as a divided country to do that. And they just did some terrible things, which even today, China and Japan are not friends.

Josh Robb:

They don’t like each other.

Austin Wilson:

There’s a lot of disputed area between the two countries that are still hotly disputed to this day. Then in 1949, the Communist Party officially redeclared the People’s Republic of China.

1958 to 1962, this is an interesting thing, it was really a failed attempt at communism. So what happened was the government tried to communize agriculture, and essentially no one could be private farmers. They all had to put essentially their crops in a pool, and everyone would get it. It’s divided out equally, and guess what happened?

Josh Robb:

It didn’t work.

Austin Wilson:

It didn’t work because communism doesn’t work. And we’ll talk about that more later. Communism doesn’t work, never has worked and never will work. But what happened was because the government decided to stick their hands in this and try and control and mess with supply and demand, mess with prices, mess with who gets what, and all of this stuff, and make it all “fair,” a famine followed, which led to 56 million deaths, including 3 million suicides.

Josh Robb:

That’s crazy.

Austin Wilson:

So communism does not work as made evident by the “Great Leap Forward” in 1958 to 1962.

In 1972, president Nixon was the first American president to visit China while serving an office. And that was the first diplomatic meeting between the U.S. and China since 1949.

Josh Robb:

That’s when the People’s Republic of China started. Since then, they’ve been kind of like, “Yep, we’re talking to you.”

Austin Wilson:

Yep, exactly. And then in 1997, on July 1st, Hong Kong was returned to China from the British.

Josh Robb:

They were controlling that place-

Austin Wilson:

Yep.

Josh Robb:

… that city, while in China, that was under British rule.

Austin Wilson:

Absolutely. And then in 2010, there was a lot of economic cooperation framework, especially between Taiwan and China that was created. Although since then, those things have certainly gotten heated again. And there’s a lot of debate between who really controls what between Taiwan and China. China thinks that Taiwan is under their rule, dominion and authority. Taiwan says they’re not. The U.S. backs Taiwan. If China goes and invades Taiwan or does anything too bad for Taiwan, the U.S is really going to get mad as will the rest of the world. And there’s just a lot of hot buttons to push there.

So that kind of brings us to where we are today. I guess you could flash forward to 2019 when COVID-19 started in Wuhan.

 

[13:24] – Dad Joke of the Week

 Josh Robb:

It sounds good. All right. Let’s do a dad joke.

Austin Wilson:

Dad joke of the week.

Josh Robb:

What did the horse say when it tripped?

Austin Wilson:

Giddy up?

Josh Robb:

I’ve fallen and I can’t giddy up.

Austin Wilson:

That’s funny. So Josh, on that note-

Josh Robb:

Yes.

Austin Wilson:

… things are falling.

Josh Robb:

Yes.

 

[13:41] – The Economy of China

 Austin Wilson:

Well, not yet really, but my point is going to be made in a little bit. Let’s talk about China’s economy.

Josh Robb:

Yes.

Austin Wilson:

Because this is a finance podcast.

Josh Robb:

Let’s talk about it.

Austin Wilson:

So, let’s talk about some stats. So, the People’s Republic of China, they have an upper middle income developing mixed socialist market economy, they call it, that incorporates economic planning through industrial policies and strategic five-year plans. It is the world’s second-largest economy by GDP, totaling around $18 trillion as of 2022. So, the economy consists of a public sector enterprise, state owned enterprises, more on that later, and mixed ownership enterprises, as well as a large domestic private sector, and a lot of openness really to foreign businesses in the system. In 2021, it actually took over from the EU, the European Union, in size of the economy.

China is the world’s largest manufacturing economy and exporter of goods. It is also the world’s fastest growing consumer market and second-largest importer of goods. It’s also the largest consumer of numerous commodities and accounts for about half of global consumption of metals. It’s a net importer of services products. It’s the largest trading nation in the world and plays a prominent role in international trade. And it’s the largest recipient of foreign direct investment as of 2020, receiving $163 billion of inflows from foreign investment into the country. They have 778 million workers, and that was the largest global workforce as of 2020. And they have the largest middle-class population since 2015. And the middle class grew to a size of 400 million in 2018, and is projected to reach 1.2 billion by 2027, which is about a quarter of the world total. As of 2018, China was first in the world in total number of billionaires and second in millionaires, and there were 658 Chinese billionaires and 3.5 million millionaires. In 2019, China overtook the U.S. as home to the highest number of rich people in the world. Crazy.

Josh Robb:

Interesting.

