I hope the late and much missed David Bowie will forgive me borrowing one of his song titles. But it seems to me that there are winds of change blowing through China so strong that they challenge the conventional narrative. For years now commentators have been saying that the 19th century belonged to Britain, the twentieth to America and the twenty-first to China.It’s impossible to ignore the Middle Kingdom when refining the macro these that should drive all your investment decisions. If you’re like me it will be a simple decision. I want nothing to do with Chinese investments on moral and ethical grounds and will never knowingly invest in a Chinese company. I even get upset if I discover the label on my underpants says ‘made in China’.

Many investors have assumed that, if China is the new America, they need to have a decent chunk of their portfolio invested there if they want to ride the wave. The problem with fund managers and advisers touting that approach is that they are like general fighting the last war. I suspect that China’s journey from 1980 to 2015 will go down in the history books as one of the great unfettered growth periods bringing massive GDP increases and lifting more than 600 million out of poverty.

It all started in 1978 when Deng Xiaoping replaced the departed Chairman Mao and became the Chief Architect of Modern China. The horrors of Mao’s Cultural Revolution were the worst since the holocaust and should be compulsory learning for the Gen Z’ers who yearn to live under a communist regime. Deng and his families were victimised during the dark days of the 1960s, his son falling out of a window during interrogation and being refused hospital treatment because he was ‘under criticism’. He ended up a paraplegic.

Deng himself was purged as late as 1976 but became leader two years later. He modernised every aspect of the Chinese economy, opened up diplomatic relations with the West and would have retired a hero on the world stage like Mikhail Gorbachev but for his brutal suppression of the Tiananmen Square demonstration. He was succeeded by Jiang Zemin who continued the economic development but with a more traditional hard line view on the supremacy of the party. He stepped down after two five year terms and was replaced by Hu Jintau. He also served two terms that saw continued Chinese growth then stepped down as per party rules.

And then along came Xi. A rapid rise through the ranks ironically saw him focus on sustainability and international relations including co-operation with Taiwan. He became Vice President in 2008 and got the top job in 2013. Thus began China’s quiet move from state-controlled capitalism to good old fashioned 1930s style fascism as he ousted any political opponents and cemented a firm power base that rubber stamped his change in the rules to allow an unprecedented third term as leader. Did I see a copy of the Vladamir Putin Presidential Playbook on his desk at the recent party congress? And if you needed any visual reinforcement that the times they are a-changin’, note how Xi had his predecessor forcibly evicted in full view of the cameras.

Xi is no friend of the West and no friend of capitalism. He has forced Chinese technology firms to de-list from New York at huge cost to shareholders. He has effectively banned the private education sector and destroyed hundreds of successful businesses overnight. He is now using language like ‘hedonism’, ‘extravagance’ and is going to take a close look at the means of accumulating wealth and excessive incomes. It’s all encapsulated in his ‘common prosperity’ vision which sounds like back to basics for the communist party.

Look at the damage being inflicted by his ludicrous zero covid policy. It has nothing to do with science or a genuine concern for people’s health and everything to do with the authority of the state. To give in now would be to admit that the party got it wrong. It is of course, infallible and must be seen to be so. Officials are now using terms last heard in the 1950s like ‘people first’ and people-orientated’, suggesting that wealth redistribution will take priority over economic growth. Xi also spent a lot of time talking about national security at the recent congress, as well as saying that the state is going to take a greater role in the economy. Anyone who remembers Britain’s nationalized industries from the post war era to the 1980s should shudder at the thought of this. Any foreign investors who think Xi gives a monkeys about their financial wellbeing should take a naivete pill immediately.

The likely outcome is firms being forced to make less profit and take on more social responsibilities, examples being made of business leaders seen to be too rich or too powerful and a dampening effect on private companies investment and growth. In other words, about as poison a chalice for foreign investors as you are likely to see this side of North Korea.

Xi’s father was himself a senior party member who believed in pragmatism and felt the party could enhance its power by relaxing the degree of control it exerts over the economy and society. Clearly this wisdom did not make it into his son’s DNA. For one who seems to hate the West and all it stands for, it’s a trifle ironic that his only daughter was sent to Harvard to complete her education. His draconian security laws are killing Hong Kong where the brain drain is well underway and companies are now leaving as they struggle to attract and retain expats willing to work in such an oppressive regime.

Much of the growth miracle in China had real estate at its core. Property accounts for two thirds of the wealth of the average urban Chinese, while the construction sector contributes 20% of Chinas overall GDP. When the mighty state decided that property was in a bubble, they introduced their 3 Red Lines policy in 2020 which forbade developers from having net debt greater than 100% of equity. Guess what, it turns out many were way above that level starting with Evergrande and Kaisa Group. They are in default and property prices are down 30% in 12 months. People are refusing to pay the mortgages on unfinished properties while rising global interest rates can only add to the pain and further suppress GDP growth in the coming years. The draconian lending restrictions are just one example of how heavy-handed state intervention can kill a sector of the economy.

And how did the stock market and currency react to Xi’s power grab? Hong Kong had its worst day since 2008 while the yuan sunk to a 14 year low. Giants like Tencent and Alibaba feel by more than 11% while the overall Hang Seng index fell by 7.3%, its worst showing after a party congress since records began in 1994.
And then there’s demographics. The impact of the 40 year one child policy will be felt for generations and, as the population ages, there simply won’t be enough working age folks to replace them. Another negative factor if we’re looking for growth prospects.

Finally, Xi’s focus on national security means continuing tensions in the South China Seas, with Taiwan clearly in the cross hairs. How long before he takes advantage of comatose western leaders to land an invasion in Taiwan? And who would bet on any kind of robust response from the octogenarian Joe Biden and his breathtakingly useless vice president?

As investors it’s important that we keep our eyes on major global developments like this. It’s so easy to assume everything will just carry on like it has for the last three or four decades. Just as we’ve seen with the rout in government bonds in 2022, we are seeing a major reversal in the second biggest market on the planet. The first question is, how much exposure to China do you have in your current portfolio? Have you checked the funds in your pension or ISA accounts? The second question is how much exposure do you want to have to China in days like these? Leaving aside my moral objections, I recognize that China has been one of the most impressive growth engines of the last forty years. Any ambitious investor is bound to have included it in their big picture thinking. My key point to leave you with is that many, if not all, of the factors that made China so attractive have already changed or are in the process of changing. This is an inflection point at which you must review, reconsider and make fresh decisions on your asset allocation to the People’s Republic.

Don’t ignore all the ch-ch-ch-changes in ch-ch-ch-China.