wanting to get some opinions from people who also have to make capital allocation decisions. I'm becoming increasingly conflicted about China and its role in investment portfolios for clients. since my job is to allocate capital as best I can with regard to the risk the client's comfortable with, the potential returns of the area are attractive and therefore we have an allocation to emerging markets (of which china's the obvious 800lb gorilla).
at the same time, the talk of common prosperity, the lack of legal protections for equity holders, the presence of the communist party in every private enterprise gives me tremendous pause. combine that with the known atrocities being committed in NK which is essentially a puppet of beijing, and there's a big moral dilemma I'm feeling. finally, while I've rarely agreed with soros on anything in the past 10y, his pieces in WSJ on china were very compelling. pasted below if you've not read.
https://www.wsj.com/articles/blackrock-larry-fink…
https://www.wsj.com/articles/xi-jinping-deng-xiao…
on the other hand, literally every single company in the USA has some ties to china, be it parts from suppliers that their vendors use, direct customer interest (movies, apparel, etc.), direct investment from china, and so on, it's a completely unavoidable thing, so part of me goes "well if I can't be 100% out, then what good does an imperfect moral stand do?" and let's not forget my job is to allocate capital, so I'm cognizant that I don't want my personal misgivings to negatively affect my investment decision making.
so, other PMs, how are you navigating the china minefield?
Removed
By saying get investor capital out of China I'd also have to avoid nearly 100% of the russell 3000 since they all do business with China, and therein lies the problem. If I simply sell my EM investments, we're still tied, so your PMs that have no direct Chinese holdings still have Chinese exposure, no?
Of note, I do not have direct investments in Chinese equities, but instead use EM funds
At the institutional level, we don't have direct equity exposure - it's all, similarly, through a variety of funds or managers - in that case, we have tilted away from China for actually quite a while now. In most cases that looks like underweights by active managers to Asia or China directly (depending on the strategies) while trying to keep a consistent allocation to EM. That is driven more by the economic growth in China vs. the risk at this point than it is any moral issues with Xi or the overall Chinese state. It's somewhat like SRI and Oil - you can't entirely get out of fossil fuel exposure, so you exclude, tilt away from or invest in renewables to compensate in the majority of cases. Domestic equities - I just don't think it's practical, underweighting anything with significant Chinese exposure (revenue, suppliers, etc.). I also don't think performance would be great - best case, you get fired - worst case, you get fired with a 'we really support what you are doing, but...' Maybe someone has done that and can prove me hilariously wrong, but on it's face seems like a tough sell.
The world has made a Faustian bargain for decades now with them. We will overlook your transgressions and in return we will get access to your markets, cheap labor, etc. The list goes on and on. Their appetite for progress and growth outweighed their ideology - though it was always there as a risk, it was at least muted. With those risks back on the table and, frankly, returns in China moderating anyway - you probably want exposure, as there is upside there, but limiting it is the game.
Goodbread makes a great point - the narrative of Xi basically reasserting the governments ability to forcibly curb and route investment to industries it deems forward looking - i.e. rare earths, renewable energy, doing away with the massive building or development projects, reigning back in the loosening of capital, tech companies getting restricted - does lend itself to opportunities... it's just very hard to get at it from over here. I also, well, don't quite believe that this is all a well intentioned green new deal. It's also similar to the actions states take when they decide they want to start tramping over other countries or, simply, ensure the regime retains control. I'm not a Chinese political scholar nor expert - but again, the risk just keeps going up.
Also - and now I'm starting to ramble - I'm not sure it's a good thing for America to, broadly, pull out of providing capital to countries like China. I don't consider myself a rampant globalist, but if you are at least at the table you can influence or do something - the last thing we need are countries with strong militaries that are isolated from one another and in constant competition.. that's generally a recipe for, well, you know.
All these comments make me so bullish china
WSO was prob mad negative tech in 2014 calling for a tech bubble
Currently recruiting for HFs, so take my input with a grain of salt (only money I manage at the moment is my personal money).
I have a slightly contrarian view on China in that I believe it offers tremendous opportunity given recent crackdowns on a number of industries (tech / for profit education etc.). Someone mentioned KWEB above (ETF that tracks China tech), and if you look at it from a fundamental perspective, it seems to me that a lot of the regulatory risk is already priced in and the underlying equities in the index look very attractive. Tech will be an important industry to drive continued China growth and as such I think that the existing players in the industry have strong competitive positions that are incredibly valuable (similar to a Facebook / Alphabet).
