Unless you stopped watching the news (I wouldn’t blame you) investing in China appears to be a fools errand. Recently, famed investors George Soros & Ray Dalio each weighed in on the future of the China markets. Soros warned against investments in this environment and Dalio reminded us of what the China market is. Both are correct and both are wrong.
Investing in China is still a very intimate decision that requires a significant amount of trust, demands understanding of layers of cultural & political nuances, and challenges even the most risk averse investor. From the Luckin Coffee Scandal to the widespread regulatory actions towards financial services that started with the canned Ant Financial IPO and put a damper on Didi’s public listing, all of these are specific examples of why to avoid China. But for every example of why not to invest, there are hundreds, if not thousands of reasons that investors still should not discount China.
The world is changing whether we like it or not
China’s economic rise is almost inevitable, short of a military conflict or collapse of their economy. In less than two decades they are likely to be the worlds largest economy, gaining the headaches and advantages that come with the label. Despite the economic growth, they are facing significant internal challenges that will alter change what the China today looks like tomorrow.
Chinese authorities are already dealing with a declining birth rate, a growth slowdown in many sectors, a rising middle class that will demand more services, and foreign policy that makes as many sceptics as it does allies. To add to that, trends in US politics favor anti-Chinese measures at the federal level which often run counter to state by state calls for foreign investment. Chinese domestic policies are constantly highlighted for human rights concerns leading to sanctions and international backlash, and a tit for tat trade war with the US left no winners.
The grim reality is that the US system is not built to change China’s nor is China’s built to satisfy the expectations of the west
In some areas there is unlikely to be a compromise unless substantial internal changes and domestic sentiment is reversed. This leaves corporations & investors to embrace the on-ground realities in China while simultaneously placating concerns of their western headquarters. For many corporations, China represents a majority of revenue streams, or at a minimum, the largest market for growth.
So the long winded answer to the question, is “Should you invest in China?”
To answer this one must look internally at what is your metric for success. China has only been open to the world in it’s modern form for less than 20 years. Since 2008, we have seen the number of China billionaires grow more than 10x. Since the appointment of current Chinese President Xi Jinping, we have seen Chinese internal politics draw a hard line on corporate influence while at the same time allowing sectors in the economy to flourish.
The “wild west” which many of us early China advisors encountered has been replaced with digital systems and a might more watchful regulatory environment. Still, in chaos and change come opportunity. China is still growing and those who can capture the opportunity will be rewarded. It does not come without risk and I cannot provide specifics to properly time this market. I can assure you that this market will not go away and only get bigger and more established. Will the government change? Will market access become easier? We can’t predict the future but we can do our best to read the tea leaves and identify opportunities for sustainable/ responsible investments in a market that has already started to shape the next century.
About the Author
Brandon Hughes is the Managing Director & Founder of FAO Global, a cross-border corporate strategy & investment consulting practice that focuses on US-China-Emerging Market ventures. Brandon served as a US Army Captain and has worked in two prestigious think tanks, the Carnegie Endowment & Asia Society prior to his time in the military. Brandon is also a start-up mentor & on the investment committee for Delta Rock Capital LLC.
This article was originally published via Linkedin here.
