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Magazine Issues » July-August 2022

China Roundtable: Has China become uninvestable?

Strategies for unique volatility
Duhra said he had added to China in his portfolio but was “hugely underweight” at the beginning of the year.

“I’m still quite underweight, but I have moved positions quite sharply over the last month or so. There seems to be better sentiment. I think that investors will have to get used to a rebalancing of the economy.”

He said opportunities would be fewer in SOEs – state-owned enterprises – which pay high dividends and might be defensive when the market moves downward. More opportunities exist in areas where the Chinese government is positive: in infrastructure and new energy, for example.

“We think they, or even domestic consumption plays, will pick up quite sharply post-zero Covid, and other stocks obviously will start to move ahead of that. We’re starting to see some of that already.”

Duhra envisions a major shift in China’s industrial strategy. “The ‘Made in China 2025’ initiative, which is a little bit under the radar now because of the antagonism that it creates with the US, is still underway and the industries that will be driving growth in the future such as biotechnology, robotics and AI, are where China is investing. They want to be self-sufficient in semiconductors and other key areas.”

Investment opportunities are to be found here, Duhra believes. “But I do think there is a whole raft of sectors which are – I wouldn’t say uninvestable – but [are] really not very attractive at all at this point.”

Tea views recent regulatory events around tech firms as a historical trend and says the tech sector still has long-term potential. The crackdown has centred on issues such as monopoly and national security.

“Regulation is not something new,” said Tea. “It has already existed for a couple of decades in China, but the magnitude of this regulatory pressure has been extremely high and very concentrated in a group of names. And it happened almost suddenly, at the same time. I think if it was implemented gradually at different periods, maybe the situation would have been different, but the fact that everything happened at exactly the same time has created a momentum, which has undermined investors’ confidence. A number of large internet names, a number of which are owned by many international investors, have seen a sharp decline in prices.

“These regulations were needed for some internet participants, given that their sectors were unregulated for the past decades. A number of participants grew very fast and became systemically important models. The government is putting those companies under proper supervision. This is not something specific to China; it’s part of a global phenomenon, but the fact that this is happening in a very sharp manner has shaken investors’ confidence.”

Some tech firms are now more mature and the sector’s “golden age is probably over”, Tea said. She added: “The tech industry still has long-term growth potential because we should not forget that the Chinese long-term development goal is, one, to better withstand geopolitical tensions, especially with the US; and two, to improve productivity for China.

“We think that there is going to be short-term pain, but probably in exchange for long-term gains. We should not lose faith in China.”