Investing in China in 2020

There is tremendous potential, argues our overseas trading expert, but investors must tread carefully.

Rodney Hobson is an experienced financial writer and commentator who has held senior editorial positions on publications and websites in the UK and Asia, including Business News Editor on The Times and Editor of Shares magazine. He speaks at investment shows, including the London Investor Show, and on cruise ships. His investment books include Shares Made Simple, the best-selling beginner's guide to the stock market. He is qualified as a representative under the Financial Services Act.

It used to be the Soviet Union that was the greatest enigma; now China has taken on the role. The world’s second-largest economy is more outward looking than at any time in the past 70 years, but its heavily cocooned geriatric leadership remains insensitive to the aspirations of other countries.

There is tremendous potential for investors who nevertheless need to tread carefully.

China’s great leap forward brought economic growth of as much as 10% per annum, although that was from a very low base: the country had fallen way behind Japan and other Asian developed nations and was still catching up with the 20th century, never mind the 21st.

Growth has inevitably slowed but it remains around a still respectable 6%, even allowing for Beijing’s known propensity to manipulate the figures. Manufacturing is holding up well, as evidenced by the fact that China is completing another atmosphere polluting coal-fired power station every week. Chinese leaders aren’t too worried about the environment.

China’s economy was about one-tenth the size of America’s 25 years ago. By 2017 its GDP was $13 trillion compared with $20 trillion in the US. The Far Eastern giant is set to overtake the United States some time during the next decade as the largest economy and its Belt and Road Initiative, involving the creation of networks across land and sea into less developed parts of Asia and Africa and on into Europe, will speed that process. It gives China access to raw materials and to markets for its own products.

New trade deals with compliant partners are strengthening China’s hand in its trade wars with US President Donald Trump. Although both sides stepped back from the cliff edge as 2019 drew to a close, with a compromise of sorts leading to some tariffs against Chinese goods being reduced and others scrapped, tensions remain. China has yet to demonstrate that it is prepared to reach an accord with Trump and keep its side of the bargain.

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Like Trump, President Xi enjoys throwing his weight around. Under his leadership Beijing has shown a disdain for its Far Eastern neighbours by claiming ownership of deserted Pacific islands and their surrounding coastal waters to gain control of oil deposits. 

It has defied world opinion over human rights abuses, keeping its population under arguably the tightest surveillance of any country in the world. Reports of the suppression of Uighurs and their Moslem religion have been brushed aside, just as the annexation of Tibet and the destruction of its Buddhist culture were carried out in defiance of global condemnation in the 1950s.

Beijing is counting on the fact that the rest of the world needs China to help to keep the global economy moving, especially now that world GDP growth is forecast to slow to 2.5%, at which level it is barely keeping up with the increase in global population. Thus, foreign nations feel obliged to turn a blind eye to what is happening within China’s borders.

The Chinese leaders may, however, be reaching the point where they find that events overtake them. The once impoverished nation has suffered many traumas under Communist rule, but it has come a long way since people were dying in the streets of cities such as Shanghai under the Nationalists. 

There is now a growing consumer class and a cohort of entrepreneurs that will look for greater prosperity. The Communist regime in China may seem a solid monolith, but neighbouring Vietnam embraced capitalism with remarkable speed and the same could happen on a larger scale once the edifice starts to crumble.

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Beijing has shown a remarkable reticence in dealing with the growing unrest in Hong Kong. The tables are turned: China needs the former British colony as an entrepot to smooth trade with foreign nations, and as a financial conduit, more than the West does.

The protests began in June over a Bill that would allow Hong Kong residents to be extradited to China and the situation escalated quickly. The Hong Kong government, no doubt consulting Beijing, vacillated for three months before the Bill was withdrawn, by which time the protests had gathered momentum.

Despite parades of some of China’s massive military might across the border and heavy hints of retribution that would rain down on protesters, Beijing’s bluff was called and it backed down. The Hong Kong protests continue.

Unfortunately, this is mixed news for investors, as Hong Kong is one of the best routes for investing in China. Companies such as Alibaba (NYSE:BABA) and Huawei are listed there as well as in the West and many multinational giants such as HSBC (LSE:HSBA), Prudential (LSE:PRU) and AIC do business through it. The Hong Kong Stock Exchange is Asia’s third largest after Tokyo and Shanghai, offers a broad range of stocks and is well organized.

Source: interactive investor  Past performance is not a guide to future performance

Hong Kong is now in recession, its GDP having shrunk 3.2% in the third quarter, the second consecutive quarterly contraction. Financial Secretary Paul Chan blamed the protests for contributing two points to the third-quarter slippage as the local economy feels the impact of business closures, cancelled conferences and collapse in tourism. That assessment is doubly worrying, as it implies that the territory would have been in recession even without the riots.

Chan has promised to pump another £500 million into Hong Kong’s economy, taking the total committed to more than £3 billion. This boost, aimed at small and medium sized businesses, is unlikely to have much impact as long as the protests continue.

The Hong Kong stock market has come through the turmoil remarkably unscathed. In fact, 2018 was far worse, with the Hang Seng, the main index, dropping from 33,000 points to 25,500. It is ending 2019 above 28,000 points.

The next decade will be exciting but potentially dangerous for Far Eastern investors. For as long as the tension within Hong Kong, and between China and the rest of the world, continues it is hard to see things turning out well. On the other hand, any positive developments and the sky’s the limit.

The big winner if Hong Kong does go pear shaped will be Singapore, another former British colony that has financially outperformed a larger neighbour to the north. Singapore has a greater racial mix than the overwhelmingly Chinese Hong Kong and has been careful to ensure that Malays, Indonesians, Indians and Westerners rub along with the Chinese majority in an exemplary display of racial harmony that has also contributed to constantly rising levels of prosperity. 

Source: interactive investor  Past performance is not a guide to future performance

The nation of 5 million people has continued to thrive since losing its founding father and greatest statesman Lee Kuan Yew, it is the financial centre of South East Asia and it stands head and shoulders above the other members of the Association of South East Asian Nations.

It has embraced democracy more successfully than other countries in the region and is a beacon of stability with a strong currency.

The Stock Exchange of Singapore is only the 20th largest globally, but it is well regulated and works smoothly. The main benchmark, the Straits Times Index, has stabilised around 3,200 points over the past 18 months. Given that Singapore is a financial centre, investors could consider the banking sector but telecoms, industrial and construction stocks are possibilities.

Rodney Hobson is a freelance contributor and not a direct employee of interactive investor.