In 1989 the empire of the Soviet Union disintegrated, the “Iron Curtain” fell and optimism in the world skyrocketed. It seemed for a moment that the “vision of the end times” was being realized. At that time, the book of the thinker Francis Fukuyama was published in the United States called “The End of History”, in which the author expressed his position that all the nations of the world were about to adopt the Western view and model of life based on democracy and freedom of economic initiative.

In China, too, students joined the aspiration for change and went on strike and demanded democracy, in Tiananmen Square in Beijing. The students fortified themselves for about two months, during which the leaders of the Communist Party of China debated how to respond. Finally, China’s leadership decided to break the protest by military force. The army and security forces stormed the students and “purged” their leaders, killing thousands of people. Only under the dictatorship of one party.

For more than the 30 years since then, China has enjoyed economic, well.planned and effective centralized rule, enabling fairly free economic initiatives. In this way, China has managed to grow at unprecedented rates, ahead of many in a democratic country, such as India, which began its development with it in one line, but is far behind today.

As the years passed, China became the second largest economic power in the world as well as a growing geopolitical and military factor. In recent years, there have been increasing signs of Chinese nationalist aggression against all around it. It is known that China, its provincial leaderships and all party leaders are heavily involved (directly and behind the scenes) in everything that happens in business in China. There is also ample evidence that in line with its strategic goal, China strives for global dominance, including in any economic.technological field, and spares not much means to achieve this, including through the use of intelligence, cyber and IP (intellectual property) infringements of Western companies.

An attempt to analyze the business and reports of a Chinese company using tools similar to those of a Western company, is quite pretentious and involves much greater uncertainty than that of a parallel Western company.

Continued rising tensions between the West and China are expected in the coming decades

The fundamental problem of a dictatorial regime, as well as its deepest concerns, are always from the revolt of its own inhabitants. Because of this, such regimes tend to “cultivate” external enemies and ignite nationalist feelings against these enemies, in order to “channel out” the feelings of frustration and the desire for freedom of their own citizens. An example of this is China’s growing aggression towards Taiwan, India and other East Asian countries, while investing considerable resources in building its military might.

In the absence of any sign of a move towards democracy in China, and against the background of the considerable increase in its military and economic power, and the use of Chinese companies to serve its purposes, increasing tensions between the West and China are expected to continue for decades to come.

Also in the issue of encouraging free economic initiative in China, there has been a significant change in the attitude of the regime in the last year.

Encouraging free enterprise in China, over the past few decades has spawned several economic empires, founded by talented private entrepreneurs, such as Alibaba, Tencent, and others.

Some of the entrepreneurs have become billionaire tycoons. Alibaba founder Jack Ma allowed himself last year to criticize the Chinese regime in public interviews for his handling of certain issues. As a result, the regime realized that it could not afford too strong and wealthy businessmen, who might also have ambitions and positions of influence for political change. In response, the regime launched a campaign to suppress and restrain the tycoons from increasing their economic and political power.

Crypto investments, real estate and technology companies – all at stake

An Israeli investor, who is tempted to make extensive investments in China, thanks to the high growth and growing power, takes much higher risks than those that exist in the West. In a top.down regime like China, underground political currents can completely change the picture of China’s internal economic competition and the strength of certain Chinese companies, very quickly, if it serves the interests of the administration. For example, the Chinese government has recently decided to take action against crypto investments, and the depth of the shocks in companies all depend on arbitrary and non.transparent government decisions.

Despite the relatively rapid growth of China’s economy, for the Israeli investor, except for speculators, I would recommend only a low dose in its investments in Chinese companies.

Chinese government involvement, especially in technology exporting companies, is well known. In the case of Chinese communications equipment giant Wavi, the U.S. government has claimed to disclose “BACK.DOOR” situations that allow for secret access for Chinese intelligence in equipment sold in the West, and for clear Chinese intelligence involvement in the matter. As a result, the U.S. has imposed heavy sanctions on the Chinese manufacturer And also demanded from other Western countries not to bring Wawi products into their territory, and in fact shut down much of its international operations.

We also remember the recent reports of a Chinese cyber attack on companies in Israel, which of course did not happen in Western countries. The confrontation and geo.strategic competition between American democracy and Chinese dictatorial rule has intensified over the years, so that today any Chinese involvement in tenders for national infrastructure in the West and in Israel is leading to growing American concern and opposition.

Western management for a local company – a certain advantage

Another interesting question, in the context of investments and business with China, is the ownership of Western companies in China. The automotive industry is one of the areas in which Western companies own factories in China.

Volkswagen Corporation – Audi and Tesla are among the largest Western manufacturers holding manufacturing plants in China. Keep in mind that for these manufacturers there is a very significant market in China vis.à.vis the domestic consumer, and through local manufacturing plants they overcome the difficulties that China imposes on the import of finished products.

If so, for a non.speculative investor, it is advisable to be very careful in dosing his investments in the country, certainly when it comes to specific company stocks. The investor must ask himself, whether it is possible to believe in the reports of companies in the country and to apply the rules of accounting properly, as can be believed in the reports of parallel Western companies.

The author is CPA Yair Lapidot, Joint Chief Investment Officer at Yellin Lapidot Investment House. The author may invest in securities and / or instruments, including those mentioned in the article.

By Editor

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