With that said, you need to be really conscious of two main risks in China:
1. CCP - Important to hedge your bets accordingly to limit your downside. The communists can kill an industry with the stroke of a pen, so ensure you have downside protection via put options or some other instrument
2. Growing debt burden - At the moment looks to be limited to real estate and lateral industries, but the situation is fluid and you need to monitor it closely
As mentioned in your original post you need to take your feelings regarding Chinese atrocities out of the equation (I am an Aussie, so I have some very strong feelings towards China), and I think if you do you will be able to see the potential large payoffs that exist if you hedge your investments appropriately.
As mentioned, I'm pretty young / don't manage outside money / don't know shit in the scheme of things so appreciate anyone challenging my above points.
When talking about a country the population of China is easy to talk in superlatives but my 2 cents is that China is going to go down as probably the architect of the biggest misallocation of capital ever seen in history. There is no way that hundreds of billions of dollars spent in ghost cities, inefficient belt and road projects and liquidity infusions to zombie companies wont come back to bite it in the butt in a major way. Yes, on the way up China saw the biggest growth story in the history of humanity but I dread to think of the consequences for the world (black swan event) when the cracks in their credit markets become unstainable and their whole economy comes tumbling down like those cheap concrete buildings we see on YouTube.
Oh no, hundreds of billions in infrastructure spending wasted? They're completely screwed, those idiots built bridges, buildings, and roads lolol. I bet some of them are not even used!
You're right of course, China should be wasting trillions in endless and counterproductive wars, massive defense spending, be content with slow ass 40 mph Amtraks, and lead the world in incarceration rates ($200bn a year spent in locking up and managing 1% of our adult population). Oh and don't get me started on healthcare, I can't believe they aren't imitating our system.
In terms of misallocation of capital, there's definitely a country I can think of that is completely fucked.
thebrofessor I started at JPM in the asian financial crisis and invested in restructurings in Asia and then back to NY for PE and special situations. Since the GFC, I pivoted to China and have been there since. Although, I am now in NYC due to covid. I think China is at turning point where most of the dumb competition have left or are scared!!!!
China is so misunderstood. How many people know that to get into the CPC (media calls it CCP) you have to take a test like Singapore. And you only get promoted based on hard numbers and review. Ever notice why there are no ruling political families? Beijing has a very very hard job. China, unlike the US, has horrible geographic borders and hence have to contend with different factions, militaries, cultures etc... We, the US have CAD and MEx - not so hard right!? Further China is less than 20% college educated - think about that!!
This talk of internet regulation, helping out middle class, etc has been done in history. Just look back a little. How many people remember that the US regulated the radio, media content in the old days when it was tightly controlled by a few? Sounds familiar. China is not doing anything, past human emotions, psychology, or actions that has not be done int he past. WSJ has to write and exaggerate. Perception as we all know is different than reality.
China has now "kicked" out all the fast, dumb and short term money. IF you think about how to remove competition, you might do what Jack Ma did; use the govt to scare away competitors -- think about that and how many times, mafia and others have used the govt to take out competition. Very very futurustic and 5 chess moves ahead thinking. Too many crooks playing in china game.. And its not just the Chinese, foreigners are even worse if you believe that.
I think China has the best valuations right now. Capital markets are opening up faster in SH/SZ/BJ b/c those old Chinese regulators needed a kick in the ass.. And if you think about it, it was Trump." No more Chinese IPOs, no more investing in Chinese companies" - what does this do? This forces Bejing and the old hands to stop sitting on their hands and change.. I believe people hate change......
Credit markets like ABS/MBS and high yield are moving faster in China. People don't understand that this is hard. Look what Milken went through and the high yield market and mezzanine, CLOs gone through in the US.. And EUR is still behind in this manner. I bet China capital markets might leap frog EUR as they are slow. CHina's banks are asset based lenders. You know how hard it is to do cash flow lending.. If Taiwan and Japan lack CF lending or a lot of it..
People talk about politics and war etc.. IF you recall 1989 Tiannemane Square, every foreigner walked away from China markets. But guess which country stayed and killed it - Taiwan!!! And we are seeing that again. Guess who is helping China build its semi-conductors or competition? Hint - already mentioned. And the benefits me and U as a consumer, b/c intel and tscm need to get off the top of the mountain so our future technologies in our hand can be cheaper... Thanks again to the former crazy president we had...
. Most people in the investing world need to keep their seat so don't play China unless ur mtg is paid off or you got juice or control your firm. And if you haven't visited non tier 1 cities, you re missing out! Look at Dalio, some may not like him, but he is right on spot. I can go on, just ping me if you want to chat more.
Overall, China has less competition now and this is better for those that can do the deep work and be long term. Govt helps Chinese consumers which is really everyone's long term thesis....Good luck