The case for China

Rob Armstrong (0:06)

Pushkin. The CSI 300 index is at about 4,000. That is an index of large onshore Chinese stocks. That is the same level it was at 10 years ago. But it hasn't really been flat. It's been a roller coaster ride since. And the roller coaster has left a lot of people thinking that Chinese stocks are uninvestable. Today on the show, maybe that's not true. This is Unhedged, the markets and finance podcast from the Financial Times and Pushkin. I'm Rob Armstrong coming to you from Unhedged World Headquarters in New York City. I am joined by Unhedged's own China expert, Aiden Reiter, reporting from his sickbed in Brooklyn. Aiden, are you up for it today?

Aiden Reiter (1:00)

You know, my throat hurts, but I'm here and happy to be here.

Rob Armstrong (1:03)

And I am also joined by the excellent Ruchir Sharma, who is a frequent contributor to the Financial Times on all matters, economics, finance, markets, and especially the emerging world. Ruchir, welcome to the show.

Ruchir Sharma (1:18)

Thanks, Rob, for having me.

Rob Armstrong (1:19)

So why don't we start with you walking us through? We're slightly China equity skeptics here. And so it's good to have someone who disagrees on the show.

In short form, give us the case for exposure to Chinese equities.

Ruchir Sharma (1:34)

Yeah, Rob, first to put this in context, I've been a big China bearer for a long period of time, which is that I've written often, including in my columns in the FT, as to why I think that China's growth rate is likely to slow down to a trend growth rate of 2% or 3%, and why the Chinese economy may in fact never be able to catch up with the American economy, at least in our lifetime.

And I've been writing about the Chinese debt bubble over the past decade or so, and also about the Chinese demographics, that how the combination of debt demographics and much more state control is likely to keep the Chinese economy from growing far from its target of 5%. So that's the context.

Rob Armstrong (2:22)

So have you had a change of heart?

Ruchir Sharma (2:24)

No. So I think that I still believe in that wrong. But the point that I was trying to make in that column is that this extremist view that China is uninvestable, to me, is wrong. You began the show by referring to the CSI index as being a benchmark in how that's done nothing over the last decade or so. Well, that's true, obviously, as a fact. But a lot of places where money has been made in China including some of the large tech stocks are not included in some of these standard benchmarks or were not included for a long period of time. So the Tencent, Alibaba, and all these other ADRs listed in the US are not there in some of these indices. And even in some of the indices which included them, such as the MSCI China index, which a lot of foreign investors look at, these were included rather late after they'd already seen a pretty substantial price spike.

So one that investing in China gets a bit of a bad name because of these indices that people refer to. So that's point one. The second in a point is the fact that the Chinese economy has slowed down a lot. The nominal GDP growth rate even officially reported now is below 5%. So we've seen a dramatic slowdown in Chinese economic growth rate. That's hurt profits, obviously, and that's one big reason why the Chinese stock market has underperformed so significantly. And for me, as I said, the MSCI China is just a better, more holistic benchmark to look at than the CSI 300 or whatever the domestic benchmarks are. So if you look at that index, in fact, it had a very sharp up move, in fact, a parabolic move in the late 2010s. And since then, it has given up a significant part of those gains. The reason it's given up those gains is because the Chinese property market went bust, the economy was in trouble, and also because you got much more state intervention, you know, with Xi Jinping being much more interventionist. And in 2020, when he went after Alibaba in a way, that was a signal to many foreign investors that this is a place which is getting dangerous to do business. So I'd say that that's really what happened.

Rob Armstrong (4:42)

And for me, what you just said really hits the very core of the uninvestability argument, which is simply that your property rights as an equity holder are a bit unclear. You don't know what you own. And that's true both in the kind of ADR structures of US listed Chinese stocks and with Chinese stocks themselves. To what degree are you subject to the whims of the party, as it were?