All investors must reckon with China. It is the second largest economy in the world and is home to some of the most dynamic and rapidly growing public companies in a robust variety of industries. However, China has a democracy problem. Gen-Xers grew up watching China slowly embrace open-market reforms and had the sense that increasingly free markets would lead to an increasingly free society. However, in recent years, the state has increased its control of the economy and continued to publicly suppress human rights.
Take Jack Ma’s Ant Group: there was the last-minute quashing of the Ant Group’s IPO, there was the directive to shirk Ant Group’s money market fund, and then billions levied for anti-trust violations. The state also, with a stroke of a pen, barred the company’s popular web browser (at the time number two in the market). Jack Ma, one of the richest men in the world, disappeared for months following these events.
Prior to the pandemic the Chinese government cracked down on Hong-Kong based Cathay Pacific and Cathay Pacific workers as the Beijing-government sought to keep Hong Kong residents in line from protesting extradition laws. In 2019, Chinese regulators demanded that Cathay workers who participated in demonstrations be barred from flying to mainland China. The CEO spoke up on behalf of workers and lost his job as a result.
In recent weeks, Chinese regulators have clamped down on US listings of Chinese securities, DiDi in particular. The Chinese government claims listing in the US is a security issue, and is forcing DiDi to remove it’s US listing. It is clear that this issue is about far more than DiDi’s US security. Around the same time Jamie Dimon, CEO of JP Morgan, made a joke that JP Morgan would outlast the Chinese Communist Party. No surprise - he had to publicly apologize days later for the comment.
There is a strong moral imperative for many investors to avoid investments in securities domiciled in authoritarian, dictatorial, or otherwise undemocratic countries. Doing so risks complicity in all kinds of bad practices, including abuses of human and labour rights.
There is also a strong investment imperative to avoid these securities. Companies that are based in undemocratic countries are inextricably bound primarily to the interests of the most influential stakeholder – the state. And the state’s interests will not always align (and perhaps not usually align) with a company’s interests and the objective of long-term sustainable growth.
However, even if you exclude dictatorships from your investment universe, as we do at Honeytree, there is no way to completely avoid exposure. Almost all the companies we own operate and procure goods from dictatorships and employ citizens and sell to individuals in these countries. The interconnectedness of economies and global commerce requires this, and we believe it is still possible for companies to make a net positive impact while operating in a dictatorship. We can avoid investing in dictatorships, but we can’t avoid speaking up for freedom.
[Image below is from the perspective of a car travelling on the trans Canada highway with Lake Superior in the background]