China social considerations

Social concerns in China often relate to the treatment of workers as well as broader public health issues relating to living standards, particularly with regards to pollution in cities. China’s record on human rights and treatment of ethnic minorities is also regularly highlighted as a cause for concern.

While worker rights sit well below the strict standards rigidly enforced in Europe, for example, the Chinese authorities have been making strides on this front. In 2021, the Chinese Supreme Court ruled that the 9-9-6 working practice (9am to 9pm, six days a week), which had been commonplace in industries such as technology, was illegal. In April 2022, China approved the ratification of 20 International Labour Organization conventions on forced labour.

With regards to broader social standards, again the conclusion is that progress is being made, albeit from a very low base with substantial further progress required. One example is China’s air pollution, where greater efforts to regulate and move key polluting activities away from densely populated areas have improved air quality in cities, such as Beijing and Shanghai, by roughly 50%³. Lower China air pollution levels have resulted in an increase in life expectancy of two years since 2013, although we note that the national average levels of pollution still sit six times higher than the World Health Organization guidelines.

There has been significant progress on poverty alleviation, where the Chinese government has had considerable success dispersing the fruits of the country’s economic development through to its population. Over the past 40 years, the number of people in China with incomes below $1.90 per day – the International Poverty Line as defined by the World Bank – has fallen by 800 million.

In the recent decade, higher income cohorts have seen incomes rise more quickly, but President Xi has made “common prosperity” a key policy agenda to reduce income and wealth inequality. The common prosperity drive has also led to new initiatives that aim to better protect individuals across the economic spectrum, such as pressure on businesses to provide insurance for employees.

China governance considerations

When it comes to governance, state governance and corporate governance should not be viewed as interchangeable for China investment. State level considerations may often be more relevant for fixed income investors than equity investors given the size of the government bond market. The lack of democracy is a worry for many investors, with trepidation as to the ambitions of authoritarian regimes increasing further following Russia’s invasion of Ukraine. Yet at the same time, the inclusion of Chinese government bonds in flagship indexes such as the FTSE World Government Bond Index (WGBI) that started in 2021 is helping to provide overseas investors with more comfort that China is determined to attract more foreign capital, and therefore willing to becoming increasingly aligned to international standards.

At a corporate level, governance scores on average are significantly lower than for developed market peers, but closer to those of other emerging market countries. The weight of state-owned enterprises (SOEs) in major indices is one area of concern: while China now has more companies on the Fortune Global 500 list than any other country, nearly 75% of these are SOEs.

Nevertheless, we do find that corporate governance standards are on an upward trend, particularly in “new economy” sectors, such as technology, and more commonly in companies listing on the A-share market. The quality and availability of corporate reporting is also improving, with the proportion of companies in the CSI 300 index producing ESG reports nearly doubling over the past decade, for example.

Conclusion

One thing is certain: ESG considerations for Chinese assets will remain a complex and emotive topic for the foreseeable future, as they encompass a spectrum of varying beliefs and opinions. Across E, S and G factors, there are areas where China is making great strides, and there are other areas where investors would like to see much more progress. It is also clear that the decision to invest in Chinese state assets is very different to investing in companies in China. Looking ahead, we expect the relative weights that our clients assign to each issue will likely determine the role of Chinese assets within a sustainable portfolio.