China's reopening raises questions for responsible investors

The more positive outlook for China presents a test for investors' ESG principles, with reports continuing to emerge of alleged forced labour abuses.
China's reopening raises questions for responsible investors

China’s ESG scores are amongst the lowest in the world, which could become a bigger concern for investors looking to increase their exposures on the prospect of China’s economic revival post-Covid.

After the market turbulence in 2022, investors are understandably looking at the relative value to be had right now.

“China equities is a really interesting asset class at the minute,” David Carruthers, principal consultant at Melbourne-based Frontier Advisers, told AsianInvestor.

The elephant in the room is China’s woeful ESG rating and its obfuscation on the issue of ethnic repression and forced labour in the western regions of the country. Are investors willing to continue to turn a blind eye to China’s failure to keep pace with ESG changes in the rest of the world?


One of the key trends in the ESG arena over the last year or so has been the call for greater rigour and scrutiny in the application of ESG investment policy. Investors are being pressed to do more to effect positive change within their portfolio companies. Index providers, research and ratings agencies are also being pressed to improve their data and validations.

A December report by the UK-based human rights monitoring group Hong Kong Watch found that pension funds may be passively investing in at least 13 China-based companies where there is evidence of involvement in Uyghur forced labour programs and construction of internment camps in Xinjiang.

China's government has denied the forced labour allegations.

Passive investors and asset managers, including BlackRock, UBS and Schroders, benchmarking against indices such as MSCI’s Emerging Markets Index, China Index and All World Index ex-USA were particularly at risk, said the report.

Johnny Patterson, co-founder and a research fellow at Hong Kong Watch, said: “This raises serious questions about how seriously financial institutions take their international human rights obligations. It is unacceptable that enormous amounts of the money of ordinary pensioners and retail investors is being passively channelled into firms that are known to use forced labour.

“Our view is that firms known to use modern slavery or known to be complicit in crimes against humanity should be classed alongside tobacco as ‘sin stocks’. Governments have a duty to signal which firms are unacceptable, but international financial institutions must also be doing their full due diligence."

Japan's Government Pension Investment Fund (GPIF) is just one of many asset owners in Asia Pacific using BlackRock, UBS or Schroders to manage their passive exposures. A spokesperson for GPIF told AsianInvestor that they rely on their external managers to exercise voting rights in line with the fund's proxy voting principles.

In its stewardship principles, GPIF requires external asset managers to determine which ESG issues they deem to be critical, specify goals that they would like to achieve as a long-term investor, and proactively engage with investee companies on these issues, a spokesperson said.

"However, GPIF does not give directions on which ESG issues they should engage with investee companies."

When it comes to the underlying benchmarks, "institutionally, GPIF cannot give directions to index providers about stocks included in each index," added the spokesperson.


The sudden opening up of China after the severe lockdowns of the zero-Covid phase and the mass migration occurring ahead of the Chinese New Year also pose serious questions about health security.

“On the one hand, you look at China and you see risk, risk, risk; what’s happening with the government, what’s happening with Covid policy?" said Frontier's Carruthers. "But then you look and see the market’s way down from its highs.”

Aidan Yao, senior emerging Asia economist at AXA Investment Managers in Hong Kong points to the lack of pandemic data as cause for concern: “The termination of daily data on COVID cases and deaths has left the market in the dark on where the nation is along the infection cycle.”      

Meanwhile, he said, “the economy is living its darkest hours. Q4 GDP, due out in two weeks’ time, should show a distressing end for the economy in 2022. However, financial markets seem undeterred by the current economic and societal struggles.”

Investor confidence has been buoyed by the prospect of reopening and signs of an economic bottoming in regions that appear to have passed the peak of infections. The MSCI China and HSI indices are up 35% since the policy pivot.


Another important question, said Yao, is whether the pandemic has left permanent scarring on the Chinese economy.

“Some evidence is already visible from reports of foreign businesses shifting supply chains out of China and mass closure of small-and-medium-sized enterprises."

If trend growth has indeed been reduced by the pandemic, China would struggle to restore growth to pre-Covid levels, he added. "If it tries with aggressive stimulus, inflation will rise as lower production capacity fails to keep up with demand,” Yao said.

Yao judges the balance of risks to his firm’s 2023 growth forecast (above consensus at 5%) has shifted “modestly to the upside”.

UBS economists are forecasting China’s GDP will expand 4.9% in 2023. “While that may not be the big bounce back that some predicted, it remains healthy growth, said UBS CEO Ralph Hamers at the firm’s Greater China Conference this week.  

“The economy is still expected to double by 2035 – after already doubling over the last 10 years. We believe there is a lot of opportunity for those committed to investing in China,” said Hamers.

For those able to ride a little more turbulence in 2023, it appears there could be obvious opportunities in China from an investment perspective.


It may be hard for conservative investors to follow legendary investor Sir John Templeton’s advice to invest “when there’s blood on the streets”, but according to Carruthers: ‘It’s a really interesting case, where all you can see is risk. That’s where you’ve got to look at it and say for every risk there’s a price. If you can understand the risk, that allows you to appreciate the potential return.”

One positive signal that China may be tentatively embracing sustainability is the announcement on 29 December by the International Financial Reporting Standards (IFRS) Foundation of a Memorandum of Understanding with the Chinese Ministry of Finance to establish a Beijing office.

The Beijing office will lead the International Sustainability Standards Board’s (ISSB) strategy for emerging and developing economies, and will act as a hub for stakeholder engagement in Asia, according to the IFRS Foundation.

Cui Shuqiang, deputy mayor of the Beijing Municipal Government, spoke of the city’s aspiration to establish itself as a hub for international engagement, according to the statement.

ISSB chairman Emmanuel Faber said, “China plays a vital role in supply chains for companies around the world, making it an important jurisdiction as the ISSB develops its global baseline of sustainability disclosures for the capital markets.”

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