Austin Wilson:

So, lots of news there, but I mentioned it and we’re going to dig into it a little bit more. State owned enterprises.

Josh Robb:

Yes.

Austin Wilson:

What is a state-owned enterprise? Well, also known as SOEs, they perform important functions that benefit the state, as in the state of China, the government, the country of China. So an academic named Wendy Luter wrote, and this is her quote, it was really good, “They contribute to central and local government revenues through dividends and taxes, support urban employment, keep key input prices low, channel capital towards targeted industries and technologies, support subnational, redistribution to poorer interior and aid the state’s response to national disasters, financial crises, and social instability.

As of 2017, China had more state-owned enterprises than any other country, and the most state-owned enterprises among large national companies. State-owned enterprises actually accounted for over 60% of China’s market cap in 2019 and generated 40% of China’s GDP, which was about $16 trillion in 2020. That’s a lot.

Josh Robb:

Do you have an example of one of those?

Austin Wilson:

So that would be like, there’s oil companies that are majority owned by, I forget the name of it. There’s a large oil company that is majority owned by the Chinese government. So they can essentially control the price of oil, which means all of the people that buy oil from them, they can control the prices for that and keep costs slow, which makes them very competitive on a global scale.

Josh Robb:

Because that’s where my brain was going. I assumed it had a lot to do with commodities, utilities, those type of things that they can then regulate prices in other areas by controlling the input.

Austin Wilson:

There’s also a lot of state-owned real estate companies. So, China grew a little too fast in a lot of ways. There’s actually discussions of full cities being built, but they have never been inhabited and are being torn down again. But a lot of real estate and development companies are state owned as well, because they get a lot of favorable debt offerings and things like that to really be able to expand and grow. So, exactly. It’s really huge. It’s a big thing that we don’t really understand here because we don’t have state owned enterprises here in the United States, but it is certainly a piece and a large piece of the economy in China.

So let’s kind of take a step back and look at the economic history of how we got to be China as we know it now. So historically, China, well, again, has been one of the biggest economic powers for 2000 years. It had actually accounted for around one quarter of global GDP until the late 1700s, and then approximately one third of global GDP in 1820, which is when the Industrial Revolution was beginning in Great Britain. In 1820, at that same point when the Industrial Revolution was beginning in Great Britain, China’s GDP was six times as large as Britain’s, which was the largest economy in Europe, and almost 20 times in 1820, the size of the U.S. That’s crazy.

Josh Robb:

That is crazy.

Austin Wilson:

And you didn’t even think about it.

Josh Robb:

No.

Austin Wilson:

Which is wild. The government began its economic reforms in 1978. As a result, they’ve had a really fast-growing economy. Growth rates have averaged 10% over 30 years, which is obviously-

Josh Robb:

That’s crazy.

Austin Wilson:

… really fast if you think the U.S. is like two, three, somewhere in there. And since the 12th National Congress of the Chinese Communist Party in 1982, the economy has been described as a “socialist market economy with Chinese characteristics.” It’s what they’ve described themselves.

Josh Robb:

That’s what they call themselves?

Austin Wilson:

Yep. There exist disputes over reliability of official economic data, however. Foreign and some Chinese sources have claimed that the official Chinese government statistics overstate China’s economic growth. TBD, hard to prove it.

Their currency is known as the Renminbi, the RMB, the Yuan, there’s a couple different things you can call it. It’s really known as the people’s currency is what it means. And that’s the currency in China. It’s issued by the People’s Bank of China, which is the monetary authority in China. The Yuan or the RMB, or whatever you want to call it, is generally considered by outside observers to be undervalued by about 30 to 40% because it’s been manipulated by the central bank to make it weaker so that Chinese exports are more attractive. So really they’re kind of pulling levers on supply and demand and interest rates and stuff like that to keep the value of the currency low relative to other ones-

Josh Robb:

The imports.

 

[20:00] – Demographic & Geopolitical Issues in China

 Austin Wilson:

… so that exports of China, people are going to China for their goods and it’s very attractive.

All right. Demographic issues. We got to talk about it. During 1960 to 2015, the population grew. It did. It grew a lot to nearly 1.4 billion people. In 1949, population was around 540 million. In 1979, it was 960 million. That’s a lot of growth, but it’s not as much growth that this could’ve been because during that time there was a slowing of it because they had a one child policy starting. And that one child policy started in 1979. 2022 data actually just got released and it shows a declining population for the first time since 1961. China actually reversed their one child policy, but many economists actually believe it was too late in that aging demographics because they were not making enough people as people were dying, essentially. It was going to be a drag on their growth and their population going forward. So, we’re just sort of starting to see that now.

