20 BARRON’S November 22, 2021
Green:It is a threat to the status quo.
Xi is committed to common prosper-
ity, and while many of the goals are
arguably positive—property tax,
higher birthrates, more welfare
spending, higher income—the effort
to achieve these goals, namely struc-
tural reform, will be disruptive.
How do you handicap the possibil-
ity that China will try to take over
Taiwan?
Green:An invasion of Taiwan is a
very low probability. We are seeing a
kind of gray-zone warfare, wherein
China is using naval and air incur-
sions to put pressure on Taiwan,
partly because it has no economic
means to apply pressure. China needs
to import semiconductors, so it can’t
really cut off trade. If it waits five or 10
years, it will have twice as many air-
craft carriers. The U.S. will be rela-
tively marginalized in the region.
There is no reason for China to rush,
as long as the balance of power contin-
ues to shift in China’s favor.
Jain:The odds are very low even in
the next 10 years of a direct sort of
invasion scenario. As Rory said,
China is much more likely to be tight-
ening the screws slowly. There are so
many other moving parts. It isn’t sim-
ply about China or Taiwan, but also
the U.S. role and what happens in the
rest of the region.
What do the changes in China
mean for the rest of the world?
Moreno:Back in the 1990s, we’d say, if
the U.S. caught a cold, Mexico got
pneumonia. Now, if China’s got a cold,
Asean [the Association of Southeast
Asian Nations] is going to catch pneu-
monia. Brazil is going to catch pneumo-
nia. There are very few emerging mar-
kets not directly tied to China in some
way. The ripple effect is going to be felt
globally—even in the U.S.; it’s a slower-
growth environment for longer. That is
problematic, perhaps, for some con-
sumer-goods companies, such as lux-
ury-goods makers, and their stocks.
Jain:If you look at broad-based emerg-
ing markets, there are no signs of a
slowdown, which is fascinating. Look
at India: Lending growth is picking up,
and the economy seems to be rebound-
ing sharply. Brazil, which should be the
most linked to China for a whole host
of reasons, saw double-digit credit
growth since last summer. Steel de-
mand is at midteens-plus growth, com-
pared with 2019 levels. Earnings revi-
sions in Europe are extremely positive.
ruled island of Taiwan further compli-
cates a fraught relationship.
This year,Barron’sannual interna-
tional roundtable tackles the changes
afoot in China, and the implications
for other markets and investors. Our
panelists include Winnie Chwang,
co-manager of the $1.6 billionMat-
thews Chinafund (MCHFX) and lead
manager of theMatthews China
Small Companiesfund (MCSMX);
Rajiv Jain, co-founder of GQG Part-
ners, which oversees $90 billion in
assets, and manager of theGoldman
Sachs GQG Partners International
Opportunitiesfund (GSIMX) and
theGQG Partners Emerging Mar-
kets Equityfund (GQGPX); Sara Mo-
reno, co-manager of the $1.1 billion
PGIM Jennison Emerging Markets
Equity Opportunitiesfund
(PDEAX); and Rory Green, TS Lom-
bard’s chief China economist.
The China roundtable was con-
vened in early November on Zoom.
An edited version of the conversation
follows.
Barron’s: China is undergoing dra-
matic changes imposed by the gov-
ernment of President Xi Jinping.
Which are the most significant?
Rory Green:China is at the start of a
profound political and economic shift
that potentially could rival Deng Xiao-
ping’s southern tour and market re-
form, in terms of its economic and
social impact. It means a focus on
slower, more sustainable, and more
equal growth. This entails much
greater regulation and much more
state intervention in the market.
What are the implications for
investors?
Sara Moreno:In previous [reform]
cycles, there had been some certainty
that growth would continue. You can’t
put the types of [earnings] multiples
on Chinese stocks that we’re used to
putting, especially in the internet sec-
tor, because the aim now is to alter the
profit structure and growth trajectory
of these companies.
Rajiv Jain:If I’m sitting as a Chinese
citizen, I can’t argue with the steps
being taken. But as an investor, a lot
of things that have happened create
uncertainty. People have been fearful
about a systemic blowup of the Chi-
nese financial system since I’ve been
investing [in the country]. The regula-
tory intervention reduces the risk of
a massive blowup. But the game is
changing, moving away from what
seven banks have almost no exposure
to the problematic developers today.
This is a paradigm shift, done for the
right reasons so that the system doesn’t
blow up, but it entails pain. The prop-
erty market could be slower for longer.
Moreno:Given the significance of
the property market to the economy—
it is roughly 30% compared with less
than 20% in developed markets—
the deleveraging process is going
to shave percentage points off gross
domestic product. It looks like it’s an
orderly, methodical deleveraging, but
it can’t not impact growth.
What would signal that China’s
policy makers are struggling with
the property situation?
Chwang:A change in sentiment. If
consumers believe, for example, that
home prices will decline and put a
pause on purchasing, that would
have negative ripple effects. But
[policy makers] have a lot of tools.
Green: Baidu[BIDU] and WeChat
trends track consumer interest in the
property market, which is still rela-
tively high.
What political risks does a
slowing economy entail?
Green:Next year is the 20th Party
Congress, the key event in terms
of personnel changes, including the
confirmation of President Xi’s third
term, and the publication of the
Party Congress report that will
become the guiding philosophy for
the Communist Party and the wider
economy.
This is probably the most impor-
tant political event in China in at least
the past 10 years. President Xi and his
common prosperity framework will
be enshrined in this report. The Sixth
Plenum earlier this month already
confirmed Xi as the unchallenged
leader of China, with no term limit.
How great a threat to China’s
stability, prosperity, and foreign
relations is President Xi’s grip on
power?
worked well for minority sharehold-
ers, and shifting in favor of what
works well for the citizens. That
means profitability could be lower.
Government reforms are coming
as growth is slowing. Where is
China’s economy headed?
Green:We’re approaching a cyclical
bottom but a secular top. We are see-
ing an easing in [restrictions on the]
property sector; the power shortages
should be resolved in the next month
or so; and there’s a willingness to ease
Covid-19 [restrictions] but no real exit
time. The key thing that’s going to put
abottomontheslowdownisfiscal
stimulus. In an interview in state me-
dia,presumablywithLiuHe,XiJin-
ping’s right-hand man in charge of
the economy, the [official] indicated
that China needs to do more to stimu-
late demand. We should start to get
stabilization approaching in the first
quarter of 2022.
Longer term, we see a secular slow-
down as China targets slower, more
sustainable, less debt-driven—and
more equal—growth. Structurally,
China has largely completed its period
of “catch up” growth and now faces
obstacles, like demographics, debt,
and slower urbanization, that also
point to a secular slowdown.
China’s efforts to clean up the
property sector have brought pain
to developers like China Ever-
grande Group. What is the fallout
for other property developers?
Winnie Chwang:The Chinese gov-
ernment still has a lot of tools in its
back pocket to manage the situation.
Overall, property isn’t in such bad
shape. Inventory levels are still quite
low, and the restrictions on leverage
are going to further consolidate the
market. Evergrande, one of the larg-
est developers, is less than 5% of the
market. The cleanup needs to be
done. But it bodes more positively for
the existing property developers to
come in and take some market share.
Jain:It is manageable; the top six or
“It always makes the most sense to buy China during a
period of confusion and uncertainty, especially when
the earnings stream will be changing for the better.”
Winnie Chwang