Studies of China’s GBA: U.S. – Chinese Interdependence after the Pandemic

Note from Dr. R.E. Xavier: This is a draft of an essay on recent changes to the long relationship between the United States and China, and a look at future relations. It was written as a “thought” piece rather than a detailed study of the topic, although there will be historical references and links to recent news reports added to the final version. The article is a following up to research that began with the origins of 19th century printing in Macau under a grant from the U.S. Consulate General of Hong Kong and Macau, which led to these observations on the adoption of modern forms of information technology throughout China. Any relevant comments from readers will be considered for inclusion in the final draft.

Introduction

During my first research trip to China as a U.S. citizen almost a decade ago, I remember being surprised by the many things our two countries seem to have in common. Although I was born in Hong Kong, I had not realized how much cultural crossover had occurred in fashion, commerce, recreation, and even types of foods. Had I discovered the research published in 2019 by Paul Van Dyke and others, I would have realized how close U.S. relations with China have been since the 18^th century, and have continued over the last few decades, despite intermittent political and global turmoil.[i] In fact, within the last year both President Biden and President Xi Jinping have indicated that their countries’ future now have a similar goal: to increase the adoption of technology and digital innovation into their respective economies.* The difficulty in analyzing this new relationship, however strained, led me to search for a common benchmark to understand their efforts in historical context.

In this article, I propose that one of China’s most significant steps was the introduction of the ”Greater Bay Area” surrounding Macau and Hong Kong in 2017, and our similar encounters with the Covid-19 pandemic and recession of 2020-2023.* Each of these events were incentives and signals that confirmed a transition toward technology was in play. As a result, I decided to compare the major stock indexes in the United States and China with a group of fast growing technology companies, which operate internationally. Comparisons with this “Growth Index” can show how much each country will need to change their economies to adjust to a digital world. The recent history of their transitions, and the progress of the companies in the index, may also provide a real-time illustration of technology’s role in the next economic recovery for both countries. This may be particularly true of China, which is slowing moving away from a reliance on heavy industry, fossil fuels, and unregulated real estate development.

Here’s how we will proceed.

A New Approach

At the end of each year, I assess my stock portfolio to measure any progress and to plan for the future. Like some, I prefer to keep track of my own investments, but I am always intrigued by how equity markets and the global economy often work together.

Over the last few years, I’ve concentrated on “growth”, or technology-based industries, while avoiding other sectors, like industrials, petroleum, and banking, which have declined since the 2008-10 global recession. This focus was intended. Since that time, there has been more synchronicity between East and West following China’s first “modernizations” began in 1979 under Deng Xiaoping, and the later projection of Chinese industry, science, and technology outside its borders under new leadership.*

Since 2013 capital spending in the U.S. and Chinese economies has been moving away, albeit at different speeds, from traditional “value” investments, such as bonds, real estate, heavy industry, and agricultural exports, while moving toward “growth”, including technology and digital innovations in several industries. The creation in 2017 of a technology “hub” in southeast China, its most prosperous and densely populated region, was a major step.* Similar efforts in the United States, as we shall see, were also important to this transition.

By the 2019 pandemic and the 2020-23 recession, the connections have been more evident. Chinese export manufacturing has declined almost in lockstep as American and European consumer markets shrank. Several increases to the bank loan rate by the U.S. Federal Reserve during the same years also led to similar moves by European and Chinese counterparts. In both cases, declining commercial activity and tightening business loans were largely the result of Covid lockdowns, and reductions in energy production and container ship traffic.* While there remain ties to older industries, the transition in the U.S. and China toward technology adoption now seems inevitable.*

So, I began to wonder whether an investment portfolio focusing on technology companies could represent an “index” of rapidly developing sectors in both the United States and China. These new market sectors might even allow us to visualize what technology “growth” looks like in the two countries that now dominate the global economy.  

To test these ideas, I will present a list of ten sectors in which I currently own shares, and my reasons for selecting them based on recent developments.[i] Then I’ll compare these investments against the major U.S. indexes (the Dow Industrials, Nasdaq Technology, and the S&P Mixed) from 2019 through 2023. Next, I will conduct a similar comparison with China’s Heng Seng and Shanghai stock indexes during the same time period. Finally, I’ll offer some observations about United States and Chinese relations as each economy begins to move closer and more interdependent in the coming years.  

Analyzing Technology Markets – 10 Growth sectors in a Representative Index

I admit to being attracted to technology from a young age. After completing graduate studies, I began working in cable television and satellite technology.* This included earlier employment as a technician, and later as a manager with budget responsibilities. My work provided direct knowledge of wired and wireless communications, hardware, digital networks, programming, and software.

