In late December 2019, I scooted off to Wuhan together with a couple of colleagues and our regulator for an annual meeting with the Chinese Securities Regulatory Commission. Why Wuhan you may ask? Apparently, it was so late in the year that there was no budget in the traditional capital cities of Beijing and Shanghai. Wuhan, of course, would very quickly become famous for being associated with something we are all too familiar with by now.
While in the city, we had our meetings in the morning, lunch with our counterparts and flew off that night. Oddly enough, there were then rumours of a strange bug in a live animal market in the South China Morning Post, but we did not think too much about it.
When this group met again in February after Lunar New Year in Singapore, we were just kicking off basic safe-distancing measures and having a run on face masks. It was a surprise that almost everyone who was on the Wuhan trip had come down with a bad flu within two weeks of return.
Perhaps I was infected with an early strain of the virus. However, with the help of three shots of Pfizer’s vaccine, I remained relatively insulated for the next two and a half years since, even as Covid-19 raged on all around me. Alas, this record was to end last Sunday. The ART kit finally showed two lines. I have probably picked up the painful XBB variant, which is more transmissible for Covid virgins or those who were infected with pre-Delta variants.
This is rather ironic as I watch the reports of the 20th National Party Congress unfold in China. Right at the opening speech, President Xi Jinping defended his zero-Covid strategy, giving more reasons for critics to call China, formerly the Middle Kingdom, the new Hermit Kingdom. Oh, and he reminded the world that China reserves the option of using force to bring Taiwan home.
Long and wrong
If there was one theme that I have gotten wrong since this column began last September, it was my long call on China this year. There were developments on both China’s domestic and international fronts lending legs to this view.
See also: China tightens securities lending rule to support stock market
For more than three years, the US-China trade war, ignited by Trump but stoked enthusiastically by Biden continued. But there were some recent signs of a detente for Chinese companies in the US capital markets when CSRC and SEC signed some MOUs.
On the domestic front, China’s mega tech companies have been battered for two long years, under the overarching “Common Prosperity” policy. Last year, when the likes of Meituan and Alibaba Group Holdings paid their long-awaited fines, there were murmurings that a line had been drawn and that the tech sector, roundly chastened, would be allowed to operate normally henceforth by the government, which would not tolerate any disruptions leading up till this October.
The optimism was further fuelled by the Beijing Winter Olympics, which went ahead in the best way that could under the pandemic restrictions.
See also: Eight reasons why I am still in favour of China stocks
Unfortunately, China took Putin’s side — or at least stayed neutral after Russia invaded Ukraine late February. As sanctions were imposed, there was concern that not only will Russia be cut off from Swift, the international banking communication network, but that China could similarly fall afoul. JP Morgan famously declared in May that Chinese stocks were “uninvestible”. Right around that time, some “robo” advisors here also cut their portfolio allocation to China to zero.
As these things happen, that point of maximum fear crystallised a bottom in Chinese indices including the Hang Seng Tech Index, which was followed by a rebound of up to 35% that took place through summer. For those savvy enough to take the trade and sell into strength in July, which coincided with a dead cat bounce in Western stock market indices as well, it was a good run, especially if maintaining a fixed percentage asset allocated to China as part of one’s portfolio.
There were however more momentum traders who saw the rebound, felt a dose of Fomo, and piled in. Again, they are now nursing their wounds, as what is cheap, apparently can get cheaper. The One Country Two Systems remains nominally in place till 2047. But when the spectre of the National Security Law hangs over Hong Kong, spooked investors would only give the Hang Seng Index a valuation of less than six times earnings.
Personally, I am convinced of the long-term potential of China, however long it may be. I have largely stayed with a small asset allocation there and nursed a bit of red ink, as a toxic combination of Chinese stubbornness and Western geopolitical grandstanding weighed down Chinese markets to a new low just before October. Fortunately, my exposure is small, but is there now a cause for material re-evaluation for investing in China?
Containing China
In the highly polarised world of US politics, there is one thing that both Democrats and Republicans can agree on — China. Signed into law on Singapore’s national day, Aug 9, the Chips and Science Act provides roughly US$280 billion ($399 billion) in new funding to boost US domestic research and manufacturing of semiconductors.
It is one thing to boast about one’s own industry — irrespective of the fact that the US is a signatory to WTO fair competition agreements. However, it is quite another just before China’s 20th Plenum “to implement necessary controls on advanced computing integrated circuits (IC), computer commodities that contain such ICs and certain semiconductor items”.
In short, depriving China of advanced chips vital for everything from smartphones to self-driving cars. Allegedly, the lack of these chips is said to have made Russian missiles less smart at hitting random civilian targets — if one assumes it was not intentional. After all, it is claimed that Russians are now cannibalising chips from dishwashers to use for their military equipment.
US officials claim that this move is a national security measure, given that advanced graphics processing units are vital for weapons systems and artificial intelligence, which is used by the Chinese government for mass surveillance domestically. In this regard, Biden has gone much further than Trump who targeted just Huawei Technologies and ZTE Corp.
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When the chips are down
Come November, Hong Kong is opening up in stages for a major banking conference, plus the Rugby 7s — seen as the premier tournament for this sport. Macau’s gaming stocks have rallied on news of the lifting of some travel restrictions. As such, Xi, as many pundits are guessing, may gradually open up China by the end of 1Q2023. After all, he would have secured an unprecedented third leadership term of the Party, plus renewing his chairmanship of the Central Military Commission. The third key post, President of the country, would be presumably cemented early next year.
With politics all but confirmed, some investors remained hopeful that the focus will gradually shift to the economy into 2023, leading to a long overdue sustained rebound of Chinese markets. However, with the new Chip Cold War — a signal that the US is willing to use trade as a weapon even if China opens up — investors’ hopes for China may not materialise as planned so quickly.
Back in the Trump days when I used to travel to China a few times each year, including that trip to Wuhan, I used to ask Chinese businessmen and leaders what they thought of the Sino-US trade war. There was a common phrase they used loosely translated to “Trump helps us build our country”. By embarking on a trade war, China was forced to cut its reliance on exports and adopt a self-sufficient policy and build its domestic economy with a heavier reliance on consumption and spending. Sure, that may just be the politically correct thing to say to help China tide over a painful economic adjustment. However, there was a lot of conviction from those who expressed it.
As seen, Biden has expanded the trade war to keep China’s tech sector at bay as we head to an even more polarised world. It is not unrealistic to expect China to catch up — maybe it could take a decade or more. Unfortunately, with this decoupling and the deliberate timing of the shot across the bow, it is now harder to see how reconciliation could take place. At some point, all nations may be forced to choose between America and China. I hope not. Staying invested in China now is perhaps the ultimate hedge.
Chew Sutat retired from Singapore Exchange after 14 years as a member of its executive management team. During his watch, the exchange transformed from an Asian gateway into a global multi-asset exchange and he was awarded FOW’s lifetime achievement award. He serves as chairman of the Community Chest Singapore
