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INVESTMENT: Political Risks Wane, Financial Risks Remain
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Political Risks Wane, Financial Risks Remain

By Anthony Lawry

BT 201705 Investment 05Finally, the man dubbed "President Bannon" for his influence in the White House has been diminished along with his (and others like Gary Cohen and Peter Navarro) anti-Chinese stances on economics and international trade. The Xi-Trump summit truly formed a positive relationship between the two world leaders, thus alleviating the political risks associated with the Bannonites' protectionist policies between the world's 1st and 2nd largest economies. There is no doubt that there has been a shift in the geo-economic relationship between the US's stance towards China and its overall foreign policy.

While Trump has invariably distanced himself from his anti-Chinese blanket tariff during the campaign trail, he has also discussed with President Xi during their recent summit in Mar-a-Lago to accept trade deficits with the Chinese if they helped the US clamp down on North Korea. Later in the week, the Chinese rejected a North Korean shipment of coal, the Hermit Kingdom's largest export which, when clamped off, will drastically and negatively affect their already weak coffers.

hl 09Because of this and other foreign policy developments, it is clear to see that the US policy in relation to the rest of the world is normalizing and Trump is set out to be a typical Republican president in terms of how he interacts with China. This is incredibly important for the financial stability of the relationship between the two countries for various reasons.

First, this means that the political risks of a trade war between the US and China have been greatly reduced. Second, it also means that the US will not battle China on international trade either. Third, Trump will not declare China a currency manipulator because this will only be unnecessarily antagonistic towards a country that has actually reversed its currency adjustments over the past few years. Trump even came out as strong as directly saying to the Wall Street Journal that, "They're not currency manipulators."

President Trump also said that the dollar is too strong and needs to be weakened. This has had a negative impact on emerging and developing markets, including China, which have a large degree of debt denominated in US dollars, making the interest on that debt more expensive.

BT 201705 Investment 02Yet in spite of all of these positive signs and the waning of political risk between the US and China, China's financial risks remain. Light has been shed on these issues when Xinhua News Agency affirmed the financial risks associated with a potential housing bubble and the large degree of debt which the country still holds at a provincial and state level.

Individual corporations are at risk too. So-called 'zombie companies', or state-owned enterprises, which are functional only because of vast sums of money they are given by the state, remain incredibly wasteful in spite of President Xi's attempts to clamp down on them and the corruption surrounding their operations. Risks in other Chinese companies exist such as dairy company Huishan which lost 90 percent of its stock value halting trading on the company that is yet to resume. This occurred due to a report made by Sina Finance suggesting that a 'major shareholder' had moved 3 billion RMB from the company's balance sheet to invest in China's real estate market and was unable to put the money back in its accounts. The Bank of China began to press further and found out that Huishan had cooked the books so to speak or that they used fake invoices to inflate the amount of money that the company was actually earning.

BT 201705 Investment 03Regardless, this conflicting information still leaves the question of where to put money and how to approach equity markets in light of lessening political risk, but remaining financial risk that still grips the country. That said, no country is completely free of financial risks and it is not of this column to judge that China is headed for an impending economic collapse. Rather, market corrections are needed and have been embraced by central authorities on the basis that such corrections are required for a healthy economy and to prevent any over-heating. This is evident in the unprecedented economic reform via liberalization under President Xi.

Where this leaves the observer of Chinese investments is quite an interesting one given several challenges involved in investing. While the country is still exposed to an overheated property market, China Daily reminds us that these financial risks are still manageable through fiscal reform and that the banking sector is increasing its risk control via targeted measures addressing credit, liquidity, local government debt and real estate. Other controls being put into place include cross-border financing, digital financing, bonds and other financial instruments such as derivatives.

All in all, it is up to individual investors to put their money in a place that is relative to their risk appetite. Low beta (risk) electronically-traded funds (ETFs) with lower growth and higher risk ETFs with higher returns have been discussed in this space before. Because of this it is important to recognize portfolio goals and remain steady through uncharted waters that investors are inevitably and relentlessly sailing into.

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