After sparking a years-long exodus of foreign investors from China’s markets, President Xi Jinping looks like he’s on the verge of cracking the formula to save the economy and attract global funds.
China’s public pivot away from Covid Zero late last year was accompanied by a speech from Xi that impressed upon top officials the importance of attracting and retaining funds from abroad. Delivered behind the doors of the Central Economic Working Conference in December – and only released in full this month – the speech outlined a series of market-friendly reversals for the most difficult sectors like property and Big Tech – as well as decisive changes. tone from regulators and state media.
The result was a world-beating stock rally in Hong Kong, a record winning streak for China’s junk dollar debt and the strongest momentum in five years for the yuan. Strategists on Wall Street recommend the country’s assets. One money manager described it as the “easiest” trade in the world, and even longtime skeptics like Morgan Stanley agree it’s time to buy.
But just two months into 2023, this trade reopening has stalled. Hedge funds that piled into the rally late last year quickly cut back on risk. Hong Kong’s main stock benchmark has fallen more than 10% from its January peak. Bond outflows have continued. And none of them are following the long-term institutional players that Xi wants to pull out.
New Era
“Most market participants we speak to do not believe that China will return to the focus it was in the pre-war era,” said Jon Withaar at Pictet Asset Management. “It ends up being about visibility – about policy, income and geopolitics.”
Money managers looking to China to rebuild confidence are getting a mixed regulatory message from a government that is refocusing on geopolitics. The superpower rivalry has ramped up to the last level seen in the early days of the Trump administration – and investors are at risk of being caught in the middle again. There are also concerns that Xi’s greater executive powers increase the risk of policy missteps.
Singapore-based Withaar, Pictet’s Asia head of special situations, said the team decided to significantly reduce China risk in mid-2021 due to Xi’s move against technology companies and online tutors. The Pictet equity fund he manages has kept his exposure to the country low.
Mistrust of the Xi government is particularly acute among investors from the US given the consolidation of power in October and the pursuit of the “common prosperity” agenda that was unleashed in the regulatory crackdowns.
James Fletcher, founder of Ethos Investment Management in Salt Lake City, said he expects caution over the next two to five years, adding that geopolitical tensions and government hands will continue to be the norm. Those concerns are underscored by recent reports that Xi will parachute in a key partner to lead the central bank.
“We are investing in an environment with lower checks and balances and higher consolidation of power, which we think means higher regulatory risk,” he said.
Santa Monica-based Belita Ong, chairman of Dalton Investments, said the firm bought some Chinese stocks late last year after the market’s sharp losses, but has since reinvested.
“Entrepreneurs are punished for speaking up and creativity is curtailed,” Ong said on Bloomberg TV this month. “This makes it very difficult to invest in China.”
The Ministry of Finance recently urged state-owned companies to shun the four largest international accounting firms, further alienating foreigners from China’s corporate landscape. And the disappearance of a high-profile investment bank this month has added to new doubts about whether Xi’s crackdown on private companies has worked.
The saga of the alleged Chinese spy balloon shot down by the US highlights the growing discordance in Xi’s efforts to woo back investors from a country that is a direct strategic competitor. Shortly after the balloon was identified hovering over a military installation in Montana, the Biden administration developed a blacklist of Chinese entities banned from buying US goods.
The number of restrictions on Chinese securities that Americans are allowed to hold has also increased and there is no stopping Beijing from sanctioning US companies.
All this means that even as policymakers in Beijing take bolder steps to boost the economy, market confidence remains shaky. There is a lingering reticence to reallocate to the country in the long term, revealing just how much damage the traumas of the past two years have done to China’s credibility abroad.
Hope for Pragmatism
Karine Hirn at Sweden-based Eastern Capital Asset Management, which has seen the value of corporate assets in Russia eroded by the war in Ukraine and the sanctions imposed, does not predict anything similar on the horizon for China.
They are betting on Xi to be pragmatic and make growth a priority. Hirn did not downplay the risks and added that China and global investors are in “uncharted territory” after the regulatory onslaught that begins in late 2020.
The key now is to “listen to market feedback and be more responsive,” said Patrick Law, who heads Bank of America Corp.’s foreign exchange trading business. in the Asia-Pacific region. “It’s getting complicated now – once bitten, twice shy.”
There are some signs that the authorities are trying.
The China Securities Regulatory Commission on February 1 asked for public feedback on draft rules for new stock listings ahead of its launch. It also clarifies the policy regarding brokerage firms that offer cross-border services. And there are many approvals given to global financial companies to operate Chinese businesses on the mainland.
Much may depend on the experience of international visitors who are now returning to mainland China in significant numbers for the first time since the pandemic, said Sean Debow, chief executive of Eurizon Capital Asia.
Strategist at Goldman Sachs Group Inc. price forecast for 20% of Chinese stocks over the next 12 months, based on the company’s earnings and valuation forecast.
Regardless, it will take a period of regulatory and geopolitical calm to help rebuild the confidence investors need, according to Julien Lafargue, head of market strategy at private bank Barclays Plc in London.
“I don’t think this is going to happen in the short term,” he said. “The healing process will take a long time.”
Learn how to navigate and strengthen trust in your business with The Trust Factor, a weekly newsletter that examines what leaders need to succeed. Log in here.