The BoLe Chronicle | August 2021
ESG with Chinese characteristics
'Now, what if yours truly tell you that the first time he recalls having a similar conversation was actually way back in the early 90s, with a company called 'Shanghai Petrochemical' at their home base just outside the city, when their CFO proudly revealed their top priority for the first year right out of their IPO being to maintain jobs and livelihood of their staff and families, some three hundred thousands of them and counting at that point. I still recall vividly it was immediately brushed off by some fellow fund manager at the meeting as a clear sign of how 'inefficiently managed' Chinese SOEs are.' - The BoLe Chronicle - April 2021
Wrote that just back in April contrasting Citi alums lamenting being let go in the middle of the COVID outbreak with what I heard from a Chinese SOE back in the 90s. While the investment world now is 'shocked' by how 'fickled' the Chinese government has been in changing the rules recently, in the name of building a more 'sustainable' (read 'stable' in China) society, old China hands would recall it has always been called a SOCIALIST country with Chinese characteristics. So what's so new indeed when they now finally take ESG principles (yes, believe me, that's really what they are) seriously in governing their private sector? And for those that have signed up to UNPRI and couldn't wait to tell the world, I would expect that this should really be your defining moment showing stellar outperformance from your Chinese equity book going forward?
Granted, Chinese equity has long been labeled as a notoriously 'policy driven' market and indeed quite some experienced managers have always been shying away from industries closely tied with government policies all along to mitigate the risks. What's catching most off guard this time around is the prevailing perceived policy priorities have suddenly been reschuffled, and in such a swift and drastic way that even some of the less prepared locals were caught.
Glancing through earlier comments made by some seasoned investors of China, however, is the 'Education Saga' really such a surprise afterall? Since when were personal data protection not a top priority? Didn't President Xi remind you all properties are for living not speculating? And for the 'infamous' online gaming sector? Haven't we been trading Tencent up and down just on that kind of news/rumours over the years? I believe we don't even have to talk about P2P and any of the other DeFi initiatives here. That would really not be doing our rather informed frequent readers any justice. In short, the era of 'regulatory arbitrage' is long gone. 'What is not explicitly prohibited is deemed legit' is now officially a thing of the past.
The inconvenient truth here I guess, is that unlike what most have previously been assuming, ESG is no longer a nice-to-have 'luxurious' hobby exclusive to the developed West. Just like smart phone penetration as well as mobile payment, it may well be implemented much easier for the developing world from scratch, especially in a country like China where decisions from the top are made quick, swift and just before you realize, final.
For those aspired to be a successful Chinese equity investor, ESG is now no longer an IF but a WHAT. The biggest ESG funds in the world one day may well be a Chinese Equity fund. ESG principles with Chinese characteristics may have different priorities and interpretations with a cultural twist, yet they will certainly be alive and kicking for a long while to come.
Fellow investors, are you prepared?
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