Home Correction letter Letter: Chinese geopolitical risk is an opportunity for investors

Letter: Chinese geopolitical risk is an opportunity for investors

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John Plender (“Didi’s Delisting Revives US-China Decoupling Risks,” The Long View, December 4) speculates on how investors should take geopolitical risks into account when investing in China and why “The flight of capital is not yet on the agenda”.

There are three good reasons why it is not imminent. First, global investors remain relatively underinvested. Chinese capital markets were relatively closed until recently, leading investors to have much less exposure to China relative to the size of its economy or capital markets. Whether this correction occurs through the inclusion of an index or through active investing, global investors will likely continue to add Chinese assets for some time.

Second, the ratio of market capitalization to gross domestic product is much lower than comparable stock markets. It may adequately reflect financial and political risks, but it is certainly not overstated.

Third, the decoupling itself is not bad because it supports an interesting feature, which is low correlation. As China decouples and operates on distinct economic cycles, Chinese assets continue to offer diversification hard to obtain elsewhere. More broadly, this is an example of how geopolitical risk is not purely negative, but also provides opportunities for investors.

Elliot Hentov
Head of Policy Research (Global Macro)
State Street Global Advisors
London E14, United Kingdom