This is not substantive investment research or a research recommendation, as it does not constitute substantive research or analysis. This material should be considered as general market commentary.
China has enjoyed a swift turn in fortunes over the past couple of years. A distant memory though it may seem, the country was being praised not too long ago for its swift response to the outbreak of Covid-19 and seemed set to return to normality, while we all still languished in lockdown.
Instead the reverse has happened. Today, lockdowns are still being enforced in China, with drones carrying loudspeakers flying around and issuing helpful reminders, like “This community is in total lockdown now. Stay in your room.” and “Control your soul’s desire for freedom. Do not open the window or sing.” Along with giving geese and household pets lateral flow tests, we are sure this promising strategy is likely to lead to the end of lockdowns in China soon.
Nonetheless, the zero Covid policy of the Chinese Communist Party has left many investors feeling bemused. Other seemingly arbitrary decisions to restrict or ban certain industries over the past two years, like prohibiting private tutoring or scrapping the IPO of fintech giant Ant, have only served to unnerve them further.
However, it’s also periods of pessimism that create opportunity. Amusing though it may be to mock some of the more peculiar elements of China’s Covid policies, the country is going to emerge from its restrictions one day. And many of the regulatory moves made by the government over the past couple of years are often framed as being pernicious, even though equivalent steps taken in the West would be seen as normal or even something to celebrate.
If you look at the measures taken against Ant, for example, the company was offering a money market fund to its users, but marketing it like a bank account via Alipay, a widely used payments app owned by the same group. Imagine a western equivalent, like Apple, with an already extremely popular payments app, directing users to deposit cash with them in what appears to be a bank account, but is actually an investment fund. There is no way this would not attract some public ire and assuming it would even be permitted in the first place, the regulators would almost certainly go after it.
A similar point was made by Emily Whiting, investment specialist for the Emerging Markets and Asia Pacific equities team at JPMorgan, when speaking at our recent event. Emily noted that whereas moves in the US to give greater rights to people working for companies like Uber were likely to be hailed as progressive, almost identical moves made by the Chinese government had been widely condemned as heavy-handed.
This disparity may be frustrating for those that believe it’s illogical or hypocritical. However, it’s also probably part of the reason why JPMorgan Asia Growth & Income’s (JAGI) managers believe there is a lot of opportunity in China today. Pessimism has arguably driven down share prices unjustly, creating the chance to buy for some managers, in what was previously a somewhat overheated market. This was the argument made by the managers at Invesco Asia Trust (IAT) when we spoke to them recently as well.
There’s also another possibility, which was argued for by Steve Hsu in the first episode of our new podcast ‘Trust Issues’. This is that China’s economy and technological development is likely to continue, but investors, particularly overseas investors, may struggle to benefit. You’ll have to listen to understand why that’s the case.
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