There is optimism around the breadth and depth of innovation in China, despite its recent regulatory crackdown, the co-manager of Baillie Gifford’s Pacific Fund has said.
Ben Durrant said the wave of regulation this summer was an effort by the Chinese government to focus capital on different parts of the market.
The crackdown began last November as watchdogs torpedoed the initial public offering of Alibaba’s fintech business, Ant.
Markets continued to react in a jittery way as the country initiated a number of investigations into the monopolistic practices of big-tech.
“The concern, that was being quite clearly flagged for years [by the Chinese government], was that consumer internet isn't the highest form of technology investment in the world," Durrant said.
“And China was trying to actually encourage their staff and capital to be put into more productive sources.”
These included renewable energy development, including building the country's own semiconductor supply chains.
The Chinese property market has always been very heavily and effectively controlled, and [Evergrande] was done on purpose.Ben Durrant“So while there's certainly been a cost to some businesses that the Chinese government perceived weren't valuable, or as valuable as the markets assumed, we are still very positive on the long-term breadth and depth of innovation that you're seeing in the Chinese markets.”
No contagion risk
Durrant added the uncertainty in the Chinese markets after property firm Evergrande ran into trouble over its debt pile did not pose contagion risk.
Global markets wobbled earlier this year as the Chinese developer ran into liquidity issues, narrowly missing defaulting on a payment in October.
The firm had been struggling under the weight of $20bn in debt and concerns were raised over possible market contagion.
“The Chinese property market has always been very heavily and effectively controlled, and [Evergrande] was done on purpose,” Durrant said.
“[The authorities] set out the three red lines in terms of leverage the developers could have and then [some] developers lost funding when they passed the three red lines..in a way it's proceeding as they wanted to do.
“[You want] some of the most leveraged players that couldn't be trusted as well to deliver to come out to the market. And that is happening.”
Durrant added the proportion of property debt compared with the country's debt as a whole represented a small percentage.
“So we don't think there's a contagion risk in that respect."
Understanding Chinese policy
Durrant said understanding the country’s five year plans and way of governing was easier than in a lot of other countries, due to its size.
“With the sheer size of the country, a lot of the ways and means of control are published quite visibly.”
He said this was because it would be impossible for president Xi Jingping to individually speak to each party chief in each city to explain his plans.
“So actually, a lot of the party documents are published and nothing private contradicts what you see publicly.
“We find the most useful way to find out what's going on in China, from a policy perspective, is simply to read the documents.”
Durrant added this was important because the way of governing was different, and the effectiveness for control was higher, but this comes with its own risks.
“The risk of that [control] going wrong is high.
“So understanding what they're trying to do really matters.”
sally.hickey@ft.com
