Retake on Double Take: China through an investment lens

For investors in China, it may be difficult to parse the Chinese Communist Party’s long-term strategic goals, like exerting greater control over Taiwan, from the day-to-day realities faced by mainland companies that are working to generate returns during a time of low confidence in the country’s entrepreneurial class and real-estate sector.

For insight into this complex dynamic, Double Take recently welcomed Dr. William Kirby, professor of China Studies at Harvard University Business School and chair of the Harvard China Fund and a closed-end fund that invests in the Taiwan technology sector.

Although China has greater state oversight of enterprise under President Xi Jinping, Kirby remains positive on the country’s long-term capacity for growth if the necessary reforms are enacted in relation to taxation and land-owning schemes. Kirby believes that a good barometer of the country’s future economic health is the strength of the country’s farmers and local governments as they work to recover from depressed land values and unfunded Covid-zero mandates.

Local governments gain much of their income from selling and reselling land, because bizarrely only the government owns the land in China, and it’s almost all in the hands of local governments. But when land values decrease, these areas of governance are strapped for cash. You could see in coming times a real cash crunch in local governments, which means they pay their officials less, they may tax their citizens more … I remain very positive on the long-term capacity for growth in China, because you have 200-300 million people in China who are still too poor to be serious consumers. If they had the social security in terms of health care and education for their children that a communist country ought to have, they could enter this economy. But right now, because farmers are not allowed to own their land and they don’t reinvest in it, and because the government has seriously underfunded rural health care and education, they save massively, but they don’t consume. And this is part of the story of the current stagnation in China.

Dr. William Kirby, professor of China Studies, Harvard University Business School

In Kirby’s opinion, it is a mistake to equate an investment in Chinese companies as an investment in the country’s broader military or political agenda.

I have been on other boards and companies that invest in China. I have written 60 to 70 Harvard Business School cases on business in China, including American investments in China. People invest in China for the reason they invest anywhere on earth – to make money. And there are hundreds and hundreds of American companies, some of them downsizing, or moving a little bit of what they have in China elsewhere. But they stay in China, because they are successful, and they’re investing in what has been, until the last year or so, the most rapidly rising economy over many decades on earth, and really in modern history. And they are investing disproportionately in private enterprises, not in state-owned enterprises. They are investing in the entrepreneurial spirit of Chinese business leaders.

Dr. William Kirby

According to Kirby, while running a sizeable business in China typically requires close party-committee oversight, it would be a mistake to view that scrutiny only as an impediment.

If you are running a business of even medium-to-large size today in China, you will have a party committee there. But very often, that party secretary is there working with the local government and the local party secretary of the municipality to help your business, not to impede it. Because the success of that business is important for the gross domestic product of that municipality. And I have met many party secretaries in municipalities who know the profit and loss of the companies in their jurisdictions better than any American mayor would know of the companies within their jurisdictions, because their central role over much of the last 40 years has been to promote economic growth… You have to deal with it in one form or another, but not all party members are the same, not all party units are the same. And many of them may have different interests depending on the companies they represent or the parts of the country that they run.

Dr. William Kirby

To hear more, subscribe to “Double Take” on your podcast app of choice or view the China through an investment lens episode page to listen in your browser.

Authors

Jack Encarnacao

Research analyst, investigative, Specialist Research team

Raphael J. Lewis

Head of specialist research