Our Opinion: 2022

China’s worrying attitude to international relations

There are three key risks for investors in Xi’s China. The first major risk is that the country is running out of time for reform. The second concern is the heavy hand of the state in all areas of the economy and society. These were covered in our two recent posts.

The third risk is China’s more muscular attitude to international relations.

Under Xi, China is cranking up its use of force. The worsening situation in the western province of Xinjiang was an early sign of this. There have long been human-rights issues in this region, but what has happened in the last few years is very different to anything seen before. The government has built what can only be called concentration camps and detained several million Uyghur Muslims without trial to stamp out any sense of a separate local identity and culture. This was followed by the crackdown in Hong Kong. It’s easy to understand why China’s top leaders are concerned about mass protests (not only could these one day pose a threat to party rule, but many – including Xi – are probably instinctively fearful of social unrest due to their experiences in the Cultural Revolution). However, the imposition of the national security law – which has been used to crush all political opposition, no matter how peaceful – erases basic civil rights and the rule of law in Hong Kong. The “one country, two systems” promise, which was supposed to last until 2047, has been cast aside.

In this context, China’s military threats towards Taiwan must be taken seriously. The government in Beijing has no legitimate historical claim to rule Taiwan, but the idea that it does – and that the island is a renegade province that should be reclaimed by force if necessary – is universally believed in China. Hence the growing nationalistic, militaristic sentiment in the country – shown by everything from comments by top figures in the party to regular videos of the army demonstrating weapons and exercises focused on a hypothetical invasion of Taiwan – is worrying.

It’s impossible to know if Xi genuinely has any intent to invade (displays of military power also help project strength abroad and stir national pride at home), but it is disturbingly plausible that he might conclude in five or ten years that it would secure his place in history. Even more unpredictably, governments sometimes lose control of the sentiments they stir up. One can imagine a scenario in which a leader struggling with other issues that dent his popularity and threaten his control – eg, a prolonged economic slump – gets carried down a path they didn’t originally intend to follow.

All this is a very bleak perspective. The outcomes may be much better. China still has much long-term potential. Yet it is increasingly difficult to be confident at present. Investors have become used to talking about growth opportunities, but maybe a shorter-term focus on value will do better while we see how much more disruption Xi’s vision will bring.

12th January 2022