China has been the chief engine of emerging-market growth for the last two decades, and the pace of growth has stepped up under the leadership of President Xi Jinping in recent years. The speed of change has been so dramatic under the current government’s policies that investors are well justified in asking whether China has entered a new socioeconomic paradigm, or whether the current brand of socialism with Chinese characteristics is simply just a continuation of plain ‘old-fashioned’ socialism.
It is worth noting that China has pursued regulatory action at various times over the last 20 years against industries deemed as becoming too comfortable or affluent at the expense of the wider population. This policy assault, termed ‘common prosperity’, has most recently focused on telecommunications operators and banks, and is now turning its sights on the perceived excesses of the real-estate sector.
In many cases, the targeted industries have subsequently underperformed the wider Chinese market as they undergo enforced changes or restructuring, but recent history shows us that new industries have arisen to ultimately exceed them in capitalisation, and to drive the market higher.
Two faces of Chinese governance
We regard this reality as the ‘yin and the yang’ of the Chinese system of governance: moderate pruning of certain sectors that have grown too big or unwieldy allows for society and ultimately new investment opportunities to flourish. Western investors might be confused or even sceptical about the future prospects of China’s capital markets, but there is a wide perception that the constant cycle of renewal is what has allowed Chinese society to endure over many centuries, and we do not expect to see this dynamic change any time soon.
Under Xi, economic and social reforms, and a more widespread ‘opening up’ of the country which had characterised his most recent predecessors, have stalled somewhat. Some observers believe that problems emanating from parts of the heavily indebted real-estate sector, which have become a concern for many in China, have led to Xi stoking up nationalist sensibilities among the population to deflect any perceived criticism. Nevertheless, while the leader talks about Taiwan as a sovereign part of China and warns the US not to get involved, he has also won popular support at home by cracking down on corruption within the ruling party and beyond, and in the strides his administration is making to tackle air pollution in China’s cities.
For multinationals still keen to engage with China, the technology sector is the area that throws up most concern. Both China and the US have begun a ‘decoupling’ process in which the US is trying to bring manufacturing capabilities back onshore, while maintaining its global leadership in technological intellectual property. China, which has become a leader in 5G technology, for example, is attempting to catch up with the US as a global technology leader and has aligned much of its high-level technology with both its internal and external geopolitical ambitions. The bilateral tensions between the US and China, not least in artificial intelligence, automation and semiconductors, have created an uncertain environment for companies looking to invest in China, especially for those in government procurement and high-level technology. Developed-world companies are also becoming more aware of Chinese companies – particularly those in the private sector – improving their competitiveness to go more global more quickly.
We are continuing to keep a close eye on the regulatory flurry of activity around China’s ‘common prosperity’ policy, to see how it manifests itself over time. Despite the continuing geopolitical tensions, many overseas investors continue to expand their investments within the country, as it is clear that, with its powerful economy and ever-expanding middle class, China will continue to be one of the strongest engines of global growth over the next decade. However, at the portfolio investment level, we believe it is crucial for investors to listen very carefully to the words of the Chinese leadership to discover which sectors will be favoured and which will be reined in over the coming months and years. By doing so, they can attempt to invest selectively with the flow, rather than against it.
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