China’s economic direction is uncertain, prompting investors to look elsewhere to capture Asia’s economic growth, according to adviser to the Pentagon and White House, Professor Stephen Kotkin.
The Princeton University international affairs academic and China expert, said China is no longer an investment proposition due to a colossal repricing of risk which is in its early stages.
This was driven by stronger communist party control of economic data, reinforced by regulatory crackdowns on its independent and wealthy entrepreneurs, stalled economic growth and its aggression towards Hong Kong – creating record high global negativity towards the country, he told Investment Magazine’s Fiduciary Investors’ Symposium.
Headed in a new direction
“China’s headed in a new direction but where it might end is completely up in the air and uncertain,’’ Kotkin said.
“That’s a really big deal for investors – the predictability of predominantly market-driven high growth year-in-year-out, that epoch has come to an end and what the new epoch will be is anyone’s guess.”
The “fundamental incompatibility” of communist-party rule and the market economy where “regime control trumps even economic growth”, has created this predictable outcome, Kotkin said.
ESG to sharpen focus
Unravelling investor interest would be turbo-charged by a sharper focus globally on the environment, social and governance (ESG) investing to reduce carbon emissions.
“There’s never been an economy this large that’s had a political system this opaque but it’s getting more opaque and it’s a really big problem,” Kotkin said.
“Once investors take ESG seriously, China becomes a very difficult proposition to sell back to your boards or to your investment community because they don’t do well.
“They do well only on pledges but not in reality on ESG performers, especially in the governance area, but also on the environmental stuff where there’s promise but not a lot of delivery and that will be the case going forward because of the demand on energy in China and the inability to transition as promised”
He says investors have to see another way to capture the growth in Asia while China undergoes “wrenching changes” to tackle inequality, slowing population growth, corruption and the property bubble, as well as its geopolitical aggression in the region.
Kotkin said Beijing’s decision to “impose itself in severe fashion and risk the benefits of the financial powerhouse” of Hong Kong had soured international opinion.
“This of course has rebounded to Taiwan which was already becoming less enamoured of any merger with Beijing politically. There’s a massive increase (to 32 per cent) in the number of respondents who want to stay outside of China and would actually be in favour of formal independence,’’ Kotkin said.
“They’ve made the Taiwan problem much greater, all for asserting the supremacy of party rule and their control of the situation and that’s a very serious proposition for them and the risk they’re willing to pay.”
Instead of recalibrating, China was getting more aggressive in its stand on Tawian and raising the negativity of China abroad, now at record highs, Kotkin said.
“The regime is a bit overconfident, a little bit underestimating of the west, the US and its allies – including Australia,’’ he said.
“Australia went from a somewhat naive view on China, in my view, to hardline on China understanding it’s a threat to sovereignty.
He said Australia’s AUKUS alliance was a symptom of China’s more aggressive stance and it should also look for other horizontal relationships with countries in the region for security and economic benefits.
“(There’s) No substitute for a bedrock alliance with the US but Australia should go further with these horizontal relationships,’’ he said.
“This is a very serious situation we’re in when the Chinese government is willing to destroy $US1.5 trillion in value in the tech industry. It shows you they don’t care about foreign or domestic investors they’re willing to win the strategic race.’’