This article is the first of a series of which will tackle a variety of issues related to Chinese geopolitics and their implications for investors. We introduce the series today by providing a broad overview of China’s domestic and international political situation. In further instalments, we will examine specific topics in greater detail, including the highly-publicized U.S.-China trade conflict and the massive One Belt One Road Initiative that will be deployed by China over the next 30 years. The main question we try to answer in this series goes as follows: Has China’s political and economic system remained robust enough or has it become too precarious to still be considered an attractive long-term investment opportunity?
Investor perception of China stems from diverse factors for which we will attempt to provide insight through both domestic and international lenses. This should help investors make up their mind about whether China is a worthy investment in spite of its repressive political system, its relatively opaque economic system, a looming trade war with the U.S. as well as the volatility and the lack of transparency of its markets.
Domestic Issues affecting China as an investment opportunity
Democracy
While China limits freedom of speech and somehow controls its media, the country is not devoid of any form of democracy. Yes, it can be considered an authoritarian state; and an undemocratic one if democracy is solely defined by the proceeding or not of opened elections. However, genuine grassroots elections actually take place at the local level throughout the country (e.g. representative to local People’s Congresses or village chiefs) on a regular basis. Furthermore, the Chinese government often displays a strategy of trial and error in its policy implementation depending on feedback from its population to rectify mistakes and improve its policies.
Despite those arguments, China’s government is undeniably led by a centralized and authoritarian regime relying on a top-down form of governance; nevertheless the Chinese population is not completely alienated from its leaders. President Xi Jinping’s recent announcement of extending the presidency limit of two mandates embodies the situation in a nutshell. Contrary to the belief in the West of an obedient and politically homogenous population, there were outcries and criticism of this autocratic announcement. It is important, however, to underline the nuance that a large majority of Chinese citizens deeply admire their president, nicknamed Xi Dada, embodying a sort of paternalist reassuring figure. In the end, Xi was effectively given the chance to prove himself and allowed to continue his critical fight against corruption.
This example has to be understood in a broader argument of domestic stability in the country. What is striking and somewhat unique to China is the acknowledgment and the powerful support of the Chinese people for the national project of Chinese social cohesion proposed by China’s leaders.
Concretely, what does this mean? As we have seen in the last few decades, the Chinese population has a strong capacity to endure severe internal crises; a definitive benefit in the advent of a long-lasting trade war with the U.S., for instance. Therefore, culturally, faced with what can be perceived as unjust policy implementations, the average Chinese citizen will tend to accept it. This grants a huge leeway for the government to implement measures that can be perceived as defying basic human rights, such as privacy restrictions (massive surveillance system) or limits on the freedom of speech (media and Internet control), in the name of the greater Chinese common good and for the social cohesion of the country. This is in sharp contrast with the polarization seen in the West where the extremes are growing and which paints China as relatively stable politically.
Nonetheless, domestic turmoil exists and nuances to the portrayal presented above must be emphasized. The model of governance and the admiration the population displays towards Xi holds for now because it is backed by impressive economic growth which has hugely swelled the ranks of the middle class and made it vastly wealthier. It is hard to predict the reaction of this newly formed younger Chinese middle class, now embarking in travels around the world and entrenched in the comfort of modernity, when the Chinese economy slows down and the newly found lifestyle of the Chinese middle class is threatened.
Human rights
Domestic turmoil could also stem from marginalized populations suffering from human rights abuse. China’s political stability is also associated with the homogeneity of its population, as about 92% of the population are ethnic Han Chinese. However, Tibet and Xinjiang represent massive (and rich in natural resources) chunks of the Chinese territory in which the culture, beliefs and traditions of the local populations differ entirely from that of the Han Chinese. Furthermore, despite having majority Han populations, Hong Kong and Taiwan remain politically sensitive nests.
Considering the long-lasting status quo and the relative stability that still holds in Hong Kong and Taiwan as well as in Tibet, we will direct our attention to the Xinjiang region (and its Uighur Muslims making up 45% of the 22 million people of the region), which has experienced dramatic development in the last few months.
In the summer, reports started reaching the West of internment camps where about 1 million Uighur citizens were held. Despite first denying the mere existence of these camps, the Chinese government later inscribed the creation of such establishments into law. This policy severely impedes on the freedom of religion of Uighurs and imposes strict controls on this ethnic group and contemptuously exempts the “colonizing” Han Chinese population of the province. China’s fear is obviously the radicalization of its Islamic population, which it is observing elsewhere on the global scene.
Framed as engines for the re-education of radical groups of this Muslim ethnic minority (in North West China), various experts and human rights NGOs have reported the blatant abuse of those citizens’ rights. For these international observers, these camps simply constitute huge prisons which China utilizes to suppress potential threat to political stability of the country. Could the Uighur situation that arose in Xinjiang province thus be a human rights pivotal moment for China on the international scene?
Although the Uighur situation is deeply concerning, we believe that it will not hinder China’s domestic stability, nor its relationship with other countries. And, if there is a potential for domestic turmoil, it will not arise in the foreseeable future. While the Uighurs form Xinjiang’s largest ethnic group, with 46% of the region’s population, their demographic weight remains marginal on the national scene (less than 1% of China’s total population).
Moreover, the condemnation of domestic policies abusing human rights in China do not offer enough of a counterweight to the dependence of China’s trading partners on the Chinese economy and the growth opportunities it offers them. Using a “realist” political analytical lens, it is clear that, for most countries in the region (and even for those beyond), the benefits to be gained by taking concrete steps in denouncing China’s human rights policies (for example by limiting trade, restricting travel or imposing sanctions on companies and individuals) would be insufficient to make up the huge cost of antagonizing the East Asian giant.
