01 Jul 2010 | Business

Voyage of Discovery to China - James Anderson 

Following his latest visit to China, James Anderson tells Heather Farmbrough why he returned even more impressed, and why he is not worrying about Greek debt.

Since we last met, you’ve visited China. I was interested in the comment that you made about China being home to an entrepreneurial fury, which was leading to the creation of some great individual businesses.

Yes, indeed, we came back almost slightly frightened at the numbers and sheer power of what is happening. For example, we are investors in New Oriental Education, which provideseducational products and services, and we went to talk to the Chairman, Michael Yu, who is almost a national hero. He and the former boss of Google China, Kai-Fu Lee, give talks to school leavers and students. How many people do you think he gets listening to him at one public gathering?

Maybe 1,000?

No, more like 30,000. Yu believes not just that families passionately want to improve their children’s education but that the best students should go to university abroad after studying in China. I was struck by how many people in China say ‘we may be the up and coming world power, but we still need to understand how America and the western system works’. This is very different from the attitude in either Britain or America. The emphasis on education is also important, and acutely different from here. Is there any way with the cuts in Britain, that there won’t be pressure on education? I don’t think so.

You mentioned Kai-Fu Lee and Google, and you are an investor in Baidu, the Chinese search engine. Why do you feel Google failed in China?

Google failed in China in my view because of the mistaken and even rather arrogant American belief that if you provide something that fits the top half percent or so of the population intellectually and economically, it will spread relentlessly. I think Kai-Fu Lee believes that things have to be more accessible to the next level down and that Google, and Americans in general, have tended to underestimate the strength of the mobile telecommunications culture in China.

How do you respond to those who worry about rising wages in China?

I think it is sheer nonsense. Wage rates are going up because productivity is soaring! Surely the point of economic development is to make people wealthier? I don’t think we have really seen anything like this over the last 100 years. It is the scale of China’s internal market and the overall power of the economy that distinguishes China from even India, Turkey or Brazil. The Chinese can set the rules of the global economy.

You said earlier you were almost frightened by the scale and the power of what is happening. Is that because we find it hard to quantify a momentum we have not seen before?

I think conventional analysis has failed to grasp that the pace of change in the global economy and scientific and technological innovation is increasing rapidly, sometimes even exponentially. All the pessimism is odd because historically, we’re doing really well. We are so obsessed with daily news – how many gallons has BP chucked into the sea last night? How bankrupt is Greece today? So much so that the underlying
drumbeat of progress, what really matters for the economy and for companies is underestimated. We have sent some colleagues away from the grimness of capital markets and Edinburgh in midwinter to Singularity University in California which looks at the future and how change happens.

So when you see a change happening, if you can learn to ignore the noise, you may see where things are really going. We know this kind of thinking applies to computing power, but increasingly it applies to areas of far greater human significance, such as medical sciences. Progress is accelerating – we could even be reverse engineering the brain within 20 years. Ray Kurzweil, the co-founder of Singularity University, says that change is very predictable and that things follow exponential power laws as they develop. Even curing cancer may not be quite as challenging as we thought given the pace of change in related genetic technology: All we have to do is to destroy cells, we don’t have to manipulate them.

Providing we can work out how?

Yes, but the point is that because we are still working on something, it does not mean that it will not happen. We’re spending a lot of time trying to think about which companies fit into this view. A good example in Scottish Mortgage’s portfolio is Intuitive Surgical where the company is thinking about robots, which will be used inside human beings for surgery. This is much more exciting than the gloom in looking at Greek debt.

We have an article in this issue about Europe, and I know that about 17 per cent of Scottish Mortgage is invested in companies listed there. How do you feel about Europe as a long-term investor?

The question is whether there are great companies selling at unreasonably depressed prices. I think so. I am a huge fan of Atlas Copco, not because of what is happening in the Swedish economy, but because of what they’ve done in the rest of the world. There are some terrific companies in Europe. Greece is a potential economic catastrophe, but it makes up little over two percent of the eurozone. We all expect more economic integration and we need tighter fiscal policy correlated with some economic stimulus. I don’t think the situation in Spain is untenable; debt to GDP is lower than ten years ago and lower than in Britain.

Lastly, do you think sterling is still overvalued against the dollar?

Yes, probably. I think there is a serious possibility that we get it wrong and tighten the economy too much. If Britain does get into a muddle, who is going to come and rescue us? I don’t think the Germans are.

This interview took place in June 2010.

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