China – to invest or not to invest

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The Xi Jinping Dynasty
Loyalty to President Xi Jinping has been written into the constitution, with Xi Jinping being “Core”. In terms of appointments to the Politburo and the Politburo Standing Committee, Xi Jinping has surrounded himself with loyalists – “yes men” – with five of the seven members of the key Standing Committee owing their promotion to Xi Jinping with the only exception being Wang Huning.

There is an apparent fundamental lack of dissenters in the main governing bodies, and the dramatic removal of the former leader Hu Jintao at the Party Congress – premeditated or not – further served to highlight Xi’s grip on power. This is prima facie a negative long-term development, given that there are few, if any, examples in history where having a long-standing autocratic leader has resulted in a positive long-term development for a country. Having said that, a positive spin on this is that policy decisions can be decided upon and executed much more swiftly than previously, and it could be an advantage that President Xi is now surrounded by people that he trusts. Also, it must be noted that these Politburo members are still technocrats and have strong economic and technical backgrounds that are relevant in terms of China’s focus on pushing self-reliance and development across a slew of technological areas. It remains to be seen whether their backgrounds will be relevant, or whether President Xi will exercise full authority over decision-making.

Is China Uninvestable?
Nevertheless, the key question that we are contending with is whether China is uninvestable going forward? The short answer is likely not. There is little doubt that there will be a much more dominant state-oriented mindset where the emphasis will be on national security and social stability in China. ‘Security’ was a term mentioned more times than ‘economy’ during the Party Congress. Going forward, China’s goal is not to maximize economic growth but rather to see this as a part of the overarching objective of achieving stability and security. Other elements mentioned by Xi Jinping, including gradually reaching the goal of common prosperity – i.e. redistributing wealth and creating a larger middle class, increasing reliance on state-owned entities,
and boosting self-reliance across various areas, including technology, food and energy, should also be viewed in similar fashion.

Opportunities Within i.a. Renewable Energy and Technology
It is precisely the increased self-reliance as well as the focus on boosting renewable energy that create investment opportunities, in our view. As we have always stressed, being on the right side of politics has always been important in China, and political support has helped us identify areas of growth.

The increasingly harsh actions and restrictions by the US on the technology front clearly serve to accelerate China’s push up the technological value chain. There is a lot of state-directed capital focused on investing in the ‘little giants’ of technology in China, and these will potentially lead to an increased number of possible investment opportunities in the coming years.

In terms of renewable energy, China has been acutely focused on boosting its capacity and developing the supply chains, and today China is a clear leader within solar, wind and EV supply chains, globally. This remains an area in which we find interesting investment opportunities. Finally, what we continue to seek are strong investment opportunities exposed to a growing middle class as a result of common prosperity.

Company Research and Political Understanding are Essential
We must stress, however, that although we see areas of potential investment opportunity in the coming years in China, we are clearly monitoring the negative impacts of an increasingly state-controlled backdrop on companies’ ability to generate profits as well as adverse actions with respect to the desired reunification with Taiwan, which Xi Jinping has moved up the agenda in terms of priority. Recent developments in China have widened the spectrum of potential outcomes and made us more concerned on the margin in terms of investment opportunities. We are monitoring actions, announcements and policy decisions extremely closely to determine the direction of travel and the impact on our views on Chinese investments.

China’s Investment Landscape Going Forward
We have more than 20 years’ experience of China’s complex investment universe and have closely followed China’s development journey from President Hu Jintao to President Xi Jinping.

China as a growing global superpower with an expanding consumer market and not least a clear technological potential, has been widely perceived as an investment opportunity for decades. Historically, China has achieved its ambitious goals, and it is likely that China under President Xi Jinping will achieve most of the stated ambitions in Vision 2049. China’s firm ambitions to move-up both the industrial and social value chain have important investment implications. The leading Western companies will eventually face massive competition as Chinese companies with a strong foundation from a huge domestic market seek to expand internationally. In this respect, it is important to understand that China’s worldview differs significantly from that of the West’s, which is a key consideration when implementing a successful investment strategy in China.