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Is the world’s second-largest economy ‘uninvestable’?

China flag

Is the world’s second-largest economy ‘uninvestable’? The potential in Chinese stocks has been a hot topic over the past few weeks as a suffocating zero-covid policy sends Chinese protesters to the streets, and National Congress push ahead with plans to seize Taiwan.

20th National Congress of the Chinese Communist Party (CCP)

Big Chinese stocks dropped in price following the recent 20th National Congress of the Chinese Communist Party (CCP). Alibaba, Pinduoduo, JD.com and Tencent fell between 10-25% in one day. The dramatic drop was led by a potential leadership reshuffle, which was set to cement President Xi’s position in power.

The purpose of this meeting was to give investors and the public, clarity and optimism for the future. But the results were quite the opposite with the famous Golden Dragon Index dropping almost 15% post-event.

During his address, President Xi reaffirmed his desire for common prosperity. He promised to improve income distribution and regulate the means for accumulating wealth. He also provided no updates on the possible easing of China’s strict Covid policy and went on to reinforce his desire to bring Taiwan under Chinese control, refusing to rule out the use of force if necessary.

Given its current semiconductor competition with the US, it’s unlikely this scenario will occur as China will need Taiwan’s support to remain competitive.

President Xi is also set to serve an unprecedented third term after abolishing the term limits in 2018, making him the most powerful man ever to lead China.

So is China really uninvestable then?

But do these events make China ‘uninvestable’? History shows us these themes can cause angst and fear in global markets, but there may also be potential for those recalling the Buffett-ism ‘be greedy when others are fearful’.

Chinese companies are strong but significantly undervalued. They operate in a different political and economic climate than the West. These events are short-term headwinds, but it’s important to remember long-term investment goals.

If we look back a year or two, similar sentiments were felt on oil and European stocks. In the short term, these assets were volatile, but a look at the bigger picture over 4+ years, they proved to be great bullish opportunities. So, don’t discount the value of businesses purely based on short-term headwinds.

Tech Support

Li Qiang—the second-ranking member of the 20th CCP Politburo Standing Committee—is known as a supporter of high-tech entrepreneurship. He believes China’s future lies in the digital economy, which may be seen as a positive for Chinese tech.

Li Qiang was also one of Jack Ma’s most notable supporters in the CCP leadership. Furthermore, he brought Elon Musk’s Tesla to Shanghai. His appointment appears to affirm the leadership’s support for private-led high-tech industry.

China investment risks

There are risks involved with all types of investing. When considering investment in China, it’s important to consider the risks of company delistings from American markets, whether the Chinese government may regulate large corporates and intervene with their profitability, and geopolitical risks around Russia/Ukraine and Taiwan.

Big tech stocks such as Alibaba, JD.com, Tencent and Baidu are trading significantly lower than at the start of the year. The lower price can be viewed as a margin of safety for taking on that additional risk, provided you are comfortable in investing in that business.

China growth prospects

According to Bloomberg, Nomura slashed China's GDP growth forecast for 2023 to 4% from 4.3%. Despite this, China still remains number two on the list of highest GDP forecasts for 2023, after India.

Howard Marks best describes investing in China via this analogy. “Europe and Japan are economic senior citizens, not much vitality. The US, is a mature economic adult, doing fine, but the best decades are behind. China is an economic adolescent, tempestuous, there are ups and downs, but you also know that the adolescence best decade lies ahead.”

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