Harry Geels: Excluding China is tough dilemma for institutional investors
This column was originally written in Dutch. This is an English translation.
By Harry Geels
Partly because of the trade war against China, the Chinese economy has been transformed in five years from an economy based on infrastructure and real estate to an industrial nation. This in turn creates all sorts of complications, especially for European industry, climate and the dollar (as a reserve currency).
Since the trade war initiated by Donald Trump against China, Chinese stocks have not exactly fared well. After Russia's invasion of Ukraine, things went completely downhill. But last week, Chinese equities suddenly got the wind in their sails after the Chinese authorities came up with a host of stimulus measures, such as a cut in the tax on securities trading, support for the real estate sector (including relaxed mortgage rules), interest rate cuts and fewer rules for tech companies.
It was extraordinary that investors suddenly got excited. At the end of August, I was still writing for 'Beleggers Belangen' magazine that Chinese technology stocks were very cheap, and that I sighed at investors' absence (two and a half years earlier, I also wrote that China was an interesting investment case). But now technology shares could indeed rise 25% in a very short time. As if investors had been rudely shaken up by the new measures. However, a structural change in China has been going on for some time.
Industrial nation
China has transformed itself from an economy that grew mainly based on infrastructure projects and the real estate market to an industrial nation in the space of about five years. Mainly due to the trade war with the US and the realisation that a dominant real estate sector can also lead to problems (too high prices can lead to dissatisfaction, especially among young people), the authorities have made every effort to set up an (independent) industry as a result of which China is now the world's largest producer of electronics to cars, steel (more than 50% of world production) and solar panels (more than 70%).
Bron: GavekalOnderzoek
The first complication of the industrialisation deemed necessary by the Chinese authorities is the competition that numerous western industries are now feeling. The German car industry in particular is sighing. An uncomfortable situation has thus arisen especially for institutional investors. China is avoided as an investment country, but at the same time the world is dependent on Chinese products for the climate transition, such as the aforementioned solar panels. But China also owns, for instance, the world's largest refineries for cobalt and lithium.
Renminbi
However, there are not only complications or investment dilemmas regarding competition and climate. Due to huge exports to the West, there has been a huge trade surplus for years, especially versus the US. China in total now has the largest trade surplus ever reported by any country. Because of the trade war with the US and China's eagerness to position the renminbi as the second reserve currency alongside the dollar, China is increasingly reluctant to hold dollars.
One of the reasons why gold has risen so much recently is that the Chinese government is increasingly holding gold rather than dollars as reserves. Whether the renminbi can eventually become a reserve currency to rival the dollar depends on a variety of geopolitical developments. In any case, an increasing number of countries are willing to hold renminbi as a reserve currency to an increasing extent, including Russia (already 17-18% of the total), Nigeria (10%), South Africa and most Asian and South American countries.
Dilemma
As mentioned, institutional investors in the West have increasingly declared China as uninvestible. The country is considered insufficiently transparent and there is too much government interference in companies. A complication is also that the country continues to trade with Russia. But so does India, for instance, and investments are still made there. The world buys climate-necessary products from China, whose low prices are also good for inflation, but does not invest there. That is chafing.
The high import duties on Chinese electric cars also chafe. The climate transition and consumers' wallets are apparently subordinate to geopolitical and Western industrial interests.
Bron: Refinitiv
Meanwhile, large passive investors invest more than 60% of their assets in the US. China has even a smaller weight in world indices than the UK, Canada, France, and nowadays even India. Passive investors thus send a clear political signal that they have great faith in the US and dollar.
Disclaimer: my employer Auréus has both an overweight in Chinese government bonds (unhedged) and Chinese equities.
This article contains a personal opinion of Harry Geels