Foreign investors, amid a darkening of the narrative on China, can be encouraged that Chinese authorities have pledged to boost the private sector and that China-US tensions over Taiwan are easing, says former New South Wales premier Bob Carr.
“I am struck by how vigorously the Chinese administration is sending out positive messages to the private sector,” Carr told the JANA Annual Conference in Sydney on Thursday, during a session titled ‘Is investing in China too risky?’ “It’s going to be very hard for the government to strike any position that suggests they are returning to the crackdown and the lockdown that applied to the private sector two years ago.”
Carr cited the document issued by the Communist Party of China Central Committee and the State Council in July as an “unabashed commitment to the private sector”. The bodies issued guidelines to boost the private economy, improve the business environment, implement pro-business policies and strengthen legal guarantees. Chinese policymakers are seeking to spur growth in the world’s second-largest economy that is besieged by a property crisis, a crackdown on technology, tensions with the US, the legacy of pandemic lockdowns, slowing investment growth, sluggish consumer spending and excessive debt.
“What makes all these (government) commitments sound serious is they are backed by huge self-interest,” Carr said, citing that 80 per cent of city workers are employed by the private sector and 90 per cent of new jobs come from private businesses.
“The public sector in China is actually smaller than Australia’s public sector,” he said, without defining how he assessed the comparison. “It is a private-sector economy strikingly and surprisingly. The private sector produces 60 per cent of (gross) national product.”
An end to de-risking measures
The former foreign minister said the recent visit of US officials to China signalled the White House is ending ‘de-risking’ measures such as limiting Chinese access to technology and investment. The Biden Administration “is at a point where (it) can engage with China.”
Carr said China-US tensions over Taiwan have eased from their peak in August last year when former US House of Representatives speaker Nancy Pelosi visited Taipei. “Both sides are pulling back to that old diplomatic formula of strategic ambiguity that has kept the peace over Taiwan for 50 years.”
The biggest risk to Chinese-US relations would be a return to the presidency of Donald Trump, Carr said. “The diplomatic world would be more alarmed by a Trump victory second time around that they were during his first term” because Trump could abandon Taiwan as he was torn between two views of China.
“On one hand, he thinks of Xi Jinping as a president of a rival corporation. He might be able to cut a deal with him or he might be able to obliterate him,” Carr said. On the other hand, Trump has advisers who urge him to lift tariffs on Chinese imports until they “eliminate the trade deficit”, which would be a “massive disruption to the world economy”.
Carr noted that President Joe Biden was ahead of Trump in the five states that have decided recent US presidential elections, though Biden’s rambling at a recent media conference in Hanoi could be the “tipping point” whereby “there could be a move to find a new presidential candidate for the Democrats”.
Carr told the super-fund audience that the Heritage Foundation is recommending that US pension funds be banned from investing in China and asked could Canberra force super funds here to do likewise. “Would we be obliged, as we have been on many aspects of Biden’s China policy, to follow the US?”
Investment in renewables most welcome
While Beijing was backing the private sector, the benefit for foreign investors would depend on the industry, Carr said. Investments in renewables would receive the biggest welcome, while he cautioned about foreign companies conducting research in China.
“Anything in the renewables sectors is likely to be very appealing to international investors because China is making a huge state-backed thrust into renewables,” Carr said. “On the negative side, … a foreign consultancy in China asking questions about companies is likely to be challenging China’s national security laws. On that score, there is going to be no compromise from the administration.”
Carr said ageing demographics were a challenge for many countries and shouldn’t play out worse in China. “They have been prepared for this for a very long time. Nearly every society is going through this. It’s acute in Western Europe. It’s acute in Japan.
“We are used to 10 per cent per annum growth rates in China. But it was a much smaller economy than the spectacular economy that’s been delivered by those years of high growth,” he said. “How can China pull of this transition? It is the IMF that has persuaded itself that one quarter of world growth in 2028 is going to come from China.
“China is still on track to achieve the goal they set themselves in 2009 to have an extra 600 million people in middle-class-income status by 2030,” Carr said.
Wenchang Ma, a co-portfolio manager of the All China Equity Strategy at the global investment manager Ninety One, gave the session six reasons why investing in China’s stock markets holds promise.
Rising household income, technological self-sufficiency, China’s world-leading role in renewables, reform of state companies, the country’s deeper integration into the world economy and depressed stock valuations augured well for future returns, Ma said.
“At the moment, the market sentiment is still very bearish. That’s true for international investors as well as domestic investors,” she said. “But the markets can’t ignore the long-term opportunities that still exist.”
The Chinese economy “is transitioning away from the very cyclical, real-estate-driven model into one with more sustainable drivers over the long term,” Ma said. “That is potentially paving the way for slower economic growth but better-quality growth.”