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This week we’re speaking to an expert on investing in China: Jason Hsu, CIO and founder of Rayliant Advisors. If and how to invest in China are key questions for long-term growth-oriented asset owners with different issues to unpack around political risk, geopolitics, ESG and even the mechanics of listing an entity.

Jason walks through these questions and others, including: should western investors understand President Xi better, how investors should think about political risks and whether economic growth is rewarded in share prices (“no” is often the answer)?

We weigh up to what extent hidden biases toward unfamiliar cultures interferes with investors thinking about China. Anyone who likes to think deeply about China and Emerging markets investing will get a lot out of this episode.

Links mentioned:

• Jason’s newsletter on LinkedIn
• Paper on why GDP growth does not lead to share price growth 

We discuss:

• The biggest question: post CCP congress Chinese stocks were on the floor and there were suggestions that China was “uninvestable”. Since then there’s been a big rally. Where does Jason think things stand today and how is he helping investors think about allocating to China?
• Diving into the details: A-shares, H-shares, VIEs, ADRs, QFE … how should investors be accessing the China market and why does it matter?
  • The difference between onshore and offshore China stocks. Offshore has been easier to access for western investors but can be very biased to large tech names and heavily correlated with the US market. The Onshore “A shares” market is less correlated (about 0.3)
  • The risk of investment “chasis” like ADRs and VIEs which many western investors will use but violate some Chinese rules but have been allowed to persist for years and are widely used
  • How indices are moving to catch up with the opening up of onshore China - they are on a glide path to more onshore A share exposure but are increasing this through time
  • Investing broadly in global growth: the US and China are two big growth pillars but investors typically will not have anything close to a balanced allocation between them – why Jason thinks China “should” probably be the second largest allocation in a global growth asset owner portfolio
• Political risk: can political interference in sectors (eg tech, e-learning) ever be mitigated in China? Is it bigger or smaller than thought, is it priced, and how should investors manage it?
  
  Should Western investors understand President Xi better, is that important? Jason gives his view and shares some insights on how investors can think about this
• Does economic growth get rewarded in share prices?
• Social risks – how can investors navigate the real or perceived social risks of investing in China relating to the persecution of Uighur Muslims?
• Geopolitics – do geopolitical narratives matter?

What’s one thing you would like listeners to take away from this?

Trying to learn about China from the popular press is a bit like learning about President Biden from Fox News. There are a lot of biases in the popular coverage, you need to have access to on-the-ground insights.

What is the most underappreciated thing?

A lot of times people worry about markets being efficient and taking away an investor’s ability to have an edge, but the opposite can be true, and most people don’t have the conviction to stay the course given the irrationality and randomness of markets in the short run. Irrational markets can also cause investors to lose their edge – the ability to profit from irrationality is not that high.

Any recommendations for good books or podcasts:

• Follow Buffett and Munger

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Each LCP investment uncut podcast is for information and marketing purposes only and does not constitute any form of investment or financial advice or a financial promotion (under the Financial Services and Markets Act 2000). All views expressed by the podcast hosts and guests are purely their own opinions and do not represent those of LCP, its clients or affiliates. Our podcast listeners should always seek independent financial or legal advice before making any financial or investment decisions. Please refer to the Legal Notices section on the LCP website for further information.​