China: Catalyst or Compromise?
By Dan Weiskopf, ETF Professor, Toroso Investments
In the ETF Think Tank, we do not avoid awkward conversations. Sometimes important decisions are made when people are uncomfortable. In that regard, this week we decided to take on the discussion of US / China tensions. Our goal is not to get political or point the finger, but rather to highlight the opportunity and hope that people will not fall prey to the media headline hype. US investors need to focus on the opportunity because isolationism and protectionism will not ultimately lead to global growth, and therefore are not realistic options. Moreover, the momentum for China’s envisioned economic growth over the next 10 years is simply too powerful a force to ignore. It is for this reason we have invited hedge fund manager Kyle Bass, as our guest in this week’s 6:00 pm Get Think Tanked Happy Hour (Link to join). Note, Mr. Bass is very vocal and open about his controversial views on the subject of China, and these views do not reflect those of the Toroso Portfolio Managers or the firm. See Kyle Bass on Twitter for details.
US Investors can target China allocations through about 50 different ETFs with almost $19 billion in AUM, and these choices narrow further to 42 ETFs when you eliminate leverage and inverse. Choices exist for China A-Shares, Broad China stocks, the China Bond market, various industry/sectors in China, even solutions that position investors’ alignment with ESG, and companies seeking to have a positive effect on the environment that are based in China. Ironically, the disparity of investment performance between an ETF that focuses on Environment (the KraneShares MSCI China Environment ETF (KRGN) versus a traditional Chinese energy company (the Global X MSCI China Energy ETF (CHIE), shows that YTD performance is positive 55% and down 25%, respectively. (A complete list can be provided upon request, but clear leadership exists in terms of innovation; access of platform choices can be found at KraneShares, DWS and Global X.)
TikTok: The Polls Highlight a Need for Change
Polls show an increased level of anxiety on both sides of the globe. The latest PEW Research poll, from July, found 73% of American respondents have negative attitudes towards China. Similarly, polls show Chinese people also digging in further in support of their political system and lifestyle. The fact is that both countries are at an important crossroads, and polls are suggesting an increased polarization of views in this mid-COVID-19 world which cannot be beneficial for global economic growth. China is the fastest growing economy, and the US is the largest economy. If politicians take us down the route of isolationism, everyone loses globally. While there may be good reason for distrust between both constituencies, the fact is that there is a mutual need for cooperation. This is why the battle over TikTok and the ban of WeChat could become an example of either important compromise or legal precedent. It is for this reason that circumstances need to be discussed openly.
Growth in China
Will China (and separately, India) become larger economies than the US? This is a question that makes many people in the U.S. uncomfortable, and the imagery makes some people even feel powerless. To be clear, linear projected growth should be viewed for illustration purposes only, and the quality of life for most Americans should be emphasized over specific projections. Technology and E-Commerce, of course, is at the core of expected growth, and clearly the lever on both political sides. In addition, questions and risks around a $52 Trillion real estate bubble have also popped up, which could impact global growth and China’s ability to hold 20% of its US Treasuries holdings. According to ZeroHedge, ownership of US Treasuries peaked in 2013 and bottomed in 2016. Exactly what this means is unknown, but let’s not be so hasty in regards to views towards our creditors. Life is a balancing act of self-interest!
Beyond the interdependence in the ownership of US Treasuries the below charts highlight an alignment in the US Trade deficit, US Surplus trade in services and the impacts from Investment flows from china in the US.
Trends in China GDP growth and its economic leadership, as implemented through policy and technology, must be at the core of both American and Chinese people. Can it be that an expanding global pie is good for everyone and will lift all boats? We look forward to a healthy debate on Thursday. Note that ETF Think Tank calls are never recorded, so insights are shared only with those on the calls.
Originally published by Toroso Investments, 9/30/20
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