EXCLUSIVE After more than a hundred days of violent anti-China protests in Hong Kong, revelations of government meddling in private companies, and the insidious nature of the Belt and Road Initiative (BRI), investing in China is becoming a risky prospect.
Since the 1970s, China has moved from a centrally planned economy to a more liberal, market-determined economic outlook. With increased trade liberalisation came increased interest from foreign investors.
But China is fundamentally different to other emerging economies. The Communist Party of China (CPC) still maintains control over many Chinese businesses. Of the 109 Chinese corporations listed on the Fortune Global 500, only 15 per cent are privately owned – and even privately owned companies are expected to maintain CPC cells.
This presents a governance risk that foreign investors should be wary of.
“The company may not be run as efficiently as a non-state-owned enterprise,” Matthew Picone, a portfolio manager at Acadian Asset Management, told Investor Daily.
“There may be conflicts of interest, or managers may be making decisions that are not in the best interests of shareholders.”
Growing interest in sustainable investment strategies has also seen investors reconsider their China prospects. As more and more companies and investors implement environmental social governance (ESG) strategies, famously dirty China faces being left behind.
According to a report from Robeco – The challenges of integrating ESG into Chinese A-shares – there is less appreciation of ESG issues within Chinese companies and no comprehensive guidelines to ensure sustainable investment.
However, the news is not all bad. Despite the reputation it earned as a polluter during its rapid industrialisation, China continues to promote and invest in green industries.
“On the environmental side they’ve got a lot of ground to make up,” said Mr Picone. “But at the same time, they’ve also made improvements. The government is making an effort to improve carbon emissions and move away from coal and some of the other dirtier industries.”
“If the government is behind improving their standards and improving the way the world sees them on these social and environmental issues then there’s opportunity to be involved in that and to invest in those themes as well.”
China’s ambitions have also impacted the global economy, particularly through its ongoing trade war with the US. The trade war – which shows no signs of cooling – has thrown global growth outlooks into uncertainty.
The RBA has indicated that the US-China trade war, along with other trade disputes throughout Asia, is the reason for its multiple rate cuts over the last year.
However, some of China’s initiatives could open up lucrative new markets around the world.
The CPC’s BRI, a global infrastructural development program, is improving economic outlooks throughout Africa, with new transport infrastructure allowing more efficient extraction of resources and the development of human potential that had previously been untapped.
But many BRI initiatives come with extensive fine print.
In 2017, China excused Sri Lanka’s $8 billion debt in exchange for a 99-year lease of a port it helped constructed as part of a BRI program. Construction on the port had gone ahead despite warnings that the project was not economically viable – in 2012, the port drew only 34 ships despite its proximity to major trade routes.
While the port was unfeasible as a trading post, it provided an advantageous position to China’s navy.
Military tensions are also driving wariness of China. Sabre rattling with the US and Australia in the South China Sea and military reprisals against Asian development projects have made dealing with China an unsavoury prospect for many countries.
Also complicating matters are perceptions that it has taken a heavy-handed approach to the unrest in Hong Kong and its inhumane treatment of Uighur Muslims in the province of Xinjiang.
For ethical investors, these issues can be cause for complete divestment from Chinese companies.
China’s economy has made leaps and bounds since the 1970s, but its growth is now slowing. With few friends and frosty global outlooks, China may be reaching the end of its economic honeymoon. Only time will tell if the country can maintain its new-found position as a global superpower.
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