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Caixin Summit

Dr. Fred Hu Explains Why Investors Need Not Fear China’s ‘Common Prosperity’

15.11.2021

Dr. Fred Hu, Economist, Founder and Chairman of Primavera Capital Group, had a fireside discussion with Xin Li, Managing Editor of Caixin Global, at the 12th Annual Caixin Summit. Their topics ranged from regulatory changes, common prosperity, and pitfalls and opportunities of investing in China.

 

Xin Li:

Some call the year 2021 as the year of regulation in China, and many investors are asking whether there will be change of the rapid regulatory changes, or what’s coming next will be the new normal. I’m sure you you’ve been asked this question many times. What is your answer?

 

Fred Hu:

What has happened on the record has been nothing short of a shock. However, the global investors have, after a period of confusion, more or less digested the implications of these regulation adjustments. Even more importantly, Chinese tech companies and entrepreneurs have made progress to varying degrees in overhauling and changing the underlying business models and the practices to bring the operations more in line with regulations. So, from this point on, I believe we should see more policy clarity and more market competitiveness, and cautiously renewed investor confidence ahead.

 

Xin Li:

How would you respond to the changes?

 

Fred Hu:

We are focused on investing in China’s new economy. That includes sectors such as consumer, healthcare and technology, among others. Despite everything that has happened over the last few months, we remain bullish and passionate about the incredible dynamism, resilience, and huge potential of China’s new economy, including the tech sector.

 

Xin Li:

What do you think is the vision that powered this change?

 

Fred Hu:

Regardless the rationale behind the changes or adjustments, I feel strongly that in the short term, international investors should not lose sight of the big picture. The important structural forces continue to shift the long-term trajectory of the Chinese economy and society, i.e. the increased urbanization process, the rise of the middle class, and continuous technological innovations. We’re going to see more and more regulations of big techs, by the way, not just in China but globally, including in the United States. But the significant investment opportunities that are correlated to China’s middle-class consumption and innovation will be here to stay. And that is the big picture.

 

Xin Li:

How would you interpret “common prosperity”? Will it be a mass advancement of the state at the expense of the private sector?

 

Fred Hu:

China has done an incredible job in eliminating extreme poverty, but it still has a big wealth disparity issue, like in most parts of the world. To me, “common prosperity” means shared prosperity, all-inclusive growth and more fair and just distribution of wealth. That’s the language of economists everywhere. I think it’s a necessary even long-overdue policy response to rising inequality in China and globally. I’m confident that the Chinese leadership understands that in order to achieve common prosperity, the private sector has to play an essential role. Both the world economic history and China’s own development experience have all demonstrated that entrepreneurship and technology are the greatest engines for economic growth and social development.

 

Xin Li:

We all know in the early stage of China’s opening-up, foreign investors actually enjoyed somewhat super national treatment. Do you think China still needs foreign capital?

 

Fred Hu:

Firstly, I don’t think at any point in recent history China has given foreign investors something like “super-national” treatment, simply untrue. Yes, the central and local governments have provided certain favorable policies, such as tax benefits, but that shouldn’t be considered as equal to super-national treatment. China today, as the second-largest economy and with the highest savings rate on the planet, still needs investments. For every dollar of foreign investment, there has been more than one dollar worth of value created in the Chinese economy in terms of technology, business best practices, etc. In fact, if we look at the past 40 years of China’s economic success, a key contributing factor is overseas investments. The Chinese government has opened up a range of sectors in recent years to greater foreign participation, which I think will be very good for the Chinese economy to raise productivity and to sustain China’s economic growth for many years to come.

 

Xin Li:

How do you think investors should hedge against U.S.-China tensions or how should they adapt to that?

 

Fred Hu:

When two elephants fight, all the small animals in the forest get hurt too. The China-U.S. relationship is the single most important bilateral relationship in the world and we have to be cognizant of this fact. However, I do believe that investors can do their part to breach the divide by focusing on the common ground. Despite all the differences, China and the U.S. shared many common interests on issues such as global economic growth, peace and stability, poverty alleviation, counter-terrorism, climate change, pandemic, etc. No major global challenge can be dealt with without the U.S. and China working together. So hopefully the leaders on both sides will use their wisdom and foresight to manage the current tensions.

 

Xin Li:

Could you name one pitfall that investors should avoid in China in 2022 and one opportunity they really cannot miss?

 

Fred Hu:

One major pitfall to avoid, in my view, is the overreaction to recent directional changes. The single biggest opportunity, I will say is climate change. China is the largest energy consumer, the largest carbon emitter, but it’s also the largest innovator with new technologies to address climate change, from renewable energy, electrical vehicles to next-gen batteries. So I think that is the biggest opportunity for investors around the world.