Page 18 - ISQ July 2022

INVESTMENT STRATEGY QUARTERLY

This difference of opinion is the more extraordinary as to remain limited. A recent regulatory clamp-down on the infor-
President Xi aims for a further term as Supreme Leader, to mation technology sector illustrates the extent to which
be confirmed in October. Contradicting Mr Xi at this crucial Chinese authorities periodically intervene in commercial
time feels like a high-risk strategy for the 66-year-old activities. Persistent sabre-rattling regarding the offshore
Premier with one more Politburo term likely before island of Taiwan hardly helps. Yet investment opportunity does
mandatory retirement. Mr Li’s difficulty lies in his limita- exist, as reflected in the 35% spike in the Chinese tech sector
tion to just two terms in his current position; thus, any since the latest recent intervention was lifted. More generally,
governmental post other than the big step up to the with (official) annualised headline CPI running at a mere 2%
presidency (last achieved by Mao Zedong himself) would combined with obvious economic headwinds, scope exists for
be a step-down. If there is support for Mr Li’s apparently looser monetary policy, potentially serving to impart further
audacious bid for the summit, outsiders will likely be the downward pressure on bond yields. The Chinese currency has
last to know and only then following the result of Octo- been under pressure on the foreign exchanges for much of 2022
ber’s vote. What is known is that President Xi has the to date; however, this has been tolerated by the central bank as
ultimate authority to dismiss anyone at the top of China’s it is perceived to support the economy’s recovery.
political tree, making it unlikely that any support for Mr Li,
if it exists, will be made public.
KEY TAKEAWAYS:
Meanwhile, President Xi maintains his global statesman • China’s economy is reopening but supply chain
persona, most recently evidenced by his hosting and bottle necks remain and activity data should be
chairing of the fourteenth annual BRICS Summit. This treated with caution.
event was hugely significant for a number of reasons.
Firstly, and most importantly, the virtual meeting was • China’s domestic political agenda is dominated
Russian President, Mr Vladimir Putin’s first public engage- by President Xi’s third term candidature, to be
ment since the Ukraine invasion on 24th February. confirmed in the autumn.
Secondly, none amongst Brazil, China, India and South • Economic and geopolitical status is without
Africa have either endorsed or supported US / NATO-led question, but China and other BRIC partners fail to
economic sanctions against Russia (all five choosing to endorse Western sanctions on Russia.
abstain from US resolutions tabled at the United Nations). • Investment in China to remain a marginal decision,
Thirdly, the optics associated with chairing such a meeting supported by limited central bank policy easing.
are hugely significant for Mr Xi himself at this critical time
in his candidature for a third term in office.

For the West, arguably the biggest economic threat from
such a confab is the possibility that a clearing system for
trade transactions might be established in local curren-
cies, supplanting the US dollar. Whilst no such agreement
took place on this occasion, it remains a possibility.
Sanction-laden Russia would likely be an enthusiastic
supporter, while China harbours designs on the yuan,
becoming the key currency for all BRICS trade at the very
least. Brazil, India and South Africa are rightly much more
wary regarding formalising ties with Russia at this time,
thus risking becoming the object of US/NATO economic
sanctions themselves. Indeed, the potency of the BRICS
Summit is diminished by India’s deep-seated wariness
towards China, to say nothing of its much-vaunted
involvement in an economic and security partnership with
the US, Japan and Australia.

Whilst China’s economic and commercial status is beyond
doubt, for investors, exposure to the country seems likely

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