Geopolitical risks ebb and flow, but investors may regret ignoring China
Australian Prime Minister Anthony Albanese’s recent trip to China was widely interpreted as a harbinger of improved relations between the two countries. When coupled with increased ministerial engagements over the past year, it seemed the troubled waters of recent years – highlighted by trade bans on agricultural commodities and coal – were calming.
Yet within weeks the relationship was on red alert after a fresh bout of accusations between the two nations over a naval incident in international waters in the South China Sea. Canberra said sonar pulses emitted by a Chinese warship injured a Navy diver, and Beijing responded by urging Australia not to make “reckless and irresponsible accusations”. It then lodged an official complaint to Canberra.
For investors, it highlighted, once again, the difficulty in navigating this critical geopolitical issue and its potential impact on portfolios, both in terms of investment opportunities in China and local economic effects.
Certainly, the importance of the economic relationship between Australia and China cannot be overstated. China is our largest trading partner, accounting for around a third of our exports and a fifth of our imports. Any threat to the trading relationship will thus have serious economic ramifications, even as exporters seek to diversify their markets in the wake of China’s recent trade bans.
Adding to the complexity of the investment equation is the fact China’s economy is struggling. From the late 1970s, which brought a series of bold economic reforms, the world grew accustomed to China enjoying strong economic growth as it lifted many of its 1.4 billion citizens out of poverty. But no longer.
China’s tough COVID-19 restrictions slowed the economy to a snail’s pace. When restrictions were lifted early this year, most analysts believed pent-up consumer demand would underpin an economic rebound. But that hasn’t eventuated.
Key economic indicators are pointing south. The investment houses Nomura, Morgan Stanley and Barclays have all trimmed their forecasts. The renminbi is trading at historic lows against the US dollar, while unemployment is rising, especially among the youth.
Overhanging a sagging economy is a property crisis. With major property developers on the brink of collapse, markets are speculating their downfall could have a contagion effect across the economy.
Geopolitical tensions. A weak economy. An authoritative leader, President Xi Jinping, whose grip on power harkens back to the days of Mao Zedong. Little wonder investors are shying off investing directly in China and wary of companies whose earnings are China-related.
Grounds for optimism
But there are still analysts who see the China story as a glass half full. Wenchang Ma, portfolio manager at the $158 billion active global asset manager Ninety One, paints a bullish long-term view of China. She cites a middle class driving consumption growth, as well as China’s technological self-sufficiency, renewable energy transition, state-owned enterprise reform and continuing integration with the global economy.
According to the $6.3 billion global asset manager Foord, the fact China has opted for short-term financial pain and resisted the temptation to pump-prime the economy (as it did after the GFC) should appeal to investors looking to the long term.
Portfolio Manager Jing Cong Xue says China is playing the long game of economic reform to allow new sectors such as renewable energy, EVs, e-commerce, gaming, online travel agencies and cloud computing to emerge. A China adopting this economic path and eschewing loose monetary policy, property and state-driven investment could shift from a mid-level economy to a modern, productive one.
There is no definitive answer. Getting the investment settings right is hard enough in an open economy; it’s even harder in a one-party state where decision-making is opaque and the rule of law questionable.
What’s certain is that for investors, the world’s second largest economy, especially one so critical to Australia’s economic well-being, cannot be ignored.