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Although the COVID-19 crisis does not appear to have been the disruptive force that was widely proclaimed, it has certainly resulted in a significant acceleration in prevailing trends. Monetary expansion, unprecedented fiscal support, a wake-up call on environmental challenges, the boom in e-commerce, the adoption of working from home, rising inequality: the list of economic and societal issues is long.
This crisis also provided a significant boost to geopolitical trends: China confirmed its superpower status; the giant panda has become a dragon.
Flying high on its management of the pandemic and early economic recovery, China’s weight in the global economy is at an all-time high. Its self-confidence is now watertight, even if its image in Europe and the US has been tarnished by the lack of transparency surrounding the origins of the healthcare crisis. It is a superpower ready to assume its role, as Xi Jinping stated clearly in his address to the National People’s Congress at the beginning March: “China can now look the world in the eye”.
Several recent events illustrate this, one being the first diplomatic meeting of US and Chinese officials in the Biden era. No compromises seem likely on Hong Kong or Taiwan independence, the fate of the Uighur minority or sovereignty issues in the South China Sea. Faced with European sanctions triggered by human rights violations suffered by the Uighurs in Xinjiang, China responded immediately with reprisals. In recent days the ideological battle lines have also moved into the trade arena, with calls to boycott H&M, Nike and Adidas broadly disseminated by the Chinese press and social media networks. The unifying factor for these companies is that all have stopped using cotton from Xinjiang, a region widely suspected of using forced labour. Those who dare to rub the Chinese dragon up the wrong way expose themselves directly to the full force of Chinese retaliation.
While China is firming up its nationalist stance on political and social issues, it is moving in the opposite direction in the financial arena. Access to its financial markets has never been so important for foreign investors, and its currency is gradually becoming a global benchmark for trading and reserves. The depth and breadth of the Chinese market, whether for equities or bonds, is today pretty much on a par with that of the US. Any investors looking for diversification would be ill-advised to exclude exposure to this region out of hand – it was the main global growth driver during the worldwide recession of 2020, and will be so again in 2021, a year likely to be characterised by euphoric growth. Exposure may take the form of direct investment in Chinese securities, or indirect investment via Western companies generating a significant proportion of turnover in China.
By Olivier de Berranger, CIO, LFDE and Clément Inbona, Fund Manager, LFDE