Singapore’s $290 billion investment firm’s CEO warns that de-risking from China will result in a more expensive world, likening it to an insurance policy where a premium must be paid.

Singapore's $290 billion investment firm's CEO warns that de-risking from China will result in a more expensive world, likening it to an insurance policy where a premium must be paid.

De-risking and Decoupling: Navigating China’s Changing Landscape

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In recent years, the G7, a group of powerful economies including the United States, has taken a new approach towards China. Instead of trying to constrain Beijing, the West seems focused on reducing its dependence on the world’s second-largest economy. However, Dilhan Pillay Sandrasegara, CEO of Singapore-based Temasek Holdings, sees these terms as merely semantic differences. According to him, de-risking and decoupling are intertwined, and the shift in focus is not just a matter of terminology.

The Changing Dynamics

Pillay’s perspective stems from the increasing tensions between Beijing and Washington, and the resulting need to navigate this complex landscape. As the CEO of Temasek, a state-owned investment company with a portfolio worth $288 billion, Pillay has been at the forefront of managing the organization’s investments and mitigating risks. The idea of “de-risking” from China has gained momentum due to Beijing’s stringent pandemic controls and crackdown on the private sector. Companies and investors alike are searching for ways to reduce exposure to China, either by diversifying supply chains or exploring emerging markets.

Adding to the apprehension towards China, the U.S. and its allies have introduced new regulations. These include the possibility of banning U.S. entities from investing in Chinese companies involved in strategic areas like semiconductors and quantum computing. Subsidies such as the Biden administration’s Inflation Reduction Act have further incentivized companies to reshore their manufacturing operations and seek alternative production hubs beyond China. However, despite these efforts, Pillay warns that transitioning away from China will come at a cost.

Resilience and Security: The Price We Pay

As developed economies prioritize resilience and security, Pillay emphasizes that investors and consumers should prepare for a more expensive world. Resilience and security, he asserts, are not typically associated with low costs. In his view, they are like an insurance policy, where one must pay a premium for added protection. This shift in focus towards more secure and robust supply chains may require investments in regions that offer stability, even if it means higher operating costs.

Temasek itself has adjusted its investments in China over the years, reducing its holdings from 26% in 2011 to 22% currently. On the other hand, its investments in the Americas and Europe, particularly the United States, have increased from 11% to 33%. The organization has consciously avoided sectors caught in the crosshairs of U.S.-China tensions, as well as buzzworthy areas like China’s generative A.I. sector. By adopting a cautious approach, Temasek aims to mitigate risks associated with geopolitical factors.

The changing landscape has not been without its challenges for Temasek. The organization recently reported its worst annual results since 2016, with a 5% drop in one-year returns for shareholders. The value of its portfolio decreased to $288 billion, down from $304 billion the previous year. Amidst these losses, some high-profile investments, such as e-commerce startup Zilingo and crypto exchange FTX, faced difficulties.

A significant portion of Temasek’s holdings comprises unlisted equities, accounting for around 53% of the total, up from about 20% in 2011. Pillay highlights that if the organization were to value these private holdings based on market conditions, it would add approximately 18 billion Singapore dollars ($13.6 billion) to its portfolio’s overall worth. This emphasis on unlisted equities indicates Temasek’s belief in the long-term potential of certain investments, even during turbulent times.

Conclusion: Navigating Safe Havens

Temasek’s cautious approach reflects the challenges faced by many companies and investors seeking to navigate the evolving dynamics between China and the rest of the world. The need to de-risk from China and the concept of decoupling are two sides of the same coin. With the focus shifting towards resilience and security, investments and operations may become more expensive. However, for many, the price of mitigating risks and securing reliable supply chains is deemed a worthwhile investment.

As the global landscape continues to evolve, Temasek remains committed to managing its portfolio wisely, adjusting its exposure to China, and exploring alternative regions that offer stability and growth opportunities. This strategic approach ensures that Temasek can weather storms while continuing to deliver long-term value to its stakeholders.

References: Fortune.com