When the Western investor wakes up…
Investment portfolios worldwide only have 3% of their assets in China, whereas the country accounts for 15% of world GDP. For the Western investor, this underweight must rapidly be closed.
This column has previously been published in L’Opinion on 17th november 2020
“Have the financial markets been closed for 12 years?” asked Huang Guangyu, the founder of the distributor Gome, when he was released from prison last June. Once the richest man in China, he was surprised that the Shanghai stock exchange index was at the same level as it had been on the day he was incarcerated. Even though the last decade has been “lost” for the Chinese stock market, the next one may turn out to be more favorable for China.
Firstly, this is because international investors will frantically continue to favor growth companies. Interest rates, expected to be “lower for longer”, will accentuate the unique nature of China’s growth, which, depending on the sector, will still account for between a third and a half of the increase in global wealth. Naturally, China growth will slow down, but it will have the new attraction of being more profitable and will generate free cash flow — the Holy Grail of Western investors.
Secondly, it is because China, in a post-Covid world, is taking the daring gamble of banking on innovation, just as the USA did in the 20th century. In contrast to the West, whose concern is for caution and social protection, China is giving priority to the technology boom in order to speed up digitization and take it further than to those industries already affected: commerce, the media and tourism. In future, Banking, insurance, education, healthcare, the food sector, manufacturing industry… the arrival of artificial intelligence will cause all these sectors to fundamentally rework their business models.
China, in a post-Covid world, is taking the daring gamble of banking on innovation — just as the USA did in the 20th century — in contrast to the West, whose concern is for caution and social protection.
Unlimited inventiveness. Already familiar with the way Tencent and Alibaba have revolutionized video games and e-commerce respectively, Western investors will gradually discover the unlimited inventiveness of this new generation of “VCs” — Venture Communists — such as Bytedance, Ant, ZhongAn, Youdao, Kingdee, Yongyou and Geely, who are hell bent on redefining the rules of their industries and on challenging the companies that lead the world.
Thirdly, and contrary to Western perception, it is because the Chinese government and the regulator are determined to create a financial environment that is favorable to international investors. As China will doubtless be warring with the USA for several decades, it is fully aware that it has to stabilize its balance of payments and, in order to do this, it has to attract foreign capital. Also, China needs a solid finance industry in order to return to the world stage.
Ray Dalio ©Brad Trent
Hence the refusal of the Chinese central bank to monetize public debt — the only one of its counterparts to do so — so as to strengthen both the credibility and the exchange rate of the Chinese currency against the dollar. And hence the decision of the regulator to stop the Ant Group’s stock market flotation at the last minute, since Ant’s business model seemed to be heading dangerously towards what happened to American sub-primes in the 2000s. And hence the opening of the asset management industry to foreign players, as in the case of the recent joint venture between Amundi and the Bank of China, or the various buy-outs by American investment banks of their Chinese partners.
Ray Dalio, the brilliant founder of Bridgewater Associates, noted recently that investment portfolios worldwide only have 3% of their assets in China, whereas the country accounts for 15% of world GDP and a good third of its future growth. As a “wide-awake” investor, he stated that over 15% of his personal investments were already in China…
