It's time to change how you think about investing in China | Pendal Group
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It’s time to change how you think about investing in China

China’s new hard-line ideological approach introduces risks that most investors have no experience with, warns Pendal’s SAMIR MEHTA

THE consolidation of Xi Jinping’s power in China heightened sovereign risk for investors in Chinese companies, says Pendal’s Samir Mehta.

China’s 20th Communist Party Congress cemented Xi’s grip on power, delivering him a third term in office and installing a leadership team of loyalists that reduces the potential for political rivalry.

Markets reacted negatively to the elevation on concerns that Xi’s hard-line policies may affect China’s economic growth.

“We are in an environment that has completely changed,” says Mehta, who manages Pendal’s Asian Shares fund.

“In the upper echelon of the party there were always factions that jostled for power and compromise.

“Now Xi has done away with the once-dominant factions and he reigns supreme.

“President Xi today exercises complete control over society in a modern state with technology and surveillance unparalleled in history.”

This has important implications for government policy, the economic outlook — and therefore investors, says Mehta.

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Pendal Asian Share Fund

“The appointment of Xi’s right-hand man Li Qiang to the premiership — where he will be in charge of economic policy — is another signal to the world that there is little chance economics will take precedence over national security.

“This signals that what Xi considers to be right cannot be disputed.”

What it means for investors

For investors, this indicates that policies like the zero-tolerance approach to Covid are not going away.

“Economic outcomes like employment and growth will become secondary to satisfy Xi’s idealism of zero Covid.”

To be sure, sometimes the greatest investing returns are found at the point of maximum pessimism, and investors will be tempted to take a risk on China, says Mehta.

“There are short-term positives that might surprise.

“What if, in the next three-to-six months, Chinese authorities reduce quarantine, or introduce new vaccines?

“These things at the margin will create hope and that’s what markets are about.

“There’s so much pessimism that any small change will see the markets bounce.”

But the hard-line ideological approach introduces investment risks that most investors have no experience with, he says.

“If you extrapolate the policy approach to economics and business, you can see a society where an entrepreneur with a great idea is unable to raise capital or do business if, for some reason, they do not adhere to ideology that Xi has laid down.

“That has severe repercussions.

“In the long run, when trying to understand what might happen to a sector or a company, we need to look at fundamental growth opportunities — and that aspect of investment in China has narrowed a lot.

“In the long run, when it comes to investing in China, I’m going to be a lot more cautious.”


About Samir Mehta and Pendal Asian Share Fund

Samir manages Pendal Asian Share Fund, an actively managed portfolio of Asian shares excluding Japan and Australia. Samir is a senior fund manager at UK-based J O Hambro, which is part of Pendal Group.

Pendal Asian Share Fund aims to provide a return (before fees, costs and taxes) that exceeds the MSCI AC Asia ex Japan (Standard) Index (Net Dividends) in AUD over the medium-to-long term.

Pendal is an independent, global investment management business focused on delivering superior investment returns for our clients through active management. 

Find out more about Pendal MidCap Fund here

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This information has been prepared by Pendal Fund Services Limited (PFSL) ABN 13 161 249 332, AFSL No 431426 and is current at November 2, 2022. PFSL is the responsible entity and issuer of units in the Pendal Asian Share Fund (Fund) ARSN: 087 593 468. A product disclosure statement (PDS) is available for the Fund and can be obtained by calling 1300 346 821 or visiting www.pendalgroup.com. The Target Market Determination (TMD) for the Fund is available at www.pendalgroup.com/ddo. You should obtain and consider the PDS and the TMD before deciding whether to acquire, continue to hold or dispose of units in the Fund. An investment in the Fund or any of the funds referred to in this web page is subject to investment risk, including possible delays in repayment of withdrawal proceeds and loss of income and principal invested. This information is for general purposes only, should not be considered as a comprehensive statement on any matter and should not be relied upon as such. It has been prepared without taking into account any recipient’s personal objectives, financial situation or needs. Because of this, recipients should, before acting on this information, consider its appropriateness having regard to their individual objectives, financial situation and needs. This information is not to be regarded as a securities recommendation. The information may contain material provided by third parties, is given in good faith and has been derived from sources believed to be accurate as at its issue date. While such material is published with necessary permission, and while all reasonable care has been taken to ensure that the information is complete and correct, to the maximum extent permitted by law neither PFSL nor any company in the Pendal group accepts any responsibility or liability for the accuracy or completeness of this information. Performance figures are calculated in accordance with the Financial Services Council (FSC) standards. Performance data (post-fee) assumes reinvestment of distributions and is calculated using exit prices, net of management costs. Performance data (pre-fee) is calculated by adding back management costs to the post-fee performance. Past performance is not a reliable indicator of future performance. Any projections are predictive only and should not be relied upon when making an investment decision or recommendation. Whilst we have used every effort to ensure that the assumptions on which the projections are based are reasonable, the projections may be based on incorrect assumptions or may not take into account known or unknown risks and uncertainties. The actual results may differ materially from these projections. For more information, please call Customer Relations on 1300 346 821 8am to 6pm (Sydney time) or visit our website www.pendalgroup.com

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