Is it Ukraine today, Taiwan tomorrow?

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Open Door Investment Management provides its perspective on the impact of the Russian invasion on China.

1. Should we be worried about China’s close ties with Russia?

In many ways, Russia’s economy is a good match for China’s, in that it is a huge supplier of many commodities that China needs. It could also be argued that convenient overland sourcing reduces China’s reliance on imports through congested (and potentially contested) sea lanes.

Secondarily, this initiative could be seen as the reverse of the Nixon/Mao initiative in 1972, which was later drafted as a strategic stroke of genius by the United States, undermining its Cold War enemy, the Soviet Union. . China’s growing ties with Russia are a direct reaction to pressure and worsening ties with the United States. However, going forward, as a consumer market and technology provider, the United States, of course, has much more to offer China than Russia.

2. Why doesn’t the Chinese government publicly condemn Russia for the invasion?

China avoided blaming Russia for the invasion, instead blaming the United States for the conflict. He also opposed US and European sanctions against Russia, hinting that he could help Moscow offset the economic impact of the sanctions. China, long concerned about “encirclement,” understands Russia’s legitimate concern about why NATO, supposedly a defensive organization, is so determined to expand to the Russian border.

3. Is the West likely to impose similar sanctions on China for its reluctance to condemn Russia?

We think China will be careful not to be too blatant in helping Russia get access to finance, semiconductors, etc. The West will also be careful not to push China into the arms of Russia by imposing Ukraine-related sanctions. The United States needs China’s help on other issues, such as climate change and North Korea. It would therefore seem unwise for the West, when global growth is already under pressure, to embark on an economic war with China and Russia at the same time.

4. Will the fallout from the Russian invasion (regardless of the outcome) be good or bad for the Chinese economy?

The greatest immediate threat is inflation in food and energy prices. This is of course a global phenomenon, but Chinese politicians are particularly sensitive to food inflation. This could hamper the Chinese government’s ability to stimulate a slowing economy through monetary or fiscal means. Inflation in the cost of nickel and aluminum will also pose a challenge for the highly publicized electric vehicle sector.

5. Is it Ukraine today, Taiwan tomorrow?

The situations in Taiwan and Ukraine are, of course, not directly comparable – today only 13 of the 193 members of the United Nations recognize Taiwan as a sovereign state under the title of the Republic of China. Ukraine, while a former Soviet republic, is considered an independent sovereign country member of the UN. More concretely, the Chinese government, so committed to stability, especially in the run-up to the 20th Party Congress in October, will have seen how destabilizing the extensive and immediate sanctions that any attack against Taiwan would entail. Another lesson is the clarity of information from satellites, which would highlight complex preparations for an amphibious invasion well in advance. The Russian invasion struggled despite overwhelming numerical superiority, a long land border, and some local support. Moreover, while one can argue about its extent or effectiveness, the US commitment to defending Taiwan would surely give Zhongnanhai pause.

6. Does it make sense to buy or hold investments in China when the geopolitical situation is so uncertain?

Although Chinese markets have been volatile over the past two months, we believe China will prove a relatively safe haven from an investment perspective this year. Ahead of its decade-long leadership reshuffle slated for later this year, China has repeatedly stressed the need for economic growth and stability. His insistence on a GDP growth target of around 5.5% shows that considerable monetary and fiscal firepower will be employed this year. We expect a bailout of the real estate sector, led by public developers, and an easing of regulatory repression on internet platforms. Investments will most likely focus on self-sufficiency and leadership in key future technologies such as artificial intelligence and green energy.

In the case where “black Swanor even “gray rhino,” China’s A-share markets are highly liquid, with daily turnover of $160 billion. Our China A-Share Fund can be liquidated in just over a day, at current trading levels. At worst, we have prepared an “Armageddon trading program”, which we believe will reduce wallet risk in a few hours.

7. Is the world more divided into two groups (democracies vs autocracies)? Will we see a political and economic decoupling of the two?

The cost of decoupling would be huge and time consuming. Getting many bickering democracies to cooperate is difficult (unless there is a powerful outside threat, like Putin). We would say that it is even more difficult for dictators to cooperate given a fundamental lack of trust.

8. If there is a significant correction, would it be time to fish the big Chinese Internet platforms or the ADRs listed in the United States?

Although we have seen signs of easing regulatory scrutiny, it still seems a little too early to buy the big internet platforms or ADRs Regulatory scrutiny is still ongoing (key investigations into Ant Group and Didi do not are not yet complete) and new regulations have recently been released, such as fee reductions for food delivery platforms. Historical valuations need to be reassessed in light of increases in operational costs to comply with new regulations. Chinese ADRs also remain under the threat of delisting due to their failure to comply with US audit oversight.

Overall, we believe Chinese A-share markets will outperform broader Chinese markets in 2022, especially against major internet platforms. We also see a particular opportunity in Taiwan’s little-known biotech sector. Support for the depressed real estate market could also offer high value investments later in the year.

For more information about our company, please visit www.odfund.com

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