In Washington, DC, China is the new Russia. Its rapid military buildup includes advanced weaponry that rivals American prowess. Much of its technology is stolen from the United States and other advanced nations. Menacing incursions threaten Taiwan and other American allies, prompting the magazine Foreign Affairs to declare China and the United States are locked in a “new Cold War.” President Trump shifted the economic relationship with China from cooperation to confrontation, a stance President Biden is continuing. China’s military and economic aggressions have left it with few friends in either U.S. political party.
Global investors, however, are far more sanguine. At the annual Milken Institute financial conference in Los Angeles in mid-October, wealth managers acknowledged risks and challenges in China, including sharp shifts in government policy under President Xi Jinping that could cause losses. But they also characterized doomy headlines as exaggerated and said China remains a rich market for investors. “Any investor who ignores China does so at their peril,” said Tim Dattels, chairman of TPG Capital Asia. “We see enormous opportunities.”
President Xi has rattled some investors with a new “common prosperity” policy based on reining in the billionaire class—and some of their high-flying companies—while promoting middle-class living standards. The biggest casualty so far is the giant property developer Evergrande, which has a mountain of debt it can’t pay amid a kind of real-estate bubble. The company seems poised to collapse, which could send shock waves throughout China’s financial system. The Chinese government could bail out the listing giant, but Xi seems willing to let Evergrande fail, as a kind of warning to China’s business elite to funnel more profits down to Chinese society.
Xi may be the most powerful Chinese leader since Mao Tse Tung in the 1960s and ‘70s, and he envisions China as a rising superpower establishing new global rules as an alternative to American dominance. But that doesn’t mean Xi will shackle the economic engine that fuels China’s power in the first place. “China knows the private sector is where their efficiency comes from,” Ian Bremmer, president of the Eurasia Group, said at the Milken Conference. “We are still going to be doing an enormous amount of business between our two countries. Vested interests in the U.S. and China understand the deep and persistent links between the two countries.”
Nearly every American politician is now a China hawk, yet the reality is that American businesses and consumers are heavily dependent on Chinese products, while the United States remains China’s most important customer. Biden wants to “reshore” some production in the United States, including critical goods such as semiconductors and medical equipment. Some of that may happen, aided by tax breaks and other incentives Congress seems likely to pass.
Investors still want to be in China
But a thorough unwinding of the links between China and its many big customers around the world seems unlikely and not necessarily desirable. China’s growth is slowing, and it faces internal challenges such as an aging population, inefficient state-backed firms and asset bubbles in some parts of the economy. But its middle class—numbering roughly 400 million—is still larger than the entire U.S. population, with spending power that continues to make China one of the world’s hottest markets.
Some American firms have pulled out of China, unable or unwilling to turn over data the government demands or abide by other rules unique to China. But investors say they still find many ways to put money to work in China—with no trouble getting profits out. “The role of the state is different, in that the state will moderate growth in some areas,” Kevin Liu, Asia Chairman at the Partners Group, said at the Milken Conference. “The overwhelming objective of the government is to make sure a large majority of people benefit in the long term.” Still, he says, “we’ve seen no problem getting capital out.”
Many investment opportunities in China are similar to those in the United States. Dattels of TPG highlights health care, given the aging Chinese population and a shortage of doctors. Digital health care is likely to take off, especially since China doesn’t have the same data privacy protections as in the west. Climate technology is another area of huge growth. American policymakers tend to bash China for its reluctance to adopt global clean-energy standards, yet China does have a plan for net-zero carbon emissions by 2060—and it's already a leading producer of key technologies such as electric-vehicle batteries and photovoltaic cells.
As for asset bubbles, press reports on Evergrande and other speculative businesses focus on giant apartment buildings that sit empty for lack of tenants, as if China is a Potemkin nation. Yet demand for real estate remains strong, given that Chinese savers prefer to invest in property rather than financial assets. “We don’t believe anything is oversupplied,” says Liu of the Partners Group. “These highways to nowhere or ghost towns—maybe in small mining towns, but not overall.”
The U.S. relationship with China is likely to remain tense, regardless of the investing climate inside China. The Biden administration has indicated it will keep the Trump tariffs on Chinese imports in place while beseeching China to play by global trade rules, stop stealing technology and make other concessions. China won’t bend easily. Behind the two-way bluster, however, are ties that bind China and the rest of the world more tightly than typically understood. The war isn’t that cold, yet.
Rick Newman is the author of four books, including "Rebounders: How Winners Pivot from Setback to Success.” Follow him on Twitter: @rickjnewman. You can also send confidential tips, and click here to get Rick’s stories by email.