China’s new playbook amid geopolitical divide
Ming Liao of Prospect Avenue Capital delves into China’s investment landscape, spotlighting key strategies such as green tech
China's investment landscape is evolving amid geopolitical tensions and economic challenges. Despite bearish investor sentiments, global LPs remain optimistic about China's economic resilience and are actively seeking new opportunities, among which collaboration with Chinese green tech companies is crucial for accelerating the energy transition.
In today's post, we are happy to invite Liao Ming, the Founding Partner of Prospect Avenue Capital, a China tech-focused growth fund, to share his perspectives as he unfolds this 'New China' playbook that may chart a trajectory for global investors towards a greener, more sustainable future.
China’s new playbook amid geopolitical divide
Ming Liao, Founding Partner of Prospect Avenue Capital
In 2023, the world watched as China grappled with unprecedented challenges. Its GDP growth hovered at historically low rates, while youth unemployment surged to a record high. Concurrently, a sweeping withdrawal of funds from Chinese stocks and bonds fostered a pervasive ‘avoid China’ sentiment among global investors.
Geopolitical rifts deepened. The balloon incident in February further strained China-US relations. April marked the termination of the China-EU trade hallmark, the Comprehensive Agreement on Investment. August saw US President Joe Biden's Executive Order, barring US capital flows into specific Chinese tech sectors. And in September, the US unveiled the India-Middle East-Europe Economic Corridor plan, positioned against China’s Belt and Road Initiative.
These geopolitical concerns, coupled with China’s sluggish recovery, have exacerbated bearish investor sentiments. But have global LPs written off China entirely?
In September, I had the privilege of speaking to over 50 global LPs at a Fund of Funds’ Annual General Meeting. Their optimism in China’s economic resilience was palpable, matched with an eagerness to uncover new opportunities. They sought to discern which China assets remain unaffected by geopolitical risks and how best to harness the nation’s future growth.
World leaders shed light on the matter.
Christine Lagarde, President of the European Central Bank, in her August speech at Jackson Hole, outlined three pivotal shifts in the world economy: the labor market and nature of work, green energy transition, and an increasing geopolitical divide.
In the context of China, the latter two shifts carry significant relevance for economic policies, market dynamics, and future investments for the coming decades:
Geopolitical chasm: Two competing economic blocs are taking shape: the US-led developed nations and the China-centric developing nations.
Supply chain divergence: The West’s intent to ‘de- couple’ or ‘de-risk’ indicates an intention to establish self-reliant supply chains, independent from China.
Distinct capital markets: The US and China house the world’s only two sizable private markets alongside public markets with quality liquidity. Regulatory shifts have halted US stock listings for Chinese tech companies since July 2021. In contrast, China’s A-share market flourished in 2021 and 2022, emphasizing the independence of these two markets.
Domestic exits: Given geopolitical risks, investments in China’s domestic assets should seek A-share IPOs for exits. Conversely, non-PRC assets with Chinese affiliations should exit via US IPOs. Traditional cross- border exits (China assets seeking US IPOs) are likely to encounter hurdles ahead.
Valuation discrepancies: Comparable assets can hold different valuations in the US and China. For instance, China’s A-share market assigns much higher multiples to deep tech companies compared to the US’ market, while US investors assign higher multiples to green tech companies compared to their Chinese counterparts.
Geography-centric investment approach: To capitalize on China-US valuation discrepancies, investors should tailor their investment strategies to better align with local valuation preferences.
The capital markets are responding in force. Green tech, where China dominates, is a perfect example; the US and EU’s own expertise deficit has led to significant valuation appreciation of the few public green tech companies in the West. For example, Enphase Energy, a US-based solar inverter producer, is currently valued at $16bn and trades at 30 times price-to-earnings, while its China peers have mid-teen valuation multiples.
This top-down analysis reveals a path forward for China’s USD funds to prioritize investments in China’s onshore assets with higher multiples (deep tech, for example) and similarly high-valued offshore assets with China affiliations, such as green tech.
Chinese companies, especially those in manufacturing, have long gone global. Formerly positioned as foreign competitors, they have transformed into local players by setting up parallel offshore entities. By integrating into Western supply chains from day one, these Chinese manufacturers are positioned beyond the reach of geopolitical crossfire.
During a recent trip to Suzhou, a hub for China’s green tech sector, many companies revealed plans to place their global assets under offshore structures. TikTok is a well- documented example of China’s reshoring trend.
China’s USD fund managers reaped robust market beta during China’s internet boom. However, tightened regulations at home and geopolitical risks abroad have fundamentally reshaped the investment landscape. They must become global alpha seekers, linking China’s industrial advantages with the West’s emerging needs. China’s green tech sector epitomizes this. In September, Bloomberg reported a burgeoning interest from global investors.
China’s green tech dominance spans the entire spectrum: from EVs and batteries to solar, and from technology and know-how to R&D capabilities. Remarkably, eight of the world’s top 10 solar manufacturers are led by Chinese entrepreneurs. In 2022, China produced 56% of global EV batteries. CATL, China’s leading EV battery manufacturer with over a third of global market share, licensed its technology to Ford Motor’s new $3.5bn facility in Michigan. At the Munich Auto Show, Chinese EV makers’ technological sophistication and infotainment system prowess stunned German industry leaders.
This rapidly shifting landscape has global investors on edge. Blackstone is considering acquiring Growatt Technology, a Chinese solar inverter maker. Furthermore, they plan to invest upwards of $100bn in renewables over the next decade. Chinese players are poised to remain pivotal to the global trajectory of this industry.
With 2050 set as the global carbon-neutralization deadline, the role of green tech in accelerating the energy transition cannot be overstated. The EU aims to generate more than 40% of energy by renewables by 2030. The US is on track to generate most of its power via solar and wind by 2050. Under such ambitious targets, policy-makers recognize the necessity and urgency of collaborating with Chinese green tech companies. In the US, J. B. Pritzker, Governor of Illinois, recently announced a $2bn investment by Gotion, a Chinese EV battery maker majority-owned by Volkswagen. It’s evident: the US can’t build a green economy without China.
Viewed in the context of this multi-decade trend, China’s green tech offshore companies show tremendous investment potential, charting a clear trajectory for future returns. This ‘New China’ playbook promises to not only secure a long runway for global investors but also empower the transition into a greener, more sustainable future.
To echo Ms. Lagarde, there is no pre-existing playbook for the challenges we are facing today; our task is to draw up a new one. It’s time to pen a new narrative for global development, and China’s technological spillover offers precisely that.