China, the problem child in EM investing

Sep 05, 2023
JAMES GARD, senior editor for, on the China vs. India sentiment. 

There is a daily run of bad economic news coming out of China.

Not too long ago investors were tremendously excited about China's prospects and saw how its economic miracle was capable of producing superior investment returns than those seen in Western markets.

The last wave of this enthusiasm crested in 2020 and it’s been downhill since, bar the odd revival in July this year.

Now a behemoth in Asia and the EM space, China could be about fall into the "middle income trap". That’s the argument of Nedgroup Investment’s Ian Beattie, who manages their emerging markets equity fund. He who argues against the idea that, as countries get richer, everything tends to go in one direction. He argues countries can get "stuck" as easily as they progress, and thinks China is going backwards under Xi Zinping.

He’s bullish on India because it's at an earlier stage of development than China, with a much lower GDP per head.

"India is finally beginning to show its potential" he says, arguing the middle class growth story there is "unimaginably big". On a street level, India may look more chaotic than China, but China’s cleanliness and order could be a sign the best investment returns are behind us. "I would always invest in the chaos and the innovation."

In India, corporate governance is improving, corruption is falling and the sheer weight of outsider money pouring into the country will help drive out bad practices, Beattie argues. In general though, institutions may be the deciding factor in progress.

"No wealthy country has poor institutional quality, and no poor country has high institutional quality," he says.

So you may have heard that "India is the new China" or even "Vietnam is the new China". Beattie does think Vietnam and Indonesia can capture some of China’s manufacturing base. But like all cycles, he thinks we may be approaching peak "anti-China", after which sentiment could turn back easily.

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