Foreign investment in China has soared in recent decades. First came the economic reforms of 1978, then the opening of markets in 1990, followed by China’s joining the World Trade Organisation in 2001. However, China remains a very different investment environment to the West. Investors should be aware of the risks.
Political risk. President Xi Jinping’s call to achieve “common prosperity” has widely been interpreted as a willingness by the Chinese Communist Party (CCP) to interfere with capital markets to make society more “equitable”.
Listed companies such as gaming giant Tencent and education provider New Oriental have plummeted in value. In an effort to get on the right side of the CCP, Tencent is to donate over $15bn into a “common prosperity” fund, according to a CNBC report. This shift is significant; after years of free reign, Xi is not afraid to rein the private sector in.
Regulatory risk. Many of China’s largest technology firms have chosen to trade on US exchanges to access international investors. Xi has signalled that these companies will face tougher regulation. They have come into the crosshairs of both US-China tensions and the “common prosperity” drive.
This year has reminded investors that they need to be cognisant of political, national security and regulatory risks of investing in Chinese companies.
ESG risk. Firstly, it is clear that governance is different: Tencent’s huge donation to common prosperity has demonstrated that Chinese companies are ultimately accountable to the Chinese government, not to their shareholders. The stock is a mainstay in many global ESG funds.
In addition, although China has committed to net-zero by 2060, it has also announced plans for 43 new coal power stations, a Time report states. Also, China’s social practices, especially its treatment of the Uighur population, should be considered.
China’s growth has rewarded investors with strong returns, but this year has been different. By the beginning of October, the MSCI China Index was down 16% for the year, FactSet data states. The potential of China from an investment perspective is vast, but so are the risks, both ethical and financial.
Alexander Johnstone is an investment associate at Ruffer
Ruffer LLP is a limited liability partnership, registered in England with registered number OC305288 authorised and regulated by the Financial Conduct Authority. The information contained in this article does not constitute investment advice or research and should not be used as the basis of any investment decision.