Hands up anyone who thinks that the conclusion of the Biden-Xi meeting in San Francisco has sounded an all-clear for investing in China again. It was certainly a momentous occasion. And without doubt a number of issues were discussed on the sidelines of the Asia-Pacific Economic Cooperation summit.
But they weren’t exactly crucial issues. That said, we all probably have our own ideas about what the two leaders should have talked about. As it turned out, they tiptoed around controversial topics and, instead, nattered about fentanyl, military communications and AI. From that perspective, the dialogue was worse than a damp squib.
But it is a start, albeit a disappointing start. A whole lot more needs to be done before investors can have full confidence in China. The world’s second-largest economy has, to put it mildly, disappointed the market with head-scratching actions that beggar belief. Investors need consistency, transparency and reliability. China’s market lacks all three.
In recent years, policies appear to be made on the fly, which does nothing to help instill confidence. Some might choose to err on the side of caution and avoid China totally, which is completely understandable. It is often said that it is better to stay out of trouble than to try to get out of trouble later on, regardless of China’s charm offensive at APEC.
Amusingly, the San Francisco meeting brings to mind a 200-year-old poem by Mary Howitt about a spider and a fly. The first two lines that have almost become legendary reads as follows: “Will you walk into my parlour? said the spider to the fly; ‘Tis the prettiest little parlour that ever you may spy.”
Things don’t end well for the fly who is eventually seduced by the spider’s deception and its own vanity and naivety. So, as investors, we need to be realistic. China remains a risky market where political ideology can often trump economic reality. But at the same time, it is a huge market that cannot be easily ignored, either.
To square the circle, we can choose to invest in non-China listed companies that have some exposure to the Middle Kingdom. These could include banks, consumer-facing companies and even property-related shares that are more experienced at balancing the risk-reward equation. It doesn’t eliminate the political risk of investing in China entirely but it can transfer some the risk through diversification.
Another strategy could be to assign a lower allocation and a wider margin of safety to China shares in our portfolios than we would normally do for other shares. It should still provide us with some exposure to the second-largest economy in the world. But it should also provide a limit to any downside.
China remains a work in progress. Unfortunately, progress has stuttered because of the ruling party’s fear of losing absolute control. It is unlikely that China will ever fully embrace free-market economics or open democracy. But provided we accept China for what it is, we can at least invest with our eyes wide open.
