The Case For Underweighting China In An International Portfolio
The Chinese economy is in a bit of a trouble. The trade war and tensions in Hong Kong are certainly contributing to their weaker performance, but it’s been years since China grew at the shocking pace that once defined its economy. GDP growth in China used to be well in excess of 10% a year: now it’s around 6% a year.
Let’s not overstate the problem: 6% is a good growth rate, and almost any developed economy would be happy to have a single year of growth that high. But it does beg the question: How invested in China should you be today?
The index I work on, VIEQX, has a lot invested in China. As of January 31st 2019, out of 39 countries, it was our 14th highest holding, at 2.88%. But ACWX, a cap-weighted index, had China at 6.54%.
As we repeatedly emphasize, cap-weighting is past-weighting. Too often, a cap-weighted approach leads to over-investment in once-great countries and under-investment in soon-to-be-great countries. While China is still clearly a dynamic and quickly growing economy, it’s been unable to maintain the growth rates that brought it to this point. At least in part, the slowdown is caused by a freeze or even reversal in the economic liberalization that has defined the Chinese economy since 1979.
The recent tensions with Hong Kong threaten to exacerbate this problem: China has been doing a very difficult balancing act, pursuing economic liberalization without political liberalization. The protests in Hong Kong may make the Chinese leadership even less interested in transitioning to a free market economy, as that tends to lead to political liberalization as well.
None of this is to say that China is a bad investment, or that an international index shouldn’t have any money in them at all. But it is to say that China isn’t growing as fast as it once was, and in turn might not deserve the weighting it once did.
Originally published on Townhall Finance.
Charles is a political risk analyst for Bowyer Research, has been published on Affluent Investor, RealClearMarkets, RealClearPolitics, Asia Times, and has been a guest on The Glen Meakem Radio Program.
Trending Now on Affluent Christian Investor
Sorry. No data so far.
The Affluent Mix
Another Theologian Falls For Socialism February 17, 2021 | Roger McKinney

GDP Bounced Back, Sort Of February 17, 2021 | Jerry Bowyer

Apathy And Envy For All February 17, 2021 | Jim Huntzinger

The Global Stock Market Decompression February 17, 2021 | Jerry Bowyer

Why Things Are Bad And What You Should Do About It... February 17, 2021 | Terry Applegate

Gamestop Scandal: Who Is The Real Culprit?... February 11, 2021 | Roger McKinney

Who Has Economic Mobility? Everyone! February 11, 2021 | Jim Huntzinger

Biden Deletes China COVID Evidence February 11, 2021 | Frank Vernuccio

How Companies Pay Shareholders: High Earnings Quality Companies Do More Buybacks... February 11, 2021 | Jerry Bowyer

Volatility Vs. Capital Erosion February 11, 2021 | David Bahnsen

When Will The Party End? February 11, 2021 | Michael Pento

Back To Buybacks: Is It More About Dilution Than Concentration?... February 11, 2021 | Jerry Bowyer

Even Amnesty International Is Criticizing Facebook Censorship... February 5, 2021 | Frank Vernuccio

The War On Poverty’s Results February 5, 2021 | Jim Huntzinger

How Companies Pay Shareholders: Total Shareholder Payout A Better Approach?... February 5, 2021 | Jerry Bowyer

Interest Rate Threshold Keeps Dropping February 5, 2021 | Michael Pento

You Are What You Live Through As An Investor... February 5, 2021 | David Bahnsen

How Companies Pay Shareholders: What Do The Data Say?... February 5, 2021 | Jerry Bowyer

Stop Griping About Big Tech And Start Voting Your Shares... January 29, 2021 | Charles Bowyer

No, Rev. Warnock, The Bible Does Not Preach Socialism!... January 29, 2021 | Roger McKinney

Does The U.S. Actually Have Poor? January 29, 2021 | Jim Huntzinger

Incompetence Rules Blue States January 29, 2021 | Frank Vernuccio

Join the conversation!
We have no tolerance for comments containing violence, racism, vulgarity, profanity, all caps, or discourteous behavior. Thank you for partnering with us to maintain a courteous and useful public environment where we can engage in reasonable discourse.