Global investors flee China fearing risks will outweigh rewards

A growing list of risks is turning China into a potential quagmire for global investors.

The central question is what could happen in a country desperate to achieve the goals of its leader. President Xi Jinping’s friendship with Russian leader Vladimir Putin has made investors more wary of China, as a strongman narrative gains momentum as the Communist Party stubbornly pursues a strategy Covid-Zero and unpredictable campaigns to regulate entire industries.

As a result, some international investors find an aggressive allocation to China increasingly distasteful. Outflows of stocks, bonds and mutual funds from the country accelerated after Russia invaded Ukraine, while Norway’s $1.3 trillion sovereign wealth fund snubbed a Chinese financial giant. sportswear due to concerns about human rights abuses. U.S.-dollar private equity funds investing in China raised just $1.4 billion in the first quarter, the lowest figure since 2018 for the same period.

The scale and speed of the sanctions imposed on Russia have forced a rethink of Western attitudes towards China, according to Simon Edelsten of British investment firm Artemis Investment Management LLP. His team at the $37 billion fund manager sold all of its investments in China last year following Beijing’s interventions in top listings like Didi Global Inc. and Ant Group Co., saying such measures threatened the rights of shareholders. China’s more assertive rhetoric around Hong Kong and claims of sovereignty in the South China Sea also made the investment team uneasy, Edelsten said.

“Political and governance factors should now set a cautious tone, especially for long-term commitments” to China, Edelsten said, adding that European moves against Russia show that strong trade ties do not guarantee peace. diplomatic security.

“The invasion of Ukraine increases these risks very strongly and our funds will probably remain very lightly weighted in China for a few years to come,” he added.

Brendan Ahern, chief investment officer at Krane Funds Advisors LLC, describes the “blind, price-insensitive selling” of Chinese stocks by international investors over the past year. he said, as sanctions on Russia raised fears the same could happen to China. His company – which manages China-focused exchange-traded funds – is replacing Chinese stocks listed in the United States with those trading in Hong Kong to reduce risk. Earning money in the Chinese public markets has become more difficult.

The CSI 300 equity index is down around 15% year-to-date and its risk-adjusted return – as measured by the Sharpe ratio – is among the lowest in the world, at minus 2. 1. It’s barely better than Sri Lanka’s Colombo All-Share Index. The China index is trading near the lowest level since 2014 against MSCI Inc’s global equity gauge.

For the first time since 2010, China’s benchmark 10-year sovereign bonds offer zero carry over comparable US Treasuries. And returns in China’s high-yield dollar credit market were the worst in at least a decade last quarter.

Global funds began to pull back, selling more than $7 billion worth of mainland-listed shares through exchange links with Hong Kong in March. They also disposed of $14 billion in Chinese government debt over the past two months and reduced their credit holdings. Betting against China was considered the fifth busiest trade in Bank of America Corp’s latest investor survey.

“Markets are worried about China’s ties to Russia – it’s spooking investors and you can see the risk aversion showing up since the invasion began,” said Stephen Innes, managing partner at SPI Asset. Management. “Everyone was selling Chinese bonds, so we’re glad we didn’t buy any.”

Still, getting out of China may not be a simple choice. The world’s second-largest economy has a $21 trillion bond market and stock exchanges valued at $16.4 trillion on land and in Hong Kong. Its assets offer investors diversification, Amundi Singapore Ltd. chief investment officer Joevin Teo said last week, with multi-asset strategies grappling with the threat of inflation and tightening global financial conditions. Some have even called Chinese assets a paradise. “This is one of the best diversification stories for global funds because of its idiosyncratic nature,” said Lin Jing Leong, senior Asia emerging markets analyst at Columbia Threadneedle Investments, which manages about $754 billion.

“Who owns the market, China’s growth cycle and inflationary pressures, low volatility in its basket of currencies” all contribute to providing better risk-adjusted returns, she added. The Chinese authorities seem to be taking steps to appeal to global funds. Regulators last month vowed to ensure policies are more transparent and predictable — key sticking points for investors who lost trillions of dollars in 2021 