Dambisa Moyo is a prizewinning author of New York Times bestsellers Edge of Chaos, Winner Take All, and Dead Aid, and she was named one of the “100 Most Influential People in the World” by Time magazine. She regularly contributes to the Wall Street Journal and Financial Times. She lives in New York and London.
In many conventional respects, China represents a dream investment.
Equity-market valuations are attractive, with the price-to-earnings ratio of the CSI 300 at 16.4 at the end of 2020 – less than half the PE ratio of the S&P 500, pointing to a lot more runway/upside. Economic growth remains robust – with China being the only major economy to grow throughout the pandemic, and forecast by the IMF to grow by more than 8 per cent in 2021.
China’s consumer base is the biggest in the world and its consumption as a percentage of gross domestic product is 55 per cent compared with 70 per cent in developed economies, indicating room to grow.
Furthermore, business is supported by ever-strengthening capital markets. The Shanghai Stock Market, which only reopened in 1990, has amassed a market value of US$6.6-trillion with more than 1,500 listed companies. By comparison, the NYSE’s value is US$25.6-trillion.
Notwithstanding these compelling arguments, there’s one major question to address: Is investing in China at odds with environment, social and governance (ESG) standards?
By today’s ESG standards, China falls afoul in many regards. Worker advocacy is one barrier. China’s 996 culture – workers willing to work 9 a.m. to 9 p.m., six days a week – conflicts with the growing emphasis on work-life balance in the West. Data-privacy standards in China are seen as less onerous for companies, but offer less protection to the individual than those in the Western world.
More broadly, China is often seen as offside in terms of trade conduct, national security and how it acquires and uses intellectual property. Added to this is its record on human rights, which has been widely called into question. No surprises, perhaps, that U.S. investors own just 2 per cent of the local Chinese stock market, compared with the average U.S. ownership of the local stock markets of advanced economies around 18 per cent.
Board members, CEOs and senior business leaders should be alive to the concerns that emerge from this conflicting picture, and the risk that a dogged ESG focus could mean corporations will sacrifice returns and become less competitive on a global basis.
On the point of sacrificing returns, early evidence indicates investment funds classified as conforming to ESG standards do not underperform the broader equity universe. Over the three years to the end of 2020, for example, the MSCI World ESG Leaders Index outperformed the traditional MSCI World by +1.46 per cent, while the JP Morgan ESG EMBI Global Diversified Index outperformed the equivalent non-ESG index by +2.05 per cent. https://www.fia.lu/esg-vs-non-esg-portfolios-2020-as-a-milestone-in-a-history-of-resilience/
It should, however, be emphasized that big tech companies, which have dominated strong equity-index returns, are core holdings to many ESG funds – highlighting remaining questions on what exactly passes for ESG.
On competitiveness, fears are not misplaced: After all, if a company does too much ESG, it might not be able to compete against Chinese company’s that are held to less-rigorous standards; but if a company does too little ESG, it could lose the support of employees, customers, investors and potentially even lose the licence to trade in more stringent regulatory ESG jurisdictions.
Business leaders are grappling with these complex trade-offs, but where to land? No doubt, issues of China’s human-rights record, technology spats and national-security threats will continue to rankle in the short term.
However, ignoring China cannot be a serious option for businesses looking at the long term and which are serious about being global. After all, China is already today the largest investor, trading partner and lender to many economies – both developed and developing economies around the world – including the largest foreign lender to the U.S. government.
Thus, investors should be willing to give China the time to adapt to ever more stringent ESG rules, and recognize by investing in Chinese assets they need to take the view that the country is on a path to converge to better standards. On this point, global investors should gain comfort from the fact China’s political class has shown itself willing to change and act on its proclamations and long-term objectives, when they are set.
For example, in September, 2020, the Chinese government announced plans to hit peak carbon dioxide emissions in 2030 and achieve carbon neutrality by 2060 – publicly and explicitly committing to a goal to tackle climate change.
A more complex question surrounds the social factors. Corporations and their boards should accept different values exist in different parts of the world – and that their companies should therefore be adaptable to local customs and norms. In essence, they have to weigh up the risks, not only of Chinese values being rejected by employees and customers in the West, but also of Western liberal attitudes being rejected by workers and customers in China.
All in all, China’s record in lifting hundreds of millions out of poverty testifies to its commitments to global goals of raising living standards and common prosperity over time. Thus, notwithstanding the importance and urgency of ESG concerns, it seems investing in China appears to have upside for humanity that far outweighs the downside from alienating and avoiding it.
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