invaluable in raising money and spotting deals. But his observational
skills were just as potent. “The way he’s gotten business isn’t by being
an aggressive salesman but by being a professor-dealmaker,” says James
McGregor, former CEO of Dow Jones China and a consultant who helps
companies navigate China’s regulatory process. Shan is “great at analyz-
ing and explaining the detailed mechanics of the sectors he invests in.”
T
HE PAG FUND LAUNCHED JUST IN TIME to capitalize on a historic
transition. Since then, Shan says, “China has gone from
the factory of the world to the market for the world.”
The recent slowdown in China’s growth is attributable
almost entirely to a decline in exports and manufactur-
ing—to the “factory,” in other words. Much of that, Shan notes, reflects
government-driven deleveraging: Starting in 2017, Beijing took radical
steps to shrink bloated, state-owned industrial enterprises and squeeze
excess credit out of the banking system and housing market.
Even more central to the deceleration is China’s long-term shift from
export-led manufacturing to consumption. As Chinese wages rise,
families spend a higher proportion of their income on health care, en-
tertainment, restaurants, and consumer goods. The shift to a consumer
society, as a rule, dampens the overall growth rate. “In manufacturing,
you have a multiplier effect,” explains Shan. “A new plant starts and
hires people, then buys supplies and power from producers that hire
more people, who generate more wages to buy things.” But consumer
spending, “dollar for dollar, creates less growth.”
Shan emphasizes that exports and manufacturing started falling
long before the trade war began. Since 2010, the value of goods China
ships abroad dropped from 36% of GDP to 18%. That means U.S.-
imposed tariffs sting less: Exports to the U.S. now represent only 4%
of China’s national income, around one-third the level of a decade
ago. This year, China’s shipments to America are expected to drop by
around $60 billion. But as Shan points out, China has been exporting
far more goods to the rest of the world, blunting that decline’s impact.
As manufacturing retreated, Chinese consumption rose. At 10% a
year, Chinese consumer spending is growing 2.5 times as fast as the
equivalent U.S. figure. Amazingly, China’s retail sector—defined as the
market for consumer goods, but excluding services—grew to an annu-
alized $6.22 trillion this August, surpassing the U.S. for the first time.
This consumer revolution isn’t completely immune to the trade war.
“The psychological impact could be large,” Shan warns. He recalls that
when the U.S. unleashed its first round of tariffs in mid-2018, panic
reigned, and Chinese stocks dropped 25%, though they have since
bounced back.
Still, Shan reckons that fast-rising Chinese incomes will triumph over
trade fears. Among the businesses capitalizing on that growth are a host
of U.S. companies—to the tune of $400 billion in sales inside China each
year. While tariff tit-for-tats have hurt U.S. farmers and manufacturers,
they’re so far sparing companies that make goods in China to sell in
China—and those, as Shan notes, are plentiful.
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