Not surprisingly, some of my earliest investments were in those sectors, and later included the internet and social media. As the United States economy began incorporating the internet into business operations in the 2000’s, I concentrated almost exclusively on companies that make up the digital infrastructure of many American and European industries.

Based on this knowledge, I selected ten industrial sectors that became the foundation of my “index” of growth companies: Semiconductor chips, Hardware, A.I. Software, Cloud Services, Search Engines, Digital Advertising, Cybersecurity, On-line Shopping, Social Media, and App-based Fin-Tech involving Banking – Credit – Loans.*  

Why choose these particular sectors of the global economy ?

My work and research suggested that technology companies have been advancing steadily well before the turn of the 21^st century. The introduction of the public internet in the early 1990’s, the rise and fall of many tech start-ups during the “Dot.com bubble” of 2003-5, and wider use of personal computers and smartphones, were some of the world’s first experiences with new technology.* While there have been setbacks, the following milestones suggested that technology soon would be a major economic focus.

• The growth of search engines and on-line shopping since 1994, including Google, Amazon, and Alibaba;
• The annual increase in on-line shopping during the Holidays since 2010: 77% of all sales through 2023;
• The central role played by semiconductor chips and software since 2015 in the U.S. and globally;
• The development of “ecosystems” created by semiconductors and other technologies among businesses with infrastructure needs;
• Digital enhancements to global commercialization: Cloud, Big Data, Mobility, Gaming, AI since 2020.

Each set the stage for the transition of equity markets from older industries to a variety of new businesses that are dependent on technology hardware, software, cloud servers, and digital networks.

2023 Portfolio Performance

So, how did our “Growth Index” perform ? As illustrated in the chart below, 2023 was a good year for technology. The Index assets (purple line) grew by 105.26%, but were trailed by the Dow (blue) at 12.76%, the S&P (yellow) at 23.71%, Nasdaq (aqua) at 42.78%.

2 and 3 Year Performance of the Growth Index

The same can be said for the two and three year charts. For clarity, the 2 year chart below, includes the 2022 recession, evident by the depressed indexes, and the rebound in 2023. The 3 year chart covers 2021 through 2023, from end of the bull market in 2021, through the 2022 downturn, to the recovery in 2023.

Two (2) Year 2022-23 “Recession” results:                        

Growth Index (purple):         16.25%                                       
Nasdaq (aqua):                    – 4.24% (loss)                            
Dow (blue):                            4.14%                                        
S&P (yellow):                         0.65%                                        

Three (3) year 2021-2023 “rebound” results:

Growth Index (purple):                 68.73%
Nasdaq (aqua):                              17.06%
Dow (blue):                                   23.97%
S&P (yellow):                               28.44%

As can be seen, even in a recession, two (2) year returns of the “Growth Index” (indicated by the purple line) increased substantially more than the other U.S. indexes. In the three (3) year chart, the “Growth Index” was 40 to 60 percent higher than the other indexes. If we look at the previous seven (7) year period, the average annual return was three times greater than the major U.S. indexes.[i]

A Comparison with China’s Heng Seng and Shanghai Stock Indexes

The differences are even more stark if we compare U.S. technology growth with the two major Chinese investment indexes. Since our “Growth Index” is well above the American exchanges, we will use the technology oriented Nasdaq index (green) and other U.S. indexes to compare with the Heng Seng index (blue).

Two significant changes are evident in the Nasdaq–Heng Seng comparison during the 2021–2023 time frame. The first is the large dip around October 2022 and another in March 2023, perhaps related to Covid restrictions on businesses in the U.S. and China during those months. Around March 2023, we can also see the point at which the indexes begin to move in different directions: the Nasdaq (green) and the other U.S. indexes are moving substantially higher, despite initial dips, while the Heng Seng (blue) begins a slow decline to the present.

The differences between the Nasdaq (green) and Shanghai (blue) indexes are more pronounced, as illustrated in the chart below. The same dips in all indexes appear again in October 2022 and March 2023. There was even a short gap in the Shanghai index in October 2023 when trading was suspended for a few days. This may be due to residual Covid policies and a lockdown in Shanghai on the Chinese mainland.

