China: big opportunities, big risks

Ed Monk

Ed Monk - Fidelity Personal Investing

The curious allure that China holds for investors is apparent if you read international media coverage of the country this week.

First, there’s analysis from the New York Times about the huge acceleration of investment from US companies into China, including the startling line that the country is now responsible for almost a third of worldwide luxury sales.

This is the great opportunity of China, from an investment point of view. A giant middle class has emerged in just a few decades - not to mention a very large elite of the hyper-wealthy - and they want the designer brands and convenience retailing that other wealthy societies around the world enjoy.

So it is that Richemont, owner of brands like Cartier and Net-a-Porter, has just announced a joint venture with Alibaba, the giant Chinese e-retailer, while Ralph Lauren has confirmed it opened 10 new stores in mainland China in the last quarter. Then, in perhaps the ultimate seal of approval, magazine publisher Conde Naste has produced plans to launch Vogue Hong Kong, with editions printed in both English and Chinese.

Undercutting all this great promise, however, is the political risk of China, confirmed in other headlines this week in which the country features. These mostly concern the Asia Pacific Economic Co-operation summit where Chinese diplomats clashed with their US counterparts, leading to the failure of delegates to produce a joint communique - the traditional slap on the back that countries like to give themselves at the end of these pow wows.

The fall-out had been building, with US Vice President Mike Pence using his speech to delegates to take a swipe at China’s aggressive investment into smaller countries in the Asia region.

“Know that the US offers a better option”, Pence said. “We don't drown our partners in a sea of debt, we don't coerce, compromise your independence. We do not offer constricting belt or a one-way road", he added - a reference to China’s ambitious “belt and road” infrastructure investment plan.

The brewing trade war between the world’s largest economies may enter a new phase when Presidents Trump and Xi meet at the G20 in Argentina at the end of the month. Tariffs so far have included steel and aluminium, as well as items like car parts that are imported by the US from China. These are the areas that energise the US President, in particular, feeding into his ideas for reinstating American manufacturing power.

Yet in the global economy of 2018 they are perhaps not the most pressing trading issues, notwithstanding the havoc that a tariff war in this area could wreak. There is feeling in the market that sense will eventually prevail and the rhetoric will calm down.

Of more concern and long-lasting importance are the deep tensions emerging in the area of technology and intellectual property. In a sign of potential troubles to come, the Chinese authorities have accused the world’s three biggest manufacturers of memory chips - crucial in computers - of anti-competitive actions. They allege that there’s “massive evidence” of wrong-doing by Samsung and SK Hynix, both from regional rival South Korea, and Micron Technology, from the US.

The subtext here is that China itself has long stood accused of gaming the global technology industry, insisting that foreign investor companies joint-venture with local Chinese counterparts, which then absorb ideas and technology into their own products. The antitrust action by the Chinese may be a pre-emptive strike against its accusers.

It is a stand-off that could prove very difficult to resolve and may result in retaliatory measures that hurt Chinese companies.

For investors, this is the trade-off of investing in China. So much of its economic progress is unprecedented, both in its scale but also in its pace and the fact that it is happening in a country where authorities are used to wielding total power in a way that markets tend not to like.

Important information

The value of investments and the income from them can go down as well as up, so you may get back less than you invest. Overseas investments will be affected by movements in currency exchange rates. Investments in emerging markets can be more volatile than other more developed markets. Reference to specific securities should not be construed as a recommendation to buy or sell these securities and is included for the purposes of illustration only. This information is not a personal recommendation for any particular investment. If you are unsure about the suitability of an investment you should speak to an authorised financial adviser.