Good Investment? Yes. Asset Class? No.

To see this article in digital magazine format, click here. 

With the Chinese economy’s seemingly inexhaustible rise from agrarian to world-dominating, recent comments from an Allianz Global Investors subunit CEO boldly proclaiming that China would soon comprise its own distinct asset class may not be shocking. It’s just wrong, think many consultants and other asset managers.

“I think you’ll see Chinese stand-alone strategies,” says Chris Levell of Massachusetts-based consultancy NEPC. “However, are you going to see institutional investors say ‘Here’s my Chinese assumption, here’s my rest-of-Asia assumption’; I think that’s some years off. The specter of what they’re doing with capital control, what they’re doing with the Renminbi peg, all the top-down things they still can do, I think limit the opportunity to say ‘Wow, this is just a single place we should be.”

Some, by way of example, are less diplomatic. “Is Canada an asset class? No,” says James Rickards, Senior Managing Director at New York-based Tangent Capital Partners. “Canada has characteristics of the U. S.,” and is thus not a distinct asset class largely uncorrelated with other equities, he believes. “Developed economies are an asset class, emerging markets are an asset class—but China should not be treated as an asset class.”

Asset classes, at their most basic, can be defined by two factors: similar risk characteristics within the group (i.e., infrastructure investments all involve some form of physical plant), and a distinct correlation apart from other asset classes. China, it can be argued, has neither. The variability of investments in China range from the fabulous to the fraudulent, Rickards points out, making it difficult to place a China play in one bucket. As NEPC’s Levell says, even a much-vaunted China is tied closely to other markets, both near and far. “Although you’ve seen decoupling, if Asia does poorly, China will do poorly,” he says, adding “I like to have fewer asset classes. I think you invest in equities, and you might have tilts to different regions, you might choose a manager structure that has specialists—but you’re taking equity risk,” and not a region-specific risk.

China: It may be good investing but, according to many, it is not—and never will be—an asset class. —Paula Vasan