Both charts illustrate a significant downturn in the Chinese economy over the last two years, which continues into the present. The similarities of the Hang Seng (located in Hong Kong) and the Shanghai (mainland) exchange suggest a “lag” as both continued to focus throughout 2023-2024 on banking, heavy industry, and real estate investments. Less activity was in technology sectors, despite significant progress in the development of Chinese electric vehicles, smartphones, computers, software, and media platforms.*

Reviewing the Chinese and American stock indexes together, each remain well behind the ”Growth Index”, indicating the distance that each economy must travel to incorporate technology into other business sectors. As we shall see below, the differences lay in the paths and relative paces that both countries have taken since the turn of the 21^st century. This raises the question: Why are the United States and China attempting similar adjustments at this particular point in time?

The United States and China in Transition

The answer is the need for redirection as each country recovers. This seems clear, based on the shared effects of the Covid-19 pandemic and the economic recession of 2020 through 2023.[i] Essentially, the pandemic and the recession were tipping points, requiring the United States and China to begin implementing reforms to maintain economic viability and political stability. The potential dangers are evident from the residual turmoil we are now witnessing around the globe. Further delays may not be an option.

New solutions for healthcare, work, shopping, recreation, and living in general were required for people all over the world. The United States and China, at different times and varied paces, had already begun maneuvering their economies to address these issues. The fact that both are moving in the same direction suggests common problems requiring similar solutions. This is evident from their recent histories.

The Transition of the United States Economy

Up to late 2013, American fund managers and financial pundits who influenced U.S. stock markets focused less attention on tech companies. This may have been due to the experience of thousands of investors who lost money and confidence in technology following the collapse of the “Dot.com” bubble in 2003-05 in the United States. During the presidency of George W. Bush (2001 -2009), the same generation experienced the “9-11” terrorist attacks in New York, the second Iraq war, the unstable aftermath in the Middle East, and the “Great Recession” of 2008-10.

So it is perhaps understandable that prior to 2013, the most valuable American companies were in heavy industry, manufacturing, government defense, petroleum, and real estate. Each sector was considered less risky than technology and more lucrative, a perspective had not changed much since the end of World War II.*

Following the “Great Recession” of 2008-2009, largely caused by the default of subprime mortgages, a rebound in the United States began in 2012. A bull market continued until the Covid pandemic, the effects of climate change, and the scarcity of fossil fuels, all reached a peak during the recession of 2020-23. Among the potential remedies were more equitable policies under new presidential administrations, despite a short hiatus in 2017-2021, resulting in the wider availability of vaccines, economic incentives for businesses, the encouragement of remote online employment, new applications for semiconductors in business, and advances in artificial intelligence.* Each contributed to higher valuations of technology companies, which offered new methods for business and working, as well as incentives for investment.

China: from “One Country, Two Systems” to “One Belt and One Road”

The pace in China has been much slower and is not as well known in the United States. A review of economic policies through 2019 indicates a more gradual change. The transition began following the retrocessions of Hong Kong in 1997 and of Macau in 1999, when China introduced the “One Country, Two Systems” initiative in 2000. This was largely a successful attempt to incorporate a mixed socialist-capitalist model using both cities as conduits for foreign investment, which may account for China’s delay or “lag” relative to the transition in the United States.

The result in Hong Kong was the involvement of European and American banks and insurance companies, transforming the former British colony into third largest financial center through 2019.* In addition, Beijing approved several 20-year licenses in 2002 for casinos and land for hotel resorts in Macau, granted to five gaming companies in the United States and one in Australia. In less than two decades, China’s “One-Two” policy converted the former Portuguese territory into Asia’s casino and entertainment capital, earning revenues more than five times that of Las Vegas by 2020.*

A less successful program was introduced in 2013, called “One Belt and One Road”, which employed PRC investment capital and skills to build railways, airports, highways, and other physical infrastructure in underdeveloped Latin American, Southeast Asian, and African countries. An offshoot were similar projects linking Macau to eight Portuguese-speaking countries, including Brazil and Portugal, originally organized in 2003.* The American Council on Foreign Relations estimates that so far China has invested $1 trillion (USD) in the “Belt and Road” program, and predicts the cost will increase to $8 trillion (USD) when all construction is completed.

The economic benefits of both programs, however, have declined. Political turmoil in Hong Kong from 2018 through 2019 seriously damaged the local banking industry, leaving future foreign investment in limbo.* In Macau, despite early successes, casino gaming and tourism abruptly halted after health restrictions were imposed from 2020 through 2023. Macau’s gaming revenues in those years reportedly dropped 80%.* The conditions also raised questions about the Belt and Road’s future viability, especially in light of massive real estate defaults and a banking crisis in China, which were revealed in late 2023.*

In summary, investments in heavy industry, banking, and real estate in China under earlier programs, as in the United States, could not withstand the effects of the pandemic and the recession that followed, requiring a change in economic direction. In both cases, the adoption of technological innovation has become prominent.

