Some argue that international investors should avoid the country altogether for reasons ranging from accusations of human-rights violations to risks arising out of government autocracy. Others point to China’s unique economic and political model as a sustainable form of governance able to circumvent the sort of policy paralysis holding some Western decision-makers hostage.
But regardless of these issues, one thing we all must acknowledge is that China’s one-party system has driven through reforms that have lifted over 850 million people out of poverty.1 What was an impoverished, agrarian nation as recently as 1980 will become the world’s largest economy within a decade.2
Vast swaths of China’s population have entered the middle class and are consuming a rising range of products and services. During my frequent pre-pandemic trips to the country and discussions with our local teams, I was under the impression that Chinese people in general appreciate the rising living standards that policy reforms have delivered. That’s not to say every policy decision is popular, or that economic and social change does not come with upheaval.
Inevitably, the breakneck speed of China’s development has added complexity to its economic relationships with the world, as well as within its own borders. Rapid economic growth has also led to an increase in income and wealth inequalities at home. This is of paramount importance to the leadership because it poses a risk to social stability.
But China is not alone in facing the challenge of how to distribute growth more evenly. The rise of populism in the West is a testament to its own inequality issues. What’s absent from the global narrative is that China is starting to take action to tackle problems of inequality.
What’s absent from the global narrative is that China is starting to take action to tackle problems of inequality.
Beijing is galvanizing policymakers to do more to level the playing field, by making essentials such as education, healthcare and housing more affordable and accessible. While much still needs to be done, the direction of travel under "common prosperity" is clear.
Today the debate on China risks becoming polarized between extremes: invest in blind faith or never invest. A look at the beneficiaries of China’s rising wealth offers some perspective. On average, S&P 500 Index companies generate a staggering 18% of their revenues from China.3
Consider Apple. The US tech giant generates almost 20% of its revenues from Greater China4 and sells millions of iPhones across mainland China each year. Apple is one of the most widely held stocks in America and its share price rise has enriched millions. Evidently it is a beneficiary of Chinese policies. So should US investors stop buying Apple shares?
Another example is UK-listed Unilever. The consumer goods multi-national, which produces and sells everything from ice cream and tea to deodorant and hair products in China, accounts for 5% of the FTSE 100 Index.5 China’s rising middle class is a major contributor to its revenues. As a consequence, UK pensioners who own Unilever in their savings plans are also beneficiaries of China’s policy approach. So should they refrain from investing? These examples underscore the intricate connectivity of global markets. We believe that absolute calls to exclude China are misaligned with economic reality.
We see one of the most prudent ways to address environmental, social and governance (ESG) concerns in China as avoiding companies that cross clear boundaries. For example, those with supply chains associated with human-rights abuses or that breach critical ESG measures.
China is home to many companies that may present compelling potential investment opportunities. It's also taking important strides to reduce carbon intensity in its economy, and this is investable. For global investors, exposure to Chinese equities and bonds may offer valuable diversification benefits. But it also comes with risks, including regulation, market volatility and ESG issues.
We're working on a series of papers drawing on expertise within our Research Institute, our Asian Sustainability Institute and across our business to put China into context, both internationally and domestically. Our first paper is entitled "China in context: the benefits and constraints of a state-led approach."
Through the series we analyze drivers behind government policy and regulatory change and consider long-run implications. We explore the importance of China’s growing share of the global economy, its increasing financial linkages such as index inclusion and global perceptions of ESG and political risk. We also consider if investment risk is priced appropriately and examine the role Chinese investments can play in light of the country’s strong, long-term growth outlook.
China is deeply embedded in the global economy today. It’s simply too large to exclude from the international financial ecosystem. That’s why we believe investors need to understand the context.
1 World Bank data, November 20212 abrdn Research Institute forecasts, November 2021
3 Bloomberg, November 2021
4 Bloomberg, November 2021
5 Bloomberg, November 2021
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