Feature – China
Border to Coast takes a focused approach to investing in the world’s second largest economy. “Our partner funds are commit- ted to being responsible investors,” Pascal says. “This is one of the reasons we have invested with specialist managers in China that fully integrate ESG issues into their investment processes.” “Our managers have boots on the ground and so are close to these issues. They live and breathe them in many ways and are best-placed to understand the risks and opportunities,” he adds.
Business crackdown On another, but different, worrying level there have been numerous reports of a business crackdown in China. “Are we concerned? No. Are we complacent? Absolutely not,” Pascal says. “President Xi’s ‘common prosperity’ agenda and long- term objectives, such as technological independence, will have material implications for most corners of the Chinese invest- ment market. But it is not all doom and gloom. “Yes, some sectors will face headwinds – we have already seen the after-school tutoring market collapse – but there will be tail- winds for others,” he adds. Yet one asset manager challenges reports of such a strategy by the authorities. “There is no such thing as a business crackdown.
“China has been working to regulate its technology sector and bringing businesses to cut financial leverage,” they say. “The global technology industry needs regulation on a global basis due to monopolistic practices, an unfair tax system, content control and other massive regulatory arbitrage versus tradi- tional sectors.”
It is worth noting that China has pursued regulatory action at various times over the past 20 years against industries consid- ered as becoming too comfortable or wealthy at the expense of the wider population. This policy is known as ‘common prosperity’ and has focused on telecommunications, technology operators and banks. It now appears to be turning on the possible excesses of the real- estate sector.
“Investors need to look through the negative headlines to iden- tify the opportunities,” Pascal says. “As an example, the drive to be technologically independent should act as a tailwind for innovation in the semi-conductor and software sectors.”
New paradigm For Richard Bullock, senior geopolitical research analyst at Newton Investment Management, the situation with common prosperity potentially raises bigger questions for investors. “Investors are well justified in asking whether China has entered a new socio-economic paradigm and whether social- ism with Chinese characteristics isn’t just a cover for plain old- fashioned socialism,” he says.
44 | portfolio institutional | February 2022 | issue 110
The population is becoming more urban, is ageing, is becoming wealthier and more environmentally conscious. All of this will create opportu- nity for investors. Luc Pascal, Border to Coast
“It can feel uncomfortable for investors and discriminatory against certain industries and companies, but in the medium term it can foster a cycle of renewal and the flourishing of new investment opportunities,” Bullock adds. Craig Allen, president of the US-China Business Council, which advises and represents US investors in China, high- lights the investor uncertainty surrounding the common prosperity idea. “Portfolio investments have largely been investing in industries that are not open to foreign direct investment: EdTech, for example. Media is another good example, and those are unfortunately the areas that common prosperity has affected. “We will see where common prosperity goes, and how this reg- ulatory flurry will right itself over time. And we don’t know the answer to that question yet,” Allen adds.
Growing economy
What will override investor doubts in the end is the fact that the prospects for the Chinese economy are moving in one direction: upwards. Late last year president Jinping asserted that China will double the size of its economy by 2035. To achieve this, GDP must grow annually by a tad more than 4.7% on average for the next 15 years.
In western terms, these are dream-like growth numbers. Not so in China. The Chinese economy grew by 6.1% last year, and by 6.7% on average in each of the previous five years. Although looking back also gives an indication of what the future holds. Michael Pettis, finance professor at Peking Uni- versity and a senior fellow at the Carnegie-Tsinghua Centre, notes that countries following the high-saving, investment-led
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