Understanding the opportunities presented by China’s shifting priorities – as it focuses on “soft” power to complement its economic might – will be key for investors.
Investors everywhere have been unnerved by a flurry of negative news headlines out of China, but these should be seen in a wider context. This year marks the 100th anniversary of the Chinese Communist Party, and China appears to be in a reflective mood. The country is recommitting itself not just to continued economic success, but to focusing on a series of other concerns. These include addressing social concerns about inequality, tackling antitrust issues and curbing challenges to traditional centres of power. Efforts such as these are bound to stir up some volatility. Yet they are all part of a new phase in China's evolution as the country repositions itself on the global stage. We expect China to continue using its economic power to elbow its way to the top ranks, while also beginning to exercise its "soft" powers of attraction and influence.
So what should investors look for next? We think China will continue to pursue its own path of hybrid development, targeting self-sufficiency while becoming a best-in-class high-tech leader. But China also wants to continue to engage with the rest of the world and maintain the success of its financial markets. And we could see China collaborating with other global powers on common challenges - most notably on climate change - in a way that lets China write a positive new story.
The three phases of China's transformation
To find out where China is headed, it's helpful to look back on how far the country has come in a short time - which we separate into three distinct phases:
- Phase 1 began in earnest 20 years ago with China's membership in the World Trade Organization. Abiding by WTO rules and committing to economic reforms helped China quickly become an essential link in the global supply chain - the "factory of the world". The result was foreign direct investment that increased from USD 47 billion in 2001 to USD 163 billion in 2020 (source: UNCTAD).
- Phase 2 came when China supplanted Japan as the world's No. 2 economy in 2010, after the global financial crisis. By overtaking a country famed for its technology, China moved from a manufacturer of cheap goods to a high-tech leader higher up the value chain. Also in Phase 2, China began integrating its financial markets into the global system - for example, with the Stock Connect and Bond Connect programmes that gave foreign investors easier access to Chinese markets. More recently, Chinese equities have been added to some of the most prominent global stock indices. This reflects the growing importance of China to the global markets, but even so, the percentage allocated to China by these benchmarks underplays China's global influence.
- Phase 3 is the newest part of China's transformation journey. President Xi Jinping is presiding over an economy set to overtake the US as the world's biggest economy by 2029. China's handling of the Covid-19 pandemic provided a big boost, even if overall growth will trend slower than it has in recent years. But this phase is arguably the toughest one for China to get right. China must walk a tightrope as it manages its economic might, focuses on its social-equality "mandate" and hones its soft-power skills. China's political system, combined with its domestic and global economic stature, will make this a uniquely challenging balancing act - both for itself and the world. Yet China's success is critical to the world's stability over the next decade.
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This post was funded by Allianz Global Investors
