As China is reopening from its lockdowns, many people are optimistic about the Chinese economy's growth. Charlie Munger said that Chinese stocks were better, stronger, and cheaper than their American equivalents. The expected returns on Chinese stocks are high, but so are the risks.
One such risk is the US's subsidization policies to bring production back home. Also, the political risks of investing in China are serious. The tensions between the country and the West have risen in the last months after it got closer to Russia, not to mention the spy balloon. A possible invasion of Taiwan is also a big risk.
But I think the biggest risk to Chinese companies is the authoritarian government. Strong institutions are important for economic development, however, power in China is very concentrated in the hands of the Communist Party, and Xi Jinping. Last week, the disappearance of Ban Fan, the head of a bank created fear amongst the Chinese business elite, but this is not a new thing. So, there is always a possibility that a company you invest in will be targeted by the government.
This further shows how systemic risks can lead the cost of capital to become higher for companies, decreasing growth and employment in the long run. I believe this is only one way that weak institutions are hurting China and its citizens.
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