Investing in China

Is communism the way forward?

Whilst on holiday, peering out over turquoise bays, ones mind starts to wander and what better route to take than pondering whether communism really has some postive aspects which we, in the capitalist world, would do very well to replicate.

I think my mind has had the space to wander into this rather philosophical space because there has been little to discuss on the Italian tax front (one of my favourite topics). We are waiting for the big announcement on exactly how Mario Draghi intends to overhaul the tax system in Italy and that decision is ‘supposedly’ being announced shortly (but will likely take longer than expected, as is always the case in Italy!). As soon as I know anything I will let you know.

So to continue my thought wanderings I thought we should talk about China.

But before I get into the detail, I want to write about a conversation I had with some clients (who shall remain nameless), who took a long trip along the old Silk Road some years ago. They had been amazed at the development they had seen along the old route, and that it had mainly been funded by China. They also travelled in China itself and commented on the magnificence of its technological and infrastructure progress. These clients, who I would say could easily be classified as socialists and defenders of free speech, said that given what they had seen and the speed at which China can just ‘get on and do things without arguing about it’ does make you wonder ‘if there is some merit to their form of communism’.

And with that thought in mind, this E-zine will explore some of those aspects of Chinese governance. This E-zine was inspired by a blog post I recently read from an asset manager called David Coombes at Rathbones Asset Management (a collaborative partner to The Spectrum IFA Group). His blog puts some recent issues surrounding China’s political decisions in a new and interesting light.

So what is happening in China?
Late 2020, Chinese regulators stepped in and forced Ant Group, a digital payments spin-off from ecommerce giant Alibaba, to abandon its stock market listing on the Shanghai exchange. More recently ride-sharing app Didi Chuxing was pulled from Chinese app stores days after it brushed aside regulatory concerns about data security to list on the stockmarket in New York. In addition, the Chinese authorities have levied a record $2.8 billion fine on Alibaba for anti-trust violations, and regulators are investigating food delivery app Meituan and internet and gaming conglomerate Tencent for the same issues.

Not only are they attacking the tech industry but the government, in an overnight decision, seemingly abolished ‘for-profit’ education in core subjects for kids up to 15 years old, sending an entire private education industry into complete chaos.

Many investors are concerned about a wider crackdown across multiple industries.

The way of the Dragon!
Before we become too shocked by how the Western media portray decisions by the Chinese government, it is a good idea to look at the problems from a Chinese perspective rather than only through our Western lens. China, in much the same way as the West, is struggling with the tremendous power that Chinese online giants now wield over various sections of society. They have created a kind of ‘winner-takes-all’ online marketplace in technology and data. Equally Chinese families are now have to pay increasingly large fees to send their children to school to get even a half decent education.

Does all this sound too familiar?

If so, let me ask you a few questions:

* Do you think that big tech firms( Amazon, Google, Facebook, Apple etc) play a much too important role in our lives and do you think they should be more heavily regulated in the way they keep and use our data?
* Do you think that big tech firms should pay more tax?
* Do you know anyone with kids who is paying a fortune for private education? From supplementary English, sports or music lessons and /or having to pay a small fortune in nursery costs to secure a place in a good nursery school for their kids?

Technology
I don’t know many people these days who can easily defend the growing, and rather worrying power of the tech companies in and on our societies. I, personally, am concerned about the use of data, the power of their lobbying and their continued ‘legal’ tax avoidance (Amazon paid an effective tax rate of 1.2% in 2020 when their marketplace exploded with Covid stay at home policies, which drove even more people to online shopping!). Yet, in many ways we are slave to these beasts. I couldn’t run a business without them, and they do make life much easier.

Education
The Chinese authorities felt that competition in education was putting too much pressure on children and creating a financial drain on parents that is possibly slowing the birth rate and affecting property prices. This was putting children of less wealthy parents at a huge disadvantage. Sounds oh so familiar! Some ‘3 year old’ Chinese children were receiving extra tuition to prep for entry exams to get a place in kindergarten. The Chinese government says this was having a negative impact on the social cohesion of the country. As a father, I think I have to agree!

China does what the West keeps talking about
Could it be that China have looked at the Western model and decided it would like to introduce more regulation to benefit families and the populous, instead of corporations? Given they are named the ‘Central People’s Government’ one might be forgiven for thinking that they are looking at putting people first and corporate expansion second. Wouldn’t it be nice if our own governments could do the same?

Do you prefer democracy or dictatorship?
The truth of the matter is that Chinese leaders don’t pull any punches when they want to implement new policy. They don’t need to put it to a public vote; they can do it overnight. This means that businesses, small and large, suffer hugely as a result. I would be very worried as a father, contributor to the family purse and businessman if the Italian government had the power to introduce legislation which effectively put me out of business overnight.

So, what do I prefer: democracy or dictatorship? In all honesty, I think I am a middle-ground man. I don’t think either work well. I think I would probably choose to compare socialism versus capitalism as economic models and once again, I don’t think either work well in the extreme. I think that we live in an advanced capitalist society in the West which should be reigned in through more regulation in these new and influential sectors. What is perpetually annoying is that I work in financial services which is one of the most heavily regulated businesses and yet we have the big tech firms, the new world of ‘influencers’ and the online world which is largely unregulated and can operate in whichever way it pleases. Maybe China has got it right and they are trying to create a more socially cohesive society.

So should you still invest in China?
You could actually think of the Chinese Government intervention as ethically responsible politics. It is focussing on inequality and trying to improve society as a whole. If you look at it through that lens, then Chinese investment starts to look quite appealing.

That being said, it would be foolish to say that this doesn’t come with some inherent underlying risks. Which industries / sectors might they attack next? And what about corruption, unquestionable power, individual rights etc? That is why it is important that when allocating a part of your portfolio to China, you must be precise – you can’t just buy a Chinese market tracker and expect explosive returns. It is a large market, but one that is still maturing. Company governance is going to have to improve from here or authorities won’t just fine you, they will close you down (or your whole industry!).

So whatever Western media might have us believe, it might just be that this inequality / social-pact shake-up is a sign that China might be a better place to invest over the next decade. And whilst we always advise caution when investing, in line with your own risk profile and using well established, competent asset managers, I would expect to see some allocation to China in almost everyone’s portfolio.

And on that note, it just leaves me to wish you a Buon ferragosto and I hope you manage to stay cool in the ‘Lucifero’ African anticyclone currently covering the country. Keep your anguria close at hand! As I write this E-zine, I notice that the hottest ever recorded temperature in Europe has been set in Siciliy at 48.8 degrees Celcius! PHEW!

As always, if you have any questions about this E-zine, or would like to contact me about your financial and/or tax planning needs in Italy, then feel free to get in touch on gareth.horsfall@spectrum-ifa.com or on cell +39 333 649 2356.