Those of a certain vintage might remember the early 80s band China Crisis, which had a number of hits – their biggest being the song ‘Wishful Thinking’, which reached No. 9 in the UK charts in 1984. This seems an apt title when I reflect on the article I wrote about China in October last year, extolling the virtues of the country and how it would go on to dominate the global economy for years to come.
Of course, making short-term predictions is a fool’s errand and the last six months have proven to be a volatile period for the Chinese stock market, as the ruling party looks to make some major adjustments to the economy and clamp down on what it sees as excessive corporate behaviour. However, it’s important to focus on the long term and not get derailed by the short-term adjustments that are being made, and will inevitably be made, along the way.
While the actions of the Chinese Government have spooked investors, in many respects its actions are actually welcome. At its heart is a desire to make the Chinese economy more equal and fairer while trying to stop a handful of companies dominating many of the key markets, particularly online.
If we go back a year, the cancellation of the huge IPO of Ant Financial which was being spun out of Alibaba was a sign that the Government was going to take a more interventionist approach. Ant Financial operates one of China’s most popular mobile payment systems, as well as offering wealth management and loans to consumers and pretty much everything in between. It was without doubt the dominant player in its field and the Government was worried it would effectively become too big to regulate and that, ultimately, this could potentially prove to be a risk to financial stability. If we cast our minds back to the global financial crisis in 2008, this is a somewhat familiar story, and the Chinese will be mindful not to allow any company to simply become ‘too big to fail’.
This was only the start of the action by the Chinese Government, which has in recent months moved to take strong action against ride-hailing app Didi after it listed in the US, with the shares falling 20% in their first day alone. Add in a fine for nearly $3 billion for Alibaba for abusing its position, and fines for another 12 companies including Tencent and Baidu, all for violating anti-monopoly rules, and it’s easy to see why investors have been worried about the direction of travel for technology companies. And that’s before we’ve even mentioned the outright ban on profiting in the education sector which, until July, was a $100 billion per year industry. Given my effusive praise of China last year, you might be wondering why I’m highlighting all of the negative things that are happening in China in recent months!
It’s clear that China is going through a period of transition and the Government is looking to make its economy more resilient. This includes a stronger rule of law, having a well-regulated financial sector and healthy competition across industries to ensure that companies can’t abuse their position. This should be seen as a positive move that should make China a better and safer place to invest in the long term. However, in the short term, with China – and the technology companies in particular – making up such as large part of the Asian and emerging markets benchmarks, these growing pains are obviously creating some challenges for those that have meaningful allocations to Chinese companies, including those listed in Hong Kong. Those invested in the AJ Bell MPS or funds will know that we allocated a dedicated exposure to China back in February as our long-term asset allocation approach highlighted the attraction of this exposure over the next decade.
Despite the Government’s actions, it appears that it remains committed to long-term economic growth, with a target to double GDP before 2035. To achieve this, it needs to grow at around 5% per annum, a number far in excess of that likely to be achieved by developed economies, and it will be well aware that if it creates too hostile an environment for capitalism, there is little chance of hitting this target. President Xi has also started to develop the domestic stock market with the announcement of a new stock exchange in Beijing and the launch of an index future that will track the A share market that represents the domestic Chinese economy.
While the clampdown on excesses may be judged as anti-capitalist, the stock exchange moves are a reminder that China remains on a journey to be a more developed, regulated, and investable country. It was never likely to be plain sailing and recent volatility is a reminder that, in the short term, the situation can change. But, given our long-term approach and focus on the expected returns of assets over a multi-year horizon, we remain comfortable with our exposure to China not just through the traditional route of Asian and emerging markets’ products, but also via the dedicated exposure to the domestic economy. Over many years, this could be a key driver of long-term returns and, given the growth trajectory that China is on, it feels right that the AJ Bell Growth portfolios have exposure to what could be one of the dominant players in the global economy for years to come. To shoehorn in another China Crisis song, it feels as if we have yet to see ‘The Highest High’…
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