11 December 2020

Crouching Tiger, Hidden Dragon

They say that a week is a long time in politics. It is turning out to be a positive age in markets.


Overall, markets have held up relatively well in the unprecedented conditions that the have been created by the pandemic. 

Some have even hit new highs, with the expectation of workable coronavirus vaccines encouraging investors to believe that a return to some sort of normality could be not too far away. But conflicting news is seeing greater volatility and a widening disparity between the performance of individual markets.

One area that does seem to be in the vanguard of the anticipated recovery is Asia Pacific, or more precisely, China. The second largest economy in the world looks set to post a positive set of GDP numbers for 2020 as a whole, while most developed economies are unlikely to avoid a recession as a consequence of the coronavirus pandemic. For the nine months to September this year the Chinese economy grew by 0.7%, helped in no small measure by its export trade. This is way below the numbers we have become used to in recent years but, in the circumstances, it is an impressive performance.

Bear in mind that during the five years to the end of 2018, China contributed around 28% of global economic growth. This is twice that of the United States, still the world’s largest economy, but one cannot help but wonder for how much longer. Recent other statistics coming out from the world’s most populous nation include retail sales rising at a rate of 4.3% - a distinct improvement on the previous set of numbers – and industrial production up by nearly 7%. The Chinese juggernaut continues to roll on.

For the nine months to September this year the Chinese economy grew by 0.7%

Then there is the trade deal that China has brokered, bringing together 15 nations in the Pacific region which together account for nearly one third of global economic output. Included in the countries that will form part of this Regional Comprehensive Economic Partnership (RCEP), as it is known, are Japan and Australia. Neither India nor the US have been invited to join, but then President Trump did take America out of the earlier free trade deal – the Trans Pacific Partnership – shortly after taking office.

Might the new occupant of the White House take a difference stance over China? On the face of it this seems unlikely as, amongst other concerns, human rights are likely to loom large in the Democratic agenda. But that is not to say that some easing of the tension between these two powerful nations could not take place. Joe Biden is well known to the Chinese leadership and, as a mature and experienced politician, is likely to enjoy greater respect than his predecessor, who’s lack of predictability will have been a source of great annoyance to Beijing.

The RCEP will undoubtedly enhance China’s position as a mover and shaker on the world economic scene. First into the pandemic, they are clearly the first to emerge - and in better shape than many could have predicted. Of course, they did have the advantage of being led by a regime that governs by dictat, so were able to clamp down on their population when fighting the pandemic in a way denied to Western democracies. Even so, the way in which they have emerged from this particular crisis is truly remarkable.

Joe Biden is well known to the Chinese leadership and, as a  mature and experienced politician, is likely to enjoy greater respect than his predecessor.

China has not always been an easy country in which to invest. In the early days of their industrial and technological revolution, corporate governance was all too often a misunderstood concept amongst the entrepreneurs that were jumping on the capitalist bandwagon. Even now there are issues that need to be taken into account when assessing the investment opportunities that certainly exist there. The role of the State is just one such concern.  

This has led to the exclusion of some Chinese companies from important infrastructure contracts in the West. Huawei has been denied involvement in further developments of the mobile telephone network here in Britain, despite being a cheaper provider, while the US has demanded a change of ownership for the TikTok operation there. And we saw Jack Ma having to withdraw the public listing of his Ant Group payments giant following pressure from the government and regulators.

China, starting from a much lower base than the developed West, has managed to leapfrog other economies in technological terms, with tech giants there now threatening the hitherto dominance of west coast America. It all adds to up to an exciting prospect for investors, but not one without risk. The risks are not confined to investment decision taking. The Chinese state is acquiring data at an alarming rate – arguably part of the reason behind their failure to support Jack Ma in launching the world’s biggest IPO. We ignore China at our peril, but need to be vigilant both in investment selection and in how we treat this emerging Leviathan.


Illustration by Jordan Atkinson

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