The China Investment CounterpointTheChinaInvestmentCounterpoint

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• Webinar Summary

As one of the largest and most important economies in the world, China is almost universally viewed by investors through a bullish lens. In the first two sessions of PGIM’s China Investment Symposium covering public debt and public equity markets, our experts talked about the upside in China. Part three of our series, featuring Stephen Joske in a fireside chat, focused on some of the less-bullish considerations that institutional investors should give weight to before allocating to China. Mr. Joske, having spent much of his personal and professional life in and around China, brings a unique perspective to the dialogue. He has worked for both the Australian Treasury and Australian Embassy in Beijing, and he served as the head of the Economist Intelligence Unit’s China Forecasting Service. Most recently, he advised AustralianSuper on financial market implications of Chinese macroeconomic issues.

Following are a few highlights of the discussion:

• China is still an immature market: There is a well-established, long-term trend of slowing growth in China, driven in part by demographics, and that trend is likely to continue. Other EM countries such as Vietnam, India and Bangladesh are poised to grow more quickly and may offer better investment returns over time. China’s financial sector is also in relatively poor condition, and the possibility of cross-border capital controls tightening is real. While not a reason to ignore China altogether, investors need to be cognizant of the risks.
• Size doesn’t matter: While China’s economy is huge and offers impressive market depth, that size isn’t necessarily an indicator of long-term investment returns. India, for example, has a far smaller economy than China but has performed much better for equity investors over the long term. With China's growth easing, better returns may be available elsewhere due to both higher growth rates and more rational financial markets. To be more attractive for the long term, China has to get past its short-term macro risks while steadily developing market maturity.
• For CIOs, go local: Institutional investors in China should tread carefully when index investing and when considering strategic partnerships with Chinese companies. Chinese equity indices have not generated sustainable returns and may be more suited for short-term investors who are prepared to act more quickly. Meanwhile, various governance structures among Chinese companies can make them difficult to partner with over time. For equity exposure to China, institutional investors should be deliberate about finding good local managers – or global managers with on-the-ground expertise –and limit the range of companies in which they invest.
• Does the US election change the outlook?: The US-China trade war is a symptom of broader geopolitical risks generated by Chinese strategic miscalculation. Many of China's international relationships are driven by a cold war mentality in China and won't be significantly influenced by attitudes in other countries. Relations with the US could also deteriorate as the US tries to build a global coalition against China, and geopolitics could continue to be a negative for investors in China.

The next installment of PGIM’s China Investment Symposium, slated for early 2021, will focus on post-US election implications of the US-China relationship and its impact on the investment landscape. In the meantime, to access previous webinars visit our China Investment Symposium page.