China is always a hot topic in the global landscape both in terms of investing and politics. There are a lot of biases and preconceptions about the China-U.S. relationship that have actually been hindering investors who may be missing out on some opportunities. Ben Harburg, a Managing Partner with MSA Capital who specializes in early stage privately held growth companies in China, joins the ETF Think Tank to clear up those misconceptions. His unique position of physically being on the ground in China means he can provide a better perspective than most.
Harburg says that the 30,000-foot view of the Chinese business environment is that it is perhaps the biggest arbitrage trade of our lifetime, driven mostly by a lack of understanding. Some of this is almost certainly a result of political narratives, but there’s also a general apathy towards China. There’s not much U.S. presence on the ground in China. There are few U.S. workers in China and most Wall St. analysts are not in the country.
It is a myth, however, that China isn’t open to foreigners. China has actually done a lot of work to create more channels for global investors. There are public markets, such as the Shenzhen Stock Exchange, that are available and Chinese regulators are trying to court foreign capital as well. It’s starting to open up again now that China has reopened post-COVID.
Harburg believes that three themes provide the biggest opportunities in China – life sciences, core technology, and the consumer. China was typically a follower on the life sciences side and usually only had one customer (the government), so that kept margins thin. That is changing now and the sector is growing. China is beginning to build out its own AI, robotics and chip industries and could be major players in the e-commerce, communications, and entertainment spaces.
The idea of decoupling will continue to be a major theme in the China-U.S. relationship. It escalated during the Trump administration with the attempts to separate trade, capital markets, talent flows, and core economic linkages. Due to this decoupling, China is at a different place in the economic cycle, e.g., it doesn’t have the inflation issues that many other areas of the world have. It does present some unique opportunities because there is a parallel universe of U.S. counterparts being developed.
Advisors still have a hesitation about investing in Chinese equities. The solution to that is to have more transparency, including more data and insight. Harburg spends a lot of time with regulators and government officials to try to improve insights and information and we need to emphasize how we are beneficiaries of information, not just victims. Investors need to know how and why their advisors are investing in China. China is too big of a market to miss out on. Even if there are narratives of conflict, advisors should be able to find a way to navigate around it.
Other key takeaways:
- The “disappearance” of Jack Ma is a perfect example of information arbitrage. While he was keeping a low profile, the Chinese people were seeing him around working and volunteering his time in China. Situations, such as these, provide opportunities for those on the ground in China.
- What’s the vision for China-U.S. relations improving? The goal is to keep the lines of communication open and foster pragmatic dialogue. Harburg, however, isn’t optimistic about this relationship. There’s a lot of political sentiment to keep the current decoupling in place.
- China has begun to blatantly impose anti-monopolistic practices and regulations. Alibaba, for example, was a company that dominated your daily life. Any company with a dominant position has faced antitrust regulations and all the tech majors have been facing it. A breakup, however, enables them to be much more agile and people don’t realize how big these companies truly are. The sum of the parts is often greater than the whole.
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