Whether China has become “uninvestable” or not, avoiding the world’s second-largest economy suggests that the economic and political risks have simply become too difficult to assess.
US Commerce Secretary Gina Raimondo’s trip to China last month promised some economic and trade détente between the two superpowers now at loggerheads. But that promise was quickly debunked by his comment that more U.S. companies view China as “uninvestable” because of espionage, fines, searches and other risks. While physical investments, supply chain exposure and stock market listings have been in the spotlight since the pandemic, portfolio flows have also been reluctant to embrace these prospects.
Fears of a systemic housing collapse, a disappointing economic recovery from the pandemic, and piecemeal government aid are all warning signs for near-term returns and performance, and the fall of the yuan accelerated.
But geopolitical rancor and bilateral restrictions on investment in sensitive technology and security sectors also have the effect of calling into question many long-term values or contrarian operations.
Bank of America’s survey of global fund managers this week showed how all these fears translate into investment positioning.
Net allocations to China-dominated emerging market stocks “collapsed” 25 percentage points over the past month to their lowest level of the year – the biggest monthly decline in exposure in nearly seven years old.
A third of respondents to the survey cited Chinese real estate as the biggest “credit event risk,” surpassing fears about commercial real estate in the United States and European Union.
And none of the 222 funds surveyed expect China’s economic growth to be higher next year than this year, reflecting a recent Reuters survey of domestic and foreign banks and investors.
More importantly, the gloomy outlook for China-led emerging markets is independent of improving global growth overall, with an increase in exposure to U.S. stocks this month the largest in history of the survey and the first net overweight position since August 2022.
The net shift from emerging markets to Wall Street was also the largest since the survey’s inception more than 20 years ago.
In this type of survey, there are many things that could suggest a “peak of gloom”. Investing biases of this magnitude are often good contrarian indicators.
Indeed, shorting Chinese stocks has been considered the second most “crowded market,” behind long exposure to the stocks of big tech companies.
“THE RISK IS BAD
But the problem goes well beyond simple cyclical ebbs and flows and incorporates aspects of the thick political fog and investment reorientation that occurred after the collapse of emerging markets in the late 1990s.
At the time, increasing political and monetary risks in Asia and other developing markets made visibility disappear. American money took refuge in an emerging domestic market, Silicon Valley, and partly fueled the Internet bubble that burst in 2000.
At the time, China was just a small player in the investment world. Today, it represents a challenge for the American economy, unlike all the emerging economies present 25 years ago.
But the extent to which recent seismic geopolitical risks have changed the basic risk calculus is a parallel.
Asset managers and financiers around the world have openly expressed their unease.
JPMorgan boss Jamie Dimon said this week he was “very cautious” following a trip he took to China this year for the first time in four years, adding that the report risks /reward for JPMorgan’s activities in this country had deteriorated. “The risk is bad,” he said.
Jay Clayton, former chairman of the U.S. Securities and Exchange Commission, told lawmakers Tuesday that large U.S. public companies should begin disclosing their exposure to China as part of a pilot program aimed at allowing investors and policy makers to identify potential risks.
“If it’s demonstrated to investors that the level of risk has increased, they will exit,” he said.
Last week, Norway’s $1.4 trillion sovereign wealth fund, one of the world’s biggest investors, announced it was closing its only office in China, although it said it would continue to invest in the country.
Earlier this month, CPP Investments, Canada’s largest pension fund, became the latest Canadian investor to scale back operations in Hong Kong and pull out of deals in China. The Ontario Teachers’ Pension Plan closed its Chinese equity investment team in April and the Caisse de dépôt et placement du Québec reportedly closed its Shanghai office this year.
To be sure, the battle to win the hearts and minds of Western investors is not a one-way street.
China’s financial markets regulator said last week it had held meetings with domestic and foreign investors, including Temasek, Bridgewater and Blackrock, to ease relations and build trust.
Jenny Johnson, chief executive of Franklin Templeton, said this week that the gloom was overblown. “You probably won’t arrive at the right time…but when you do, the situation will spring back like a rubber band.”
Willem Sels, chief investment officer at HSBC Private Banking and Wealth, remains neutral on the Chinese market, although he said there are interesting choices in the internet, tourism, domestic services, games and electric vehicles in the event that a recovery in profits is felt.
“He currently prefers US stocks, the dollar and hedge funds for the next 3 to 6 months and favors longer-term themes like India and Indonesia.
But with U.S. presidential elections scheduled for next year, Washington’s appetite for resolving political tensions may be low.
A bipartisan majority of Americans support raising tariffs on Chinese goods and say the U.S. needs to step up preparations to deal with military threats, according to a Reuters/Ipsos poll last month. emanating from this country.
Even if the economy recovers, political catalysts for a return to China may be slow in coming.
The opinions expressed here are those of the author, a columnist for Reuters.
2023-09-13 06:00:00
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