FT Wealth Management  

In this new world order, how does China affect global investment strategies?

In terms of the geopolitical situation and the tension between the US and China, "we are watching what is going on" but there is no reason for panic.

Foreign investment disappearing - or is it?

Foreign investors have also pulled money from the country.

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In November, the annual Asia-Pacific Economic Co-operation gathering brought Xi Jinping from Beijing and Jo Biden from Washington to San Francisco.

While China can be a polarising topic in the US (as, doubtless, the US is in China), economists at asset manager Payden & Rygel "fear that polarisation might cloud investment judgment."

For example, they pointed to the recent plunge in foreign domestic investment in China, which some doomsayers have said is a sign of global corporations abandoning it.

"As usual, the story is more complicated", the economics team commented.

Kelly Chung, Value Partners

A note from the team explained: "Sure, non-Chinese companies could be extracting retained earnings from existing operations out of China due to geopolitical fears.

"However, we'd posit another explanation: interest rate differentials. US interest rates are much higher than similar maturity instruments in China. US 2-year Treasuries yield nearly 5 per cent while China's equivalent offers 2.3 per cent."

Indeed, adjusted for the impact of re-invested earnings, actual FDI used in productive activities and new projects remain relatively stable.

So it is not crystal-clear whether this FDI plunge was because of yield chasing, or a sign that investors are voting with their capital and fleeing China.

Wider ramifications

Given the above - an outflow of FDI, a structural slowdown and nervousness about political tensions, what does this mean for the region and for global growth?

Laith Khalaf, head of investment analysis at AJ Bell, said China's economic performance has "significant ramifications for the wider Asia-Pacific region", largely because it is a major trading partner for many countries in the area.

He explained: "A robust Chinese economy can therefore boost the growth of its neighbours considerably, and an economic slowdown can have precisely the opposite effect. 

"China has also been a significant source of investment in the region, particularly through its Belt and Road Initiative which has seen it investing in infrastructure projects across Asia, and more widely across the globe."

The Chinese tourist dollar, or more accurately, tourist yuan, is also an important financial contributor to the surrounding economies, seeing as Chinese tourists form such a significant proportion of travellers in the region.

This is one reason why the late and protracted Covid lockdown created ripple effects across other economies.

More widely, he said the fact China has become an "economic powerhouse", means its influence on global finances has grown.