Toronto Star

Should we invest in China or not?

- Frank Giustra

Is BlackRock’s entry into China a “blunder” as George Soros claimed in a recent op-ed? Or are critics misconstru­ing China’s recent regulatory crackdown, as Ray Dalio would like us to believe?

Both Soros and Dalio are highly respected and very successful global macro investors. BlackRock, the world’s largest fund management group with close to $10 trillion under management, recently launched a set of mutual funds for the Chinese consumer. It raised $1 billion from more than 100,000 investors, making it the first foreignown­ed fund group in China.

Soros believes this move was a mistake that will not only lose money for BlackRock clients, but also imperils the national security interests of the U.S. He believes that the current regime regards all Chinese companies as instrument­s of the one-party state, and will use them accordingl­y to consolidat­e President Xi Jinping’s ever-increasing power by “bringing to heel any entity rich enough to exercise independen­t power.” He gives several other reasons to be wary, including a collapsing birth rate, an over-indebted real estate sector and, most importantl­y, the recently launched “common prosperity” program, which is designed to redistribu­te the wealth of the rich to the general population. A worthy idea in principle, but certainly not investor friendly.

In a response to the Soros op-ed, BlackRock justified its move by stating that the U.S. and China have a large and complex economic relationsh­ip, and that financial firms like them contribute to the economic “interconne­ctedness” of the world’s two largest economies. Furthermor­e, it said that given the overwhelmi­ng majority of its assets are for retirement, it must have exposure to a broad and diversifie­d range of investment­s. In essence, China is too big to be left out.

Adding to the pro-China side, Dalio takes the position that the recent regulatory crackdown on tech, education and gaming companies was being misconstru­ed by the West as being anti-capitalist. He points to a 40-year trend that demonstrat­es China has embraced capitalism and all its participan­ts, from capital markets to entreprene­urs. Dalio’s take on the recent crackdowns is that Chinese regulators are working in a rapidly changing environmen­t and aren’t clear in their actions or messaging. His bottom line is that China has delivered great returns and will continue to do so. Investors who don’t get that will continue to miss out.

So, what to make of these contrastin­g opinions? Historical patterns provide additional insight into what seems to be unfolding and are very useful when making long-term investment decisions. The rise of the U.S. and China as industrial powers share similar features, and are separated by only 100 years. During its industrial buildup, the U.S. mostly tried to mind its own business and stay out of global squabbles. Isolationi­sm reigned supreme. Much like China today, the U.S. focus was mostly economic superiorit­y.

But then, through a series of presidenti­al doctrines starting with the Monroe Doctrine in 1823, the U.S. began to slowly flex its military muscle and continued to ratchet it up right up to the present day. China is now starting to flex its own military muscle with its own version of a “Monroe Doctrine” with respect to the South China Sea and Taiwan. Its tone is increasing­ly bellicose. And its military and economic might, not to mention its technologi­cal capabiliti­es in AI, robotics and quantum communicat­ions, is rapidly catching up to the U.S. Furthermor­e, its brutal repression of dissent internally, specifical­ly with the Uyghur population, is increasing­ly worrisome.

U.S./China relations started to deteriorat­e badly during the Trump administra­tion and are not faring much better for Biden’s either. I am afraid we may be entering a Cold War period as both powers vie for global supremacy. That will lead to an accelerati­on of deglobaliz­ation in trade and investment.

Tit for tat, tariffs and regulatory attacks targeting investment­s and businesses may intensify, which could lead to trade wars. History shows that when countries are busy trading with each other, there is little appetite for conflict. People on both sides can prosper and be happy in their hedonistic consumptio­n. It is usually when trade stops that wars start.

All-out war, although a possibilit­y, is unlikely. The U.S. and China are both nuclear powers and they need each other in more ways than they will acknowledg­e. The U.S. is China’s biggest trading partner representi­ng 17.5 per cent of China’s total exports. And China is the largest single foreign holder of U.S. debt, owning about $1.1 trillion. That number has come down quite a bit the last few years as China has attempted to de-dollarize its economy. But China can’t just dump its U.S. treasury holdings without hurting mostly itself, and, on the other side, the U.S. needs China’s cheap goods for its avaricious consumer economy. It’s a reluctant but symbiotic relationsh­ip that will be hard to unwind by either side without effectivel­y shooting oneself in the foot. This relationsh­ip of convenienc­e may help avoid a worst case hot war scenario.

But this relationsh­ip is definitely on the rocks. The Chinese regime under President Xi is becoming more authoritar­ian and more belligeren­t. Perhaps it’s time investors start factoring in non-financial considerat­ions in their investment decision making (such as human rights) as we already do with ESG-type investment­s. Lastly, Although western investment is welcome for now, I see a real risk that it won’t be in the future. China may continue to rise as Dalio predicts, but to who’s benefit and at what cost?

Caveat emptor.

The U.S. and China are both nuclear powers and they need each other in more ways than they’ll acknowledg­e

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