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Baillie Gifford’s Anderson: Don’t ‘give up on China’

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China’s ability to create world-leading tech companies will outlast a sweeping clampdown by President Xi Jinping that drove investor sentiment in the world’s second-biggest economy to the lowest level in decades, according to one of the most prominent foreign investors in the country.

“I don’t think it’s right to give up on China,” Baillie Gifford’s James Anderson told the Financial Times. “I don’t think the golden goose has been killed off at all . . . from the point of view of building companies.”

Anderson is joint manager of Baillie Gifford’s £21.2bn Scottish Mortgage Investment Trust, an early investor in Amazon, Tesla and Moderna. In China, he backed food delivery app Meituan, TikTok owner ByteDance and ecommerce giant Alibaba when they were still private companies.

Scottish Mortgage counts three Chinese companies among its top 10 holdings: Tencent at 4.1 per cent of its total assets, Meituan at 2.9 per cent and electric carmaker Nio at 2.8 per cent. “We really haven’t done much portfolio repositioning over the summer,” said Anderson. “And I’m not sure in any sense I regret that.” 

The £346bn Edinburgh-based fund manager was among the investors that were blindsided in July when the Chinese government announced an effective ban on the for-profit education sector, wiping billions off the market capitalisation of TAL Education, in which Baillie Gifford is one of the biggest shareholders.

That kicked off a wide-ranging regulatory crackdown on China’s biggest tech companies, real estate speculation and the video games industry, hammering the shares of some of the country’s highest-profile companies.

Some have questioned whether Baillie Gifford has stuck too readily to the decades-long tech-driven China growth story and has underestimated the political risk of investing in the country.

Anderson confessed that “we should have seen more of this coming than we did” and that the fund manager had some “rethinking” to do.

“We all knew perfectly well that the broader aims of the Chinese Communist party were improvements in prosperity, some form of national consciousness and some form of social peace for the future,” he said, adding that “for all of those reasons, some form of regulation of the internet was more than likely always to happen”.

In particular, Baillie Gifford ought to have anticipated the clampdown on education, said Anderson, because Xi himself had written “about the difficulties of the educational system” and the financial and competitive burden it creates for Chinese families had been well-flagged. “We ought to have seen that one coming,” he said.

Investors and analysts are starting to turn positive on China, predicting the country’s equity markets are nearing their lowest point.

“The pace of what happens in China is sometimes somewhat scary to capital markets,” he said, adding that “it’s conceivable”, though not certain, that peak regulatory risk had passed.

As an investor he is “more confident” from a corporate, rather than a political perspective, that the regulatory framework means “we’re already basically able to envisage the shape of these companies . . . and the continuing economics of these businesses is quite attractive.”

Anderson maintains his view that the Chinese internet platforms are “showing greater innovation” than their Silicon Valley counterparts. “In that sense, hasn’t the Chinese government system attained what it wants to do? There is evidence of this continuing dynamism in the system.”

A number of public and private investors in China are repositioning their holdings away from the largest companies in sectors targeted by the reforms in favour of smaller, more innovative businesses and those in areas such as renewable energy, mass consumption and the domestic supply chain that should benefit from Xi’s “common prosperity” agenda.

Anderson pointed to ByteDance as an example of the dynamism he sees, saying it “has been extraordinarily successful internationally” and illustrates “this ability to have the next generation of companies rise up in China”.

However, he said Baillie Gifford was, “comparatively speaking, disappointed by the relative progress of Alibaba”, which it has held since 2012.

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As the crisis at real estate developer Evergrande calls China’s property-driven growth model into question, Anderson said the country would “have to generate more of a domestic savings market” as money was channelled out of property. “It seems to me that getting these companies to come home and be quoted there is actually part of the long-run underlying strategy,” he added. “Five years down the road we may be looking at a re-domestication of a genuine domestic savings market.”

Additional reporting by Tabby Kinder in Hong Kong

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