So that leads us to geopolitical issues. Obviously, China’s been all over the news. We’ve talked about it, but we’re going to talk about it some more. So, starting at around 2016, speaking of U.S. relations with China, those started to get strained a bit as the Trump administration began taking a serious look at the anticompetitive nature of China’s trade tactics, essentially. So, China’s economy utilized extremely cheap labor and a manipulated currency together making for a very low cost of goods, which made it very attractive to buy, import them here to U.S.

But there was quite a bit of drama, a couple trade deals happened that were supposed to close the gap. However, the U.S. still imports the majority of our goods from China at this point. And I will note though that right now, we’re kind of in an ongoing effort to re-shore some of our production here in the U.S. and out of China, because we saw some huge disruptions during Covid because China really hung onto having zero covid policy for a long time. It disrupted supply chains and made it really hard and caused issues. And some of the inflation we saw here actually it can be certainly attributed to that as well. So that’s number one is trade.

Josh Robb:

And also, within the business sector, there have been concerns of data, right? So Chinese companies getting data, and like you said, there’s a lot of state-owned enterprises. And so, then the government has data. And so, I know that’s been in the news quite a bit, especially when it comes to the technology side of things, chips, those type of things. So that’s been a concern going as well because it was one thing if a business gets your data and uses it, but if a communist government gets your data, it could be a little more concerning.

Austin Wilson:

Well, and that leads right into the next point I was going to make is spying and intellectual property theft and all of these things. It’s really come into the forefront of people’s minds as we had the “Chinese weather balloon,” because who knows what that was?

Josh Robb:

We know it was a balloon.

Austin Wilson:

It was some balloon and we shot it down and-

Josh Robb:

Who knows?

Austin Wilson:

We don’t know what was on it. There’s no way it was just rogue.

Josh Robb:

It was flowing.

Austin Wilson:

But I also think-

Josh Robb:

Yep.

Austin Wilson:

… that the U.S. knew about this the second it took off or whatever.

Josh Robb:

Or at least across the ocean. It takes a while to get over here.

Austin Wilson:

We know. So we just didn’t know about it as a public for a while. But anyway, this is just an effort in most people’s opinions of some sort of spying. Who knows what they were looking for or whatever. But there’s a lot of spying going on, and there’s been internal spying, even within American technology companies where they’re trying to steal intellectual properties, steal technology, steal ideas, send them back to China. There’s a huge market of knockoff, Chinese tech-

Josh Robb:

Everything,

Austin Wilson:

… stuff, everything and over there. And I think that that’s definitely something that is another reason we want to keep as much here as we can going forward. But the spying isn’t new.

Josh Robb:

Right.

Austin Wilson:

It’s been going on for years. It’s just becoming more to light.

Couple concerns geopolitically I think is China even right now is not backing away from alignment with Russia. China’s buying a lot of Russian oil and they stand to benefit from the rest of the world now buying Russian oil because they can get it at a really good price.

Josh Robb:

Yep.

Austin Wilson:

But they’re also seemingly willing to supply Russia with things like weapons and all kinds of bad things. They probably shouldn’t because Russia invaded Ukraine and that was wrong. Most of the rest of the world is behind Ukraine on this. China, not so much. So they’re aligned with Russia in a lot of ways. They’re also aligned with Iran in a number of ways. Some of their precious metals, alignment and nuclear weapons technology as well as oil and things like that. They’re working together. They’re in cahoots and they’re aligned with North Korea. And North Korea as we know, obviously, as small as they are a threat nuclear wise and not something that you’d want to be known as being friends with. So those three countries, I think just themselves is enough to say that China’s leadership is sketchy.

Josh Robb:

Yes.

Austin Wilson:

Let’s say sketchy. And I’m sure this podcast is being censored over there. So it’s probably not even being played.

And then my last point is just communism in general. We just talked about one example a while back. It doesn’t work. It is not how economies work well. It’s really wealth redistribution and it’s never worked out.

Josh Robb:

Yep.

Austin Wilson:

A free market has historically always worked out better for more people and the Chinese Communist Party continues to not do that. Well, they’re the Chinese Communist Party. And you know who stands to gain, is themselves, the Chinese Communist Party, not the people of China. And all their policies for 50 years now have been really a drag instead of a boom. So that’s something that I think is certainly something hopefully the rest of the world is watching and learning that as we’re seeing things like their population decline and their growth slow and all the issues that we’re having over there, communism is not the answer. It’s not the answer. So communism sucks.

Josh Robb:

That’s the end.

Austin Wilson:

That’s the end.

 

[26:03] – Should You Have Chinese Investment Exposure?

 Josh Robb:

All right. Good. In general, and you, we’ve talked about this, the China economy is the second-largest economy in the world. Do you invest in it? I know we’ve talked about emerging markets and they fit in there, but in general, what do you think?

Austin Wilson:

I mean, I would say-

Josh Robb:

Go ahead. Say it.

Austin Wilson:

Say it. It depends.

Josh Robb:

Good job.

Austin Wilson:

It’s coming. I would say if you have a well-diversified portfolio, specifically, I would avoid things like Chinese fixed income like a plague. That’s a whole different story. But if you are holding a well-diversified portfolio of stocks, specifically, you’re going to hold probably some Chinese stocks because of how big they are compared to the rest of the world. And you probably should if it fits your financial situation because that’s the fastest growing middle class with the most consumable income in the world.

Josh Robb:

Yep.

Austin Wilson:

So, if that is how your risk profile works, I think that that’s okay. I think that the best opportunities are ones with limited government control. So, some of those state-owned enterprises, you can actually do certain investments that filter out a state-owned enterprise positions. And I think that’s probably the best way to do that. But generally speaking, if you’re looking at your 401k and you’re involved in some emerging market investment that’s market cap weighted or whatever-

Josh Robb:

Broad international.

Austin Wilson:

… broad international, you’re going to have quite a bit relatively speaking of China, not as much as the U.S., but quite a bit of Chinese exposure there. What are your thoughts on that?

Josh Robb:

I would agree. I mean, again, none of this is recommendations-

Austin Wilson:

Yep.

Josh Robb:

… but in general, a globally diversified portfolio, that being the second-largest economy, you would expect to see some exposure there. So like you said, probably, I would be shocked for somebody who says, “I’m diversified to not find some allocation or impact through that.” So you probably have some exposure already. It comes down to investing in your beliefs on whether how they control their country and what they do internally matches up with how you feel. Some people like to make those decisions, but in general, most people who are broadly diversified will have some exposure there.

Austin Wilson:

And I would just say that it’s good to look at a lot of your U.S. company holdings as having a bit of indirect Chinese exposure as well because of how-

Josh Robb:

There’s a McDonald’s over there.

Austin Wilson:

McDonald’s and Starbucks and Nike and Apple and all these companies sell billions of dollars of products in China. That’s usually their second-largest market.

Josh Robb:

Yep.

Austin Wilson:

And therefore, you are getting exposure to China’s economy through an American company, which is regulated, stable, legal, understood, and not owned by China’s government.

Josh Robb:

Those are some, yep.

Austin Wilson:

So that’s something that I would say that even if you’re just holding American stocks, you’re getting exposure to Chinese economy.

Josh Robb:

To the purchasers there, yep.

Austin Wilson:

So thank you for listening to this long-winded explanation of what’s going on in China, how it got to be where it is today. This is always a reminder that if you would like someone to look at and talk about your financial situation, feel free to go to our website, click on the Invest with Us tab. We’d love to talk to you and see if we can help you out in any way that we can. And please share this episode. Maybe you had someone asking, Hey, what’s going on with China? Share this episode with them, and don’t forget to subscribe and leave us review on Apple Podcasts. Well, until next Thursday, have a great week.

Josh Robb:

Talk to you later.

Austin Wilson:

Bye.

Thank you for listening to The Invested Dads Podcast. This episode has ended, but your journey towards a better financial future doesn’t have to. Head over to theinvesteddads.com to access all the links and resources mentioned in today’s show. If you enjoyed this episode and we had a positive impact on your life, leave us a review. Click subscribe and don’t miss the next episode.

Josh Robb and Austin Wilson Work for Hixon Zuercher Capital Management. All opinions expressed by Josh, Austin or any podcast guest are solely their own opinions and do not reflect the opinions of Hixon Zuercher Capital Management. This podcast is for informational purposes only and should not be relied upon for investment decisions. Clients of Hixon Zuercher Capital Management may maintain positions in the securities discussed in this podcast. There is no guarantee that the statements, opinions or forecasts provided herein will prove to be correct. Past performance may not be indicative of future results. Indices are not available for direct investment. Any investor who attempts to mimic the performance of an index would incur fees and expenses which would reduce returns. Securities investing involves risk, including the potential for loss of principle. There is no assurance that any investment plan or strategy will be successful.