International issues affecting China as an investment opportunity
This section seeks to briefly explore the major contentious situations which China is currently facing: the South China Sea conflict, the One Belt One Road Initiative and the Trade War with the U.S. Of course, there are many more issues, like the North Korean situation in which China plays an instrumental role, but we believe that those three elements are the most pressing and significant issues to be examined.
A large quantity of information is accessible in the West about these specific topics. The point of discussing them here is to link them at a macro level to get a better sense of the political and economic global influence China is likely to gain in the years and decades ahead.
What we can observe from its behavior on the international scene is that China is seeking to expand its geopolitical influence in its own region and reassess its power at home (South China Sea). China also embarked on a massive umbrella project that expands towards many countries, creating dependency ties and opening markets throughout the globe: One Belt One Road. Finally, at the same time, China is also challenging the uncontested hegemon of the last three decades, creating frictions with the U.S. Today, these are mostly limited to the threat of an escalating trade war by the Trump administration but these frictions could grow into a more serious conflict as the situation evolves. Hence, at the risk of taking a narrative shortcut, we are assessing that China’s objective is to reaffirm its power domestically and in its sphere of influence and strengthen ties with new allies abroad while trying to undermine the U.S. as the global hegemon.
It is important to recognize that China’s international practices do not include sending soldiers abroad like the U.S. has done on numerous occasions in the last several decades; peacekeeping operations are of course an exception to this general principle. China’s large military is concentrated in protecting its borders – we can think of the tensions that arose at the Indian border in the summer of 2017 – and safeguarding domestic stability (in Xinjiang and Tibet, for instance).
The South China Sea is disputed by many countries and territories, some advocating for those waters to become international, others claiming most of the waters as theirs. The main focal point of the dispute is the trillions of dollars’ worth of trade passing through the area, as the Strait of Malacca, one of the most important shipping lanes in the world, leads directly towards the contentious South China Sea. China has used ancestral maps to prove its point, while also building artificial islands to reinforce its claim. The question of Taiwan and Hong Kong, which also border the Sea, adds to the complexity of the conflict, as the U.S. inevitably uses its sphere of influence over Taiwan and other allies (e.g. the Philippines) to push its own agenda. Both superpowers also have strong military presence in the area. Needless to say that this situation is a powder keg ready to explode in case of a military or political faux pas.
The importance of the South China Sea in the region is symptomatic of a larger trend of global economic expansion for the Chinese giant. We will discuss in greater depth the One Belt One Road Initiative and the U.S.- China trade war later in the series and thus not get into specific details here. It is sufficient to mention for now that the One Belt One Road Initiative is made of a plethora of projects and trade opportunities which are inscribed into a grand narrative, in turn fuelling the national project of Chinese social cohesion. Intellectual property theft, forced technology transfer, economic neo-colonialism and mega infrastructure projects in Africa and Asia financed by China are all poles of a massive initiative which would lead to a significant increase in China’s economic and political power and international influence if the initiative succeeds.
In the West nonetheless, we hear more often about the China-U.S. trade war than about One Belt One Road. Escalation of tariffs between the two economic superpowers has, for now, led to some pain in China but only relatively minor headaches in the U.S. (e.g. for soy bean farmers). However, it must be acknowledged that the threat of a trade war with the U.S. is not at the forefront of media coverage in China or the Chinese population’s preoccupations. Chinese nationals are way more inclined to share their enthusiasm about the ambitious and patriotic One Belt One Road Initiative than complain about U.S. tariffs.
It is possible that the Chinese have not yet felt the impact of the trade war on their daily lives and that concerns will shift towards trade in the near future. It is also possible that the controlled media apparatus is preventing those affected by the trade war from letting their concerns spread to the general population. Nevertheless, most Chinese, rather than yield to U.S. demands, would probably support their leaders and accept the cost of a trade war if the strategy allows China to reach its longer term objective.
Conclusion
Are we witnessing the shift of a unipolar political world towards a bipolar one, or even towards the establishment of a new hegemon? It is still too early to say. The decline of Chinese growth, coupled with the difficulties of an unanticipated trade war with the U.S., seems to have tarnished Chinese ambitions for now as well as investors’ enthusiasm for China. However, what will happen in China and in the region during the next decades promises to be interesting and merits our attention.
As we have argued, we should not be worried about Chinese domestic instability for the foreseeable future. Despite outstanding issues on the domestic front as well as on the international scene, such as China’s territorial claims on the South China Sea and its contentious international trade practices, the world will likely take a back seat as China’s global influence and technological leadership expands through the deployment of its One Belt One Road initiative which, for now at least, has the firm backing of both China’s leading elite and population.
Disputes regarding international trade practices, foreign access to domestic markets, intellectual property violations and the general lack of transparency of Chinese entities will have to be settled between China and its trading partners. But, despite their apparent seriousness, these irritants do not warrant for the U.S. the painful costs of escalating a trade war with a country that has recently become the largest global trading power. It is also worth emphasizing that the economic and political dependence of most countries towards China, combined to its own ambitions, has, reluctantly or not, compelled China to generally abide to international political and economic norms and standards.
In the end, China’s recent economic development contributed significantly to economic growth in the West and, perhaps more importantly, fostered its deep political and economic integration within the community of nations. With such accomplishments in mind, it is not expected that China’s economic partners should wish these to come undone. We are thus confident that the trend of gradual economic (if not political) opening of this officially communist country, its enduring political stability and its prudent geopolitical behaviour should continue to provide attractive investment opportunities for investors well into the next decade.
With analysis by Charles Lepage