Should you get out of Chinese investments – or stay the course?

North American wealth industry reaction is mixed about benefits and dangers

Should you get out of Chinese investments – or stay the course?

As eyes turn from Ukraine to China, concerns are heating up about news reports that Russia is asking China for more weapons for its war. Given that China abstained from condemning Russia’s invasion during the UN Security Council vote earlier this month and fears are rising that China may be watching the western response to Russia as China considers a similar move on Taiwan, some in the wealth management industry are pondering withdrawing from China – while others are holding firm.

“Businesses all over the Earth are moving production away from China just as fast as they can,” Dr. Mark G. Dotzour, an American real estate economist, said at a recent presentation. “I wouldn’t invest a penny in a Chinese company or any other investments in China, whatsoever, because I don’t believe a word of any of their accounting or anything else.”

Dotzour was commenting on how this exodus from China would impact inflation and business costs. He said that after a 40-year deflationary environment of globalization, we are now moving into a higher inflation environment. As businesses leave China, their wage and goods costs would increase. Companies, such as General Motors, which is building an electric vehicle plant in Michigan, and Ford and General Motors, which are building computer chips in the U.S. are leaving China, he said, because “they can’t trust Chinese production anymore”. But they’re facing a labour shortage in North America, so he warned they may take their production to Mexico. 

“The move away from China is accelerating dramatically. China’s shining star is like a shooting star. It’s like a meteor. It’s headed toward Earth,” said Dotzour, adding that China has been “a reliable low cost subcontractor” for the last 20 years, but has never been a trade partner with the U.S.

“The North American continent has exported our jobs and our wealth to China in return for cheap stuff, but China doesn’t buy anything from the United States,” he said. Although he noted that Donald Trump, while President, forced China to sign a $200 billion agreement to buy from the U.S., it had “not come anywhere close to it” two years later. Now, given that China dealt with the pandemic by shutting down whole cities, he said it’s also become an unreliable subcontractor.

“China’s also got a much bigger problem,” Dotzour added. “We all know what customer service means and it’s not a good idea when your biggest customer views you as an enemy. And China is quickly morphing into an enemy of not only the United Sates, but also Australia, India, Korea, Japan, and Germany. You can see how this list is going and production is moving out just as fast as it can.”

Dotzour also noted that the world is going to be challenged with things like electronic vehicle production since China produces more than 90% of the world’s manganese and almost 80% of the world’s graphite production, both required in batteries. It is currently responsible for 80% of the global battery chemical refining capacity, and Dotzour predicted costs will increase with demand.

Holding Firm

While Dotzour painted a grim picture, Barry McInerney (pictured above), President and CEO of Mackenzie Investments, which has launched Chinese funds, was much more tempered.

“China remains focused on its economic growth and development,” he told Wealth Professional, noting those have been some of China’s fundamental tenants for several decades. “Their focus is really providing quality retirement, quality housing, and quality education for their citizens.”

While China has lifted many out of poverty into the middle class, it would like to transition far more. “So,” he said, “they remain focused on that”. It’s been opening its capital markets very quickly and many asset management giants are working with it to help China develop those and participate in the unprecedented growth in the retirement, asset management, and economic space.

“China just started its industrial revolution 40 years ago. We, in North America and Europe, started it 140 years ago,” said McInerney.

He said Mackenzie has a “terrific partnership” with the China Asset Management Corp., which was one of the first to sign the United Nations’ principles of responsible investing. After its fast growth and industrial revolution, China is also focused on quality growth and is a world leader in manufacturing electric cars, wind turbines, and batteries. ESG is also becoming more important to it.

“I think it’s important to understand what their focus is this year,” said McInerney, noting President Xi Jinping is seeking another five-year term and the party will be developing its next five-year plan.

“We feel very fortunate to have such a significant investment with such a terrific partner, China AMC,” he said. “It’s certainly a two-way benefit we see, and it will continue to be for us.”