So long as investors are still comfortable with the risks of investing in China that were evident before Russia’s invasion of Ukraine, they should not change their opinion now, experts advise.
Russia has sustained its attack on the Ukraine for 22 consecutive days now, seemingly undeterred by the global economic and political sanctions placed on it.
Throughout this, Kasim Zafar, chief investment strategist at EQ Investors, said Chinese president Xi Jinping has endeavoured “to remain neutral on the issue” of Ukraine, encouraging diplomatic efforts for a peaceful solution.
“But with ever-growing western sanctions on Russia, it may be that China’s neutrality is seriously tested,” he added.
China and Russia have historically been linked by their politics, both operating as “authoritarian states”, according to, Zafar. The strength of that political friendship was made clear prior to Russia’s attack, when Xi Jinping said there were “no limits” to the Sino-Russian relationship.
At the same time, activists have highlighted the apparent hypocrisy that Russia has faced vast economic sanctions for its invasion of another country, but China has faced no political or economic repercussions for its alleged persecution of the Uyghur population and other mostly-Muslim ethnic groups in its own borders or its open intimidation of Taiwan.
But Ben Yearsley, co-founder of Fairview Investing, said that the key difference here was that “China has not invaded another country.
“If China had invaded Taiwan then there would be a parallel. The government may have repressed minorities in its own country but it has not invaded another region, so on that basis the situations are very different”.
If the situation did change and China openly supported and aided Russian forces, it is expected that the world’s second-largest economy would face sanctions, although the repercussions of those would have a much wider impact.
“If western politicians tried to cut China off, we would almost certainly be looking at a global depression,” Zafar said.
Yearsley echoed this pointed, adding that the world got a small glimpse of the havoc caused by cutting China off from the world during Covid, when many Chinese factories were forced to close during lockdowns and global supply chains fell apart.
“It would be huge, unquantifiable impact. Global trade would be paralysed,” he said.
However AJ Bell head of investment research Ryan Hughes said, things have not reached that stage and while events can move quickly “it’s dangerous to constantly react to events and make investment decisions on the back of a lot of noise”.
The experts agreed that investors holding Chinese assets should not be rushing to sell them based on concerns that they are contaminated by Putin’s actions in Ukraine.
Hughes said that: “For now, China’s scale means any solution that needs global cooperation cannot succeed without China’s support.”
There are also prior factors to bear in mind, outside of the country’s ties to Russia. China plays a central role in global supply chains but the disruption caused when these could not operate during Covid increased the shift towards deglobalization, a trend the war in Ukraine has only accelerated, Zafar said.
There were also pre-existing geopolitical tensions, specifically with the US. Indeed, some of the trade sanctions imposed by former president Donald Trump in 2018 are still in place and both countries’ open mistrust for one another has never been far from the surface.
Yearsley said: “I find it fascinating that people are now going ‘oh god China, I didn’t realise the risk’ but it’s always had political risk, it’s not that different now to what it was last year or throughout history.”
China has become a key figure in global supply chains and production, establishing itself as the manufacturing hub of the world, particularly of electronics, attracting the likes of Apple and other large companies.
It also plays a big part in the global economy and is set to become the largest in the in the world by 2030. Hughes said: “Its own internal market is enormous with a multitude of companies to select from”.
This perhaps explains why it has been an appealing investment option in recent years.
Yearsley added that the Chinese government’s shift in policy towards a ‘prosperity for all’ ideology, which has had a short-term negative impact, “should benefit investors in the long-run because it will raise the incomes of the lower earners, enabling more of them to be consumers”.
This makes Chinese small-caps very appealing, he said, because they are “closer to the ground” and are likely to be more insulated from any future Chinese regulation, which tend to focus on the large caps. He recommended the Matthews China Small Companies fund for exposure here.
On top of this, China has a lot of long-term growth available, according to Hughes. Although its weighting in global benchmarks continues to increase “it has a long way to go before its true weight is reflected”, he said.
“This should create a very strong long-term tailwind behind the market for the next few years.”