For decades, China has been a driving force in the global economy, boasting double-digit GDP growth and serving as a beacon of hope for investors worldwide. However, there are signs that this economic giant is no longer a viable investment option.
Here are several key reasons for this assessment:
Political Repression: China has not followed the expectation of liberalizing politically as it did economically. Instead, the country is moving in the opposite direction, with political control and repression increasing under President Xi Jinping’s leadership.
Economic Challenges: China faces a series of economic challenges, including a shrinking workforce, an aging population, a declining birth rate, and a property market that has shifted from a boom to a bust. Deflation has taken hold, and consumer spending is declining. Tourism has collapsed, and exports have fallen significantly.
Central Planning: Currently, China’s economic strategy is to prioritizes the Communist Party over free markets and growth. Central planning by bureaucrats cannot effectively manage a complex and rapidly changing economy.
Foreign Investment Outflows: There is a significant drop in foreign direct investment in China, with an 80% decline in the first quarter compared to the previous year. This outflow of money and talent is a concern for China’s economic innovation and productivity.
Youth Unemployment: Shocking statistics show that 21.3% of Chinese citizens between the ages of 16 and 24 in cities were unemployed, prompting the government to suspend the future publication of this unemployment rate. This raises concerns about the government’s focus on maintaining party control over improving citizens’ lives.
Repression and Surveillance: The Chinese government has cracked down on intellectuals, rights lawyers, activists, and anyone with dissenting views. They employ extensive surveillance technology, leading to comparisons with North Korea.
Market Performance: Chinese stock markets have underperformed their U.S. counterparts significantly. U.S. equities have outperformed their Chinese counterparts by a staggering margin. Since the start of 2021, the main stock index of China, the Shanghai Stock Exchange Composite Index, has declined by more than 10% while the S&P 500 has gained more than 18%.
Autocracy Risk: among investors we see an increased perception of “autocracy risk”, which is a concern for investing in China. China could become a potential black hole for world capital, similar to Russia after the invasion of Ukraine.
With the current political and economic situation in China under President Xi Jinping’s leadership, the country has become an unattractive investment destination with significant risks. As long as things do not change, investors should seek better investment opportunities in other regions with much lower risk profiles.
Sven Franssen