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The Silk Road – a bumpy ride ahead?

The Silk Road – a bumpy ride ahead?

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Article highlights

  • With these developments dominating world headlines in the past few weeks, one must consider the impact the news has on investment prospects when it comes to China
  • The State is trying to do away with practices where the social cost is not desirable

We saw stunning developments this month from the Chinese Communist Party looking to restrict the amount of time that people spend online as well as limiting certain segments in the market from profiteering on education.

With these developments dominating world headlines in the past few weeks, one must consider the impact the news has on investment prospects when it comes to China.

From an analyst point of view, it’s important not to get caught up in the sensationalist news headlines – and to look through the noise to get the facts.

In the media we have obviously been seeing the developments and announcements by the Chinese government as they unfold. There has been particular focus on announcements that are targeting some of the areas where the Chinese government deem the actions of companies not to be in line with their long-term framework of common prosperity and reducing income disparities within Chinese societies. This is important because some of the headlines we are seeing are very specific to the Chinese State’s approach to tutoring companies – and making some of these companies non-profit organisations virtually overnight - which has resulted in some significant, and permanent, destruction of wealth for shareholders.

However, we also need to consider what these announcements are trying to achieve to get a real sense of the situation. Generally, the proposed regulations are aiming to achieve a better life for Chinese people and more or equal access to education. Furthermore, the intention is that if education becomes cheaper, it will encourage people to consider having more than one child, in support of the Chinese government’s move away from the one-child policy that has been ingrained for so long.

The other issue we are seeing is that the government is taking action to try and create a more sustainable society that supports ordinary people. We can see this with some of the announcements that the Chines government has made which haven’t been as high profile in the media -  for example limiting the maximum weekly work hours of certain segments of workers that have been the victims of exploitation.

The State is trying to do away with practices where the social cost is not desirable. The difference with China is that China tends to adopt these changes very quickly and sometimes without tact. In the West it’s a longer process of litigation and lobbying before finding some middle ground in policies and practices.

So, while we have seen pressure on share prices and the sense that the Chinese government is increasing their involvement in the state – and we must acknowledge that they are doing that – their long-term goal is on common prosperity which is a well-intended objective. Achieving this and addressing the huge disparity between the rich and the poor in China will, however, be a delicate balance to achieve.

History has shown that whenever governments get too involved in the state, it tends to be very bad for economic growth. We have seen this in China’s history in particular, so the Chinese government will have to be extremely careful while they go about this process of closing the gap in inequality in their society. They will need to set a framework for their businesses that is accommodative for sustainable growth, and also reasonable in terms of competition. This is something we will watch carefully.

The last piece of this equation which also hasn’t been spoken about much is the green element. The Chinese government is looking to improve the environment in which people are living – including things like quality of life, education, health care and social services.

In addition, they are also looking at the environment. We are already seeing lots of changes and we expect lot’s more to come in terms of regulation and legislative frameworks that ensure that companies change the way that they operate to become more sustainable and supportive of the environment.

The crucial - and difficult - thing will be to achieve balance. A lot of these developments have very good rationale behind them but given the demand and supply nature of the economy there is always the risk that they go too heavy in terms of the control side, and this is the issue that is causing the concern for many businesses and investors.