China has been a magnet for foreign investment for decades as it typically offered buoyant returns and growth potential. But in recent months, there have been a slew of investors shunning the world’s second-largest economy.
Around US$300 billion could exit the country this year, more than double last year’s outflow of $129 billion, according to forecasts by the Washington-based Institute of International Finance.
This global trend needs to be reconsidered. Investors should be more cautious about radically reducing their exposure to China.
Investors are claiming myriad reasons for pulling out.
One of the main reasons is unpredictable regulatory crackdowns. Since last August, global investors have been carefully watching 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 July 2021.
That regulatory attack has been perceived by many as highlighting the Chinese government’s new thinking and its increasing push for control of private enterprise, including in the crucial tech sector.
Another cause for concern has been Beijing’s strict zero-Covid policy and draconian lockdowns, which have had a serious economic impact and created ongoing uncertainty. Investors say they just do not know where the policy’s consequences may lie.
Elsewhere, China’s jittery real-estate sector is also triggering investor fears. It matters because construction and property sales have been the biggest drivers of economic growth since President Xi Jinping came to power a decade ago.
However, despite the concerns, I would suggest that investors should take a zoomed-out perspective on China if their primary objective is capital growth.
China is transitioning from an export economy to a consumption one that, ultimately, will be more sustainable. Indeed, PricewaterhouseCoopers (PwC) forecasts that the country’s burgeoning middle class could create the largest consumption market – $6 trillion – by 2030.
As China moves up the value chain, it is directly acquiring more and more foreign brands, market networks and technologies that will further strengthen its position for global investors.
There’s still enormous potential for growth, as its urbanization strategy is still in its infancy and the scope is massive. Plus, the reform of state-owned companies could blow apart monopolies and create major investment opportunities.
Although its economic growth rate might be lower than in previous years, there’s still much potential in China. Beijing is seeking an optimal global reputation for its own economic benefit. In addition, officials will likely roll out broader stimulus packages to shield against the worst effects of lockdowns and other restrictions.
Despite the current waning interest, investors who want to build long-term wealth should be less emotionally reactive and keep an open mind on the opportunities in China.
Nigel Green is the founder and CEO of deVere Group. Follow him on Twitter @nigeljgreen.