China’s “Greater Bay Area”

China’s recent transition began in July 2017 with the introduction of the “Greater Bay Area” (GBA), centered in Hong Kong, in Macau, in a research hub next door in Zhuhai, and in the manufacturing city of Shenzhen.[2] Although slowed by travel restrictions and commercial decline from 2020-2023, the potential impact on the whole of China is just being realized. During the interim, eleven (11) southern cities linked by a high speed rail network to the Chinese mainland was completed, and the new Hong Kong-Zhuhai-Macau bridge was built across 55 kms of the Pearl River delta.* By the end of construction in 2018, the GBA served 35,000 square miles of territory, a young and educated population of 86 million inhabitants, and had a GDP estimated in 2020 to be $1.7 trillion (USD).*  

As impressive as the initial years have been, the future of the Greater Bay Area project may now depend on a little known collaboration involving the PRC government, and American and British organizations aimed at expanding the model to other regions in China. The international planning group includes: U.C. Berkeley’s Center for Information Science, the Kennedy School of Government at Harvard University, the British Council, Stanford University’s Center for Asia-Pacific Studies, the commercial firms of Deloitte and KPMG, the World Trade Center of Los Angeles, and several San Francisco Bay Area governments and NGO’s. 

The planning group first met in Beijing in January 2020, but future meetings were postponed until October 2023 due to travel restrictions. Once resumed in February 2024, official Chinese interest apparently remains “very strong”, and involves officials of China’s Ministry of  Commerce.[4] Significantly, the GBA’s latest phase is now under the direction of the National Development and Reform Council, which is responsible for regional and national development planning, and economic system reform. (author’s emphasis) This change in direction suggests that the Greater Bay Area is no longer a regional project, but has been elevated to a national priority.

Conclusion

The apparent willingness of the Chinese government and American institutions to form an alliance in 2024 suggests an openness that belies reported political “tensions”. But intentions and planning will only go so far. The final question is: What must occur in both countries to reach the goal of digital innovation and technology adoption ? The answer lays somewhere between the willingness of China and the United States to remain both aligned on the GBA and commercially competitive in the global economy. This is, of course, a terrain strewn with obstacles that could derail any relationship, even one that had endured for over two hundred years. Despite these caveats, let us conclude with a few observations.

One of the keys to success is the willingness of China, the United States, and the European Union to keep markets open for technology products from both Western and Chinese companies. This is admittedly an optimistic proposal. Tabling the issue of protectionist policies for the moment, the willingness of major industrial countries to reduce trade barriers would certainly allow a transition to technological innovation to occur more rapidly. This scenario also depends on how strategically sensitive some products, such as American and European semiconductors, will remain, and whether other products, such as Chinese electric vehicles (EV), would be more welcomed outside China.

The interest in both products worldwide already suggests huge benefits. In the case of semiconductors, Nvidia and Advanced Micro Devices, both intent on marketing to Asia, are currently working at great expense on a modified U.S. chip that could be approved for Chinese use, even while domestic producers like Huawei work to develop their own.* On the other hand, the Chinese EV producer NIO is already selling cars in Germany, Sweden, Denmark, and the Netherlands, offering stylish, longer range vehicles that use solid state battery swapping instead of plug-in lithium batteries. Despite this success, the spread of the pandemic and the recession effectively placed the appearance of Chinese EV’s in other markets on hold. Whether the approval of semiconductors for China may be linked to the introduction of EV’s elsewhere is beyond anyone’s projection.

Should these products reach more countries, and other barriers are overcome, the wider application of semiconductors and portable batteries in manufacturing and transportation, for example, could provide great incentives for further transition in China and the United States, pushing both further away from heavy industries and fossil fuels. Other key products, we might presume, would lead to more improvement. Ancillary markets in Europe for semiconductors, more portable solid state batteries in Southeast Asia, and alternative energy sources such as solar could be preludes to further transitions. Such innovations, much like the introductions of the printing press in the late Middle Ages and the mechanical loom at the beginning of the Industrial Revolution, have the potential of overcoming many obstacles. There is also evidence, even when considering uses under feudal and colonial systems, that the introduction of such technologies led to sustained economic growth.*

Ultimately, as travelers in the age of digital technology and artificial intelligence we have arrived at a crossroads. One road requires us to adopt personal attitudes of collaboration and innovation in order for this transition to move forward. The other path, as we have seen over the last decade, is marked by suspicion, fear, and mistrust. There should be little doubt on which road we should travel. Our future, and that of the global economy, may well depend on it.