Investing and China: Ten Reasons for More Cooperation

It is clear from an investment standpoint that what is best and necessary is cooperation between China and the West, or what might be called "co-evolution in investing." Here are ten reasons why.

1.      The world is becoming more equal and global, and though some countries are under temporary pressure to become more economically isolated, finance and investing are global, as are sustainability challenges, therefore related investment opportunities are as well. 

2.      The largest financial institutions such as JPMorgan, Blackrock, Fidelity and Bridgewater remain focused on China as an opportunity, as they can see the co-benefits of doing business there, as opportunities emerge they don’t want to miss out, for their own financial maximization. The largest public companies also continue to do increasing business in China; i.e.; Tesla and BMW in the auto manufacturing sector, for fear of being left behind in China and through innovations that might emerge in China. The largest corporations and investors are likely to continue to see China as an opportunity not to be missed.

3.       If you believe the world will come to attempt to fix sustainability issues, then related opportunities will by definition be global, i.e.; China and India will want to improve the quality of their air, water and arable land because they are immediately experiential and acute challenges, therefore in order to invest in such opportunities, solutions may most likely arise from and in these regions. Large private equity firms remain focused on the region for this reason.

4.      For investors to attempt to maximize financial returns from such opportunities, conditions need to be ideal for investment success, i.e.; limited tariffs and penalties, favorable policies for foreign investors, confidence in markets and maximized cooperation to ensure trust and integrity of investments made.

5.      Fixing sustainability challenges requires collaboration, given systems dynamics at play in global investing and finance, i.e.; to fix large problems they need to be tackled as a single, global effort. Any single asset owner, such as Norges Bank, can’t solve major sustainability challenges on their own even if they are mandated by their government on climate change as they are. Ownership in companies is too diffuse for any one asset owner to make a difference on their own, proper checks and balances on companies therefore requires a majority of investors wanting to solve challenges to take full effect. For markets to be maximally profitable going forward, sustainability challenges need to be solved in the short to medium term, therefore successful markets going forward need to be both global and cooperative for best success.

6.      Further, a majority of anything is required to change things. Marijuana and gay marriage legalization happened once a majority of Americans agreed and these then became law. The same dynamic is true for any policy related to environmental issues, investors ending up on the wrong side of eventual policy run the risk of being left on the wrong side of the financial equation as public perceptions shift towards a majority wanting to fix problems through investing. In the US, roughly half of Americans want specific action on climate change, what happens once this becomes 60% or more, and investment aligns to these beliefs over time? 100% is not required, as markets need winners and losers to function well, and an increasing majority of investors seeking solutions can be expected to gradually emerge as investors see where future returns are likely such as Larry Fink now makes clear he sees this as the way things will play out.

7.     This same dynamic is true for all social and governance issues, for example once markets want to establish governance checks and balances, or fix what are often complicated and deeply embedded social issues, then markets will be better positioned to succeed more generally and fund managers and their asset owner partners will be best positioned when aligning themselves this way or run a variety of risks such as losing market share and not financially succeeding when seen as part of the problem, not part of the solution in increasingly competitive and transparent markets, etc. This is in effect Enlightenment Now in action, and increasing numbers of investors are interested in being on the right side of this equation.

8.      The ongoing race for innovation is likely to be won longer term by countries who attract the best and brightest, who increasingly want to solve these problems, or at the least it is a risk for investors who do not diversify accordingly, i.e.; if they get regionality wrong when it comes to innovation opportunities.

9.      Investors therefore need to diversify their bets on innovation to ensure they capture the upside where innovation will emerge on technologies such as battery storage, electric cars, sustainable agriculture, etc. – and it is unclear who will win, even if we think we know, not doing so is arguably a violation of fiduciary duty

10.  Therefore, global investment is a fiduciary requirement, and for that to succeed trust and transparency is needed, trust requires verification and cooperation, cooperation will only happen in markets that are globally fair, unbiased, and best positioned to attract capital, talent and seek to solve for acute problems that remain gaps in the global system.