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The year of contagion

This is not simply to suggest that the fear of Covid-19 will eventually extract a higher cost – however that is measured – than the virus itself. That particular fear is just one of several strains of social contagion that have swept across the globe this year. Even as Covid-19 was warming up, Extinction Rebellion (XR) was demonstrating its own infectiousness.

Many of those infected by XR virus have been equally susceptible to the global break-out of a similar strain following the grotesque death of George Floyd. The virtue-signalling protestors who dumped the statue of Edward Colston into Bristol harbour seemed much like those who joined Emma Thompson aboard a pink boat marooned in Oxford Circus last year as XR brought much of central London to a halt.

Meanwhile, those right of centre are swooning before another virus – the fear that China’s ruthless state machine will trample all before it. Of course, the source of this contagion has been clearly located in Washington’s White House. From there, its rapid spread has infected the UK’s political leaders, who are threatening criminal sanction against anyone who fails even to report a mooted takeover of a British company by a ‘foreign’ (read ‘Chinese’) one.

Another symptom of this virus was the furious response to both HSBC (HSBA) and Standard Chartered (STAN) banks supporting the Chinese government’s intention to impose a national-security law on Hong Kong. At its most craven, HSBC said it “respects and supports all laws that stabilise Hong Kong’s social order”.

Rather than get hot and bothered about what HSBC said, it might have been better to critique it. Obviously, the statement had the finger prints of China’s communist party, the CPC, all over it. Never was a regime so obsessed with maintaining stability than that run by the CPC.

True, stability has its merits. But it has its limitations, too. In the long run, the stability of an authoritarian state will generate about as much innovation as has come out of the Middle East in the past 60 years. And China – with an almost-affluent, although ageing, population to satisfy – cannot get away with that. As a result, its critics argue that China’s state-sponsored version of capitalism is doomed to fail. Since it will lack the free-wheeling instincts of proper capitalism – the willingness to take risks and accept the consequences – it won’t generate sustained wealth by renewing itself.

That’s fine as rhetoric, but it is not what is borne out by history. It is closer to the truth to say that any great economy must start out as a state-sponsored project. More or less, that would be true of the UK in the 18th century, of the US in the 19th century and of Germany and Japan after the Second World War.

The Atlantic trade that powered Britain’s rise in the 18th century – and helped Edward Colston get rich – could not have been achieved without a nascent state machine that raised the tax revenue to help build and maintain the navy that ensured Britannia would rule the waves.

Far closer to what’s happening in China today is the experience of the US in its so-called ‘gilded age’ from the end of the civil war in 1865 to the early 20th century. As the war was relegated to a sideshow in the nation’s historical narrative – although one whose consequences have never completely gone away, as this week’s protests demonstrate – the westward spread was sponsored by the federal government. It gave away land on an epic scale – much of it stolen – to its friends, especially those who built its hopelessly inefficient railroad system.

Then, when it was convenient to squash the US’s increasingly restive labour movement, the state – via politically-appointed judges – was quite willing to use against labour the anti-trust laws that were supposed to curb the monopolistic tendencies of railways and oil refining. All this was done against the background of tariff controls that sheltered nascent US industry and was bathed in a corruption that washed up against every aspect of commercial life, both private and public.

If this sounds uncomfortably similar to China in 2020, the good news is that the US did manage to reform itself, even if its democracy remains flawed and corruption has been replaced by an industrial-sized lobbying machine that yields similar results.

For investors in China, the point is that if, from a similar starting point, the US managed to create and maintain an economic system that fostered innovation and generated wealth on a scale that could not have been imagined by its robber barons of the late 19th century, then China may be able to do something similar in the coming decades. Sure, the details will be very different, but the result may be much the same.

In which case, that’s not just an argument for equity portfolios to maintain a weighting in the country, but for using the effects of fear about China for putting in new money; after all, the discount to net assets on London’s two China-specialist investment trusts – Fidelity China Special Situations (FCSS) and JP Morgan China Growth & Income (JCGI) – have just widened to 10 per cent.