L-R: Martin Lau, Norman Zhang and Ben Weiss. Photo: Tim Baker.

Three sets of factors have coalesced to present major challenges to investors in China: structural, political and international, the Fiduciary Investors Symposium in Healesville has heard.

Ben Weiss, Asia-Pacific managing director for investment consultancy Veracity Worldwide, said the Chinese economy is “a floundering economy at the moment”.

“The prospects for massive growth of the sort that we have seen over the last few decades is not there,” he said. “The sort of infrastructure boom that existed, that sort of infrastructure, is not needed anymore in China. So [that’s] one structural issue there.

“Another is the demographic issue, with a young population, lots of unemployment, youth unemployment.”

Weiss said that from a political standpoint, it’s “also extremely challenging” and the 20th Chinese Communist Party National Congress resolved to “basically adjust the balance between economic considerations and security considerations”.

“Security is now paramount for the Communist Party and its administration of the country,” Weiss said which makes it more difficult for foreign investors into China to get useful information about potential investment targets and counterparties.

And from an international perspective, “rules around foreign investment, coming out of the United States in particular, [are] making it increasingly difficult to invest in China, or at least to do so with the sort of with the lack of care that may have been possible during previous stages”, Weiss said. “All of these three sets of considerations coalescing has made China increasingly difficult place for foreign investors to put money,” he said.

“For money coming from Australia, money coming from the United States, [there] are a whole bunch of strings attached and considerations that you need to bring to bear when looking to deploy in China. And that is where the geopolitics really matters. That is how geopolitics influences actual investment.”

LegalSuper chief investment officer Norman Zhang said investors tend initially to overreact to the likely impact of geopolitical risks.

“Geopolitics creates a lot of headline risks, and typically, they just appear,” Zhang said. “As an investor, especially when you’re investing for large groups of people, you’ve got stakeholders, including your board or your investment committee, and in some ways there’s a tendency to overreact.

“Geopolitics is important. It’s very hard to prepare for; diversification is quite important. You don’t want to put a single bet on a single region – that could be dangerous. If you put a single bet on Russia or a…manager investing Russian assets, that could be dangerous. But it’s very, very hard to set up a portfolio, especially if it’s very concentrated.”

Even so, Zhang said that whether China is an attractive investment destination “depends on your risk appetite; it depends on who you are as an investor”.

“But if speaking as a completely unconstrained investor, with money to invest today with a 10, 15-year horizon, I would say it’s quite investable for several reasons,” Zhang said. “The market itself is well diversified. It’s a deep, liquid market, it’s got a lot of different industries that you can invest in. And it’s a very, very big market. From a market dynamics perspective, it’s good.

“From an asset allocation perspective…if you look at where inflation is in China, and where growth is, it’s quite decoupled [from the US] and from the rest of the world, which means from an asset allocation perspective you’re getting more diversification, potentially, than any other equities market in the world.

“On fundamentals, the market is cheap on valuation grounds. You’re now being paid a country risk premium, which you would argue in the past was less prevalent. And then, and with this whole play-out of the property crisis, a lot of the systemic risk, I would argue, is playing out. So it’s probably setting a stronger foundation.”

Zhang added that the withdrawal of economic stimulus was also contributing to make the market “fundamentally…healthier than what it was a couple years ago, in my opinion”.

Zhang said the decoupling of the Chinese economy from the US and constraints on technology, “national champions will need to emerge things in areas like pharmaceuticals and technology that will require capital investment, and they would have a big market to grow into”.

“So, from that perspective, I would say these are the benefits,” he said. “Obviously, there are risks, but you can somewhat manage it through being selective in how you manage like active investments.”

FSSA Investment Management managing partner Martin Lau said the influence of geopolitics on investment isn’t going to abate in the foreseeable future.

“Geopolitics is something structural, is not something that would go away anytime soon, because it’s related to politics,” Lau said. “From a bottom-up investor’s point of view, because we focus on companies, geopolitics is something that we observe from companies as in how they deal with it. Because doing business is more complicated in this world, in our view, in a way it’s good, because it differentiates the good companies from the bad companies. So this is also something that we focus on when we talk to companies.”

Lau said China remains an investable market, but it is changing and “how I will say China is different today is, it is a lot more mature, it’s a lot bigger than before”.

Lau said the way businesses mitigate geopolitical risk is also changing.

“Because of geopolitics, and especially after COVID when people saw how China closed up the whole world’s supply chain, there’s quite big movements of China Plus One.

“You as a customer, like Apple or Nike or Uniqlo, the last thing you want is to have all your eggs in one basket. A lot of companies have been diversifying away from China. So that has benefited countries like Vietnam, Indonesia, Mexico, and Poland, for example.”

But Lau noted that while businesses seek to reduce geopolitical risks by diversifying manufacturing away from China, they’re not necessarily picking up that manufacturing capacity directly in other countries.

He said that FSSS has observed that while a company’s customers may be global, and companies want to diversify away from China, they are not really trying to diversify their supply base, “meaning that [while] people want to diversify away, let’s say, from Taiwan because of geopolitics for semiconductors, people are not diversified away from [semiconductor manufacturer] TSMC”.

“TSMC is actually investing into Arizona, into Europe, into Japan, on behalf of the clients,” he said.

“And the same thing happened for Hon Hai, which is better known as Foxconn. So again, Apple is trying to diversify away from China [where they] currently make all the iPhones in the world. It is diversifying to India, but it is not going into another Indian company, but actually investing into India through Foxconn.”

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