IMCA’s Annual Conference Experience in May covered a wide range of topics with immediate and clear impact on investment and wealth professionals, from investment theories to behavioral economics. But the conference also tackled subject matter of a broader scale—including how economic and political developments abroad can affect money management at home. Dr. Paul Tiffany of the University of California – Berkeley took a close look at the dynamics of the American-China relationship in particular, in the context of whether you should consider investing in Chinese firms, as well as the ethical implications of those investments.
The nuances of investing in China begin with understanding its role in the current international order. As Tiffany explained, the history of the modern world is the history of the rise and fall of modern nations—from Spain in the 16th century to the U.S. in the 20th century. It is very possible, given China’s rapid economic and population growth, as well as its continued assertion of global power, that the 21st century may go down in history as the rise (and possible fall) of China.
As of March 2017, China boasts more than 100 cities with populations in excess of 1 million each, and growth estimates anticipate that number will reach 200 by 2025. In 1995, eight of the top 10 firms in the Fortune 500 were U.S. businesses. As of 2015, only three are U.S. firms, and another three are Chinese. In other words, the U.S. is not in decline, but China is very much on the rise.
What this ultimately means for us in the U.S., as well as investors and their advisors, is that we need to be keeping a careful eye on U.S.-China relations as China takes on a more prominent role in the global markets. In an ideal world, both countries would have a cordial, mutually beneficial relationship; in practice, however, there are tensions that must be resolved both internal to China and on a wider international scale.
From a purely return on investment standpoint, it is important for investment and wealth professionals to have as clear a view as possible into the economic factors affecting U.S. investment opportunities in both private and state-owned Chinese entities. The classic considerations, such as GDP, population and economic growth prospects, remain important. But there are other items to evaluate as well. Infrastructure and friendliness to foreign investments, political stability and how Chinese markets align with goals are equally critical. These factors can seriously impact the volatility of investments and ability to project returns. Unfortunately, it can be difficult to get a definitive grasp in this realm, as China’s economic data is not the most reliable.
But for many investors—and for investment managers and consultants seeking to maintain the highest professional standards—there are ethical implications for investing in China. In many ways, U.S. and Chinese values are not aligned. There is no single correct way to respond to this disconnect, but investment professionals must think about what their and their investors’ individual values are: Will they be comfortable investing in businesses that may not maintain the same labor standards as U.S. businesses? Are they comfortable investing in a country lacking in government transparency? Are they comfortable investing based on that country’s actions—both in terms of hard and soft power—globally? These are important questions that must be resolved before any investment decisions are made.
The bottom line for the investment and wealth management industry is that when investing in China, proceed carefully. As the country’s economy continues to grow, there is very real opportunity for strong returns. However, uncertainty remains a prominent concern, and for the risk-averse investor, may be an insurmountable hurdle.