Lou Jiwei: U.S. Is Playing a ‘Negative-Sum Game’ With China
Lou Jiwei, China’s finance minister from 2013 to 2016, is currently director of the foreign affairs committee of the Chinese People’s Political Consultative Conference. This article is a two-part assessment of China’s current foreign relations and market strategy. Read the first part here.
I have noticed that foreign financial institutions are — wisely — interested in the Chinese market. When the S&P 500 Index plummeted earlier this year, China’s stock market also took a hit, but fell far short of a slump. When China’s stock market rises, it’s nothing like the dramatic rebound that the S&P index experienced after its plunge this year. In this sense, the Chinese and U.S. stock markets are related, but different.
China has a promising economy that serves as a solid foundation for further market growth. With the opening-up of China’s financial system, foreign financial institutions have made the wise decision to enter the market. At the same time, foreign investors need to localize their management teams because the Chinese market remains immature and has big room for active investment.
In an immature market like China, an experienced, active fund manager can earn more profit, but also need to pay attention to risk management.
I recommend enhancing risk management. Chinese people tend to be risk taking. They see risk as an opportunity. But there should be a balance in risk management. In China, foreign investors should not employ the same risk management measures they use for a mature market. Nor should they completely adopt Chinese investor habits, which can make institutional investors look like retail ones.
In addition, investors can focus on the East Asian region which is performing better economically than many other parts of the world. Southeast Asian countries, Japan, Korea and China all have learned from the past, so their markets are less likely to suffer major fluctuations.
In terms of allocating assets like private equity, distressed debt, and infrastructure, investors can moderately increase their investments. Fixed-income products are now offering paltry returns. Under risk management, investors can increase their holdings of debt, particularly in better-performing regions like East Asia.
Countries that rely on commodities exports typically provide good returns. However, gains could be negative when converted to the U.S. dollar due to greenback depreciation.
Regarding geopolitics, China-U.S. tensions can be resolved relatively easily, but relations can also be very unpredictable. The most unpredictable is the U.S.’ China policy because it is illogical. In the midst of the coronavirus pandemic, and the final phase of the 2020 presidential election season, the U.S. side has politicized all areas of the China-U.S. relationship. The U.S.’ thinking is to play a “negative-sum game,” in which the winning player is the one who loses less. In my opinion, China and the U.S. must be rational to avoid unnecessary friction.
In the long run, globalization is inevitable and driven by capital. Countries should make structural reforms to resolve the problems of globalization, such as the worsening income gap and the shift of job opportunities. The decoupling of the U.S. and China will cause both countries to lose, but won’t be achieved anyway. I believe the China-U.S. relationship will eventually get back to normal after some short-term turbulence.
Translated by intern reporter Hou Xinle.
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