For many years, seasoned investors have been extolling the virtues of investing in China. The reasons for this are varied and sound. They include risk diversification, low correlation with other key markets, the size and sophistication of the Chinese economy, the rise and rise of the middle class, and the major developments in technology and innovation.
However, 2021 has been an unusual year with China, due to a raft of triggers, now a significant concern for global investors. And it is likely to remain as such for at least the second half of next year too.
The country’s economic growth is uncertain, and it’s a major cause of worry for investors.
The International Monetary Fund’s latest forecasts, published in October, predict that China’s GDP growth will slow from 8% in 2021 to 5.6% in 2022. And many analysts are now saying that we should expect less than 5% growth next year.
Much of the recent slowdown has been fueled by the wider impact of the collapse of huge property developers such as Evergrande.
The crisis at the world’s most indebted company worsened in the last few days after news it had missed a critical repayment deadline. The property giant, whose liabilities exceed US$300 billion, failed to meet interest payments to international investors last week.
There are now serious discussions taking place that this could initiate a worrying credit crunch that would be disastrous for the world’s second-largest economy.
Typically, when there are prevalent growth risks, Beijing has been quick to roll out monetary and fiscal stimulus. But the government is now keener to rebalance the economy away from a reliance on debt – even if it means some short-term pain.
That said, I do believe that we can expect to see some stimulus packages in the first few months of 2022, which could help soften the fallout from slowing growth.
Another of the largest risks is the China-Taiwan issue. Beijing is becoming increasingly noisy about its assertion that Taiwan is part of China. Meanwhile, the US has “guaranteed” the defense of Taiwan. Any escalation of tensions between the world’s two largest economies will directly impact global financial markets.
The other important angle to this issue is that of Taiwan Semiconductor Manufacturing Company (TSMC), the largest maker of chips that are needed for everything from cars to smartphones.
As such, China’s moving in on Taiwan would bring with it an extra positive for Beijing: It could potentially have state control over TSMC. This would be huge, as China, which lags behind in the semiconductor sector, could use it as a stick to hit the West by threatening to cut off supplies to North America and Europe.
Global investors will also be carefully monitoring for signs of a broader regulatory crackdown on Chinese tech companies after Beijing in effect issued a shock ban on the country’s $100 billion private tutoring sector in September.
Entities that want to list in the US, that use algorithms “too much,” or have large cloud computing capacity have also been targeted.
That regulatory attack on tutoring, and other sectors such as gaming and ride-sharing, appears to highlight the Chinese government’s new thinking and its increasing push for control of private enterprise. This stance could be expected to bubble throughout 2022.
Given the state-sponsored attack on private capital, investors will be required to take a leap of faith regarding China’s political strategies.
There are many investment headwinds on the horizon – as well as key tailwinds – for global investors to consider in 2022. But China will remain one of the biggest areas of concern.
Nigel Green is founder and CEO of deVere Group. Follow him on Twitter at @nigeljgreen