100 years of Communist China: avoid, invest or engage?

interactive investor comments on the milestone as the West continues to grapple with the growth and influence of China.

On 23 July, it will be 100 years since a group of revolutionaries secretly met in a small home located in Shanghai’s French Concession. Huddled around a table, they debated the future of China.

In a state of constant civil war between rival warlords, and other parts under colonial control, the group sought to pull China out of this state of chaos, forming a new political movement: the Chinese Communist Party.

Within a few decades, the Communist Party took control of the whole country, proclaiming the modern-day People’s Republic of China in 1949. While the Communist Party would oversee plenty of new chaos and tragedy once in power, including mass violence and famines, it has also played a pivotal role in the economic transformation of China.

As the West continues to grapple with the growth and influence of China, interactive investor, the UK’s second-largest direct-to-consumer investment platform, looks at whether investors should avoid, invest, or engage.

Dzmitry Lipski, Head of Fund Research, interactive investor, says: “The Chinese Communist Party is one of the world’s most powerful institutions. The policy choices and actions of this opaque political organisation, and concerns about human rights, means that investors looking for exposure to China may well want to focus on fund management groups that take engagement and stewardship issues seriously.

“We think that for investors, this engagement approach is more realistic than the idea of avoiding China – global supply chains mean that we all have exposure to China, both as consumers and investors.

“Most recently, China’s Tencent (SEHK:700) has agreed to buy UK video games firm Sumo (LSE:SUMO) for more than £900 million. Aside from the consumer implications, Tencent is the biggest holding of the UK’s largest investment trust, interactive investor Super 60-rated Scottish Mortgage (LSE:SMT). Manager Tom Slater says that the pace of innovation at scale in China today exceeds anything they can find in the rest of the world.

“Specialist China-focused collective investments that we like include Fidelity China Special Situations (LSE:FCSS) investment trust, which believes that better governed companies make better investments – again, engagement here is key.”

Tom Bailey, ETF Specialist, interactive investor, adds: “China is now the world’s second-largest economy and home to some of the world’s leading and most innovative companies. As a result, Chinese stocks are something few investors can now ignore. But if Chinese stocks cannot be ignored, nor can the organisation which wields ultimate power of the country – the Communist Party.

“This can be seen in the so-called ‘tech crackdown’ in China. Over the years, the Communist Party has turned a blind eye to Chinese companies using complex legal loopholes to list on foreign, often American, stock exchanges. Many of the world’s leading Chinese tech companies, found in the portfolios of many UK investors did this – including Alibaba (NYSE:BABA), JD.com (NASDAQ:JD) and Meituan (SEHK:3690).

“Now, however, the Communist Party’s goals have changed. China’s leader, Xi Jinping has decried the “disorderly expansion of capital”. For various reasons, China seems to no longer be keen on its companies listing on foreign exchanges. More broadly, some analysts think the party is trying to reassert dominance in the face of the growing power of Chinese tech firms.

“Either way, it has led to increased regulations for Chinese shares trying to list on foreign exchanges. To list their shares abroad, Chinese companies will have to seek approval from Beijing. As a result, markets are now fearful of the future of the US-listed Chinese shares.

“This incident should be a useful reminder to investors that political risk in China is real and can cause serious losses. However, it should also serve to remind investors about the nuances of Chinese stock indices, since China’s tech crackdown has primarily impacted companies listed overseas.

“For all the risks of investing in China, there is no denying its increasingly important role in the global economy. It is home to some of the world’s leading companies as well as a huge consumer market. For many investors, not having any exposure would be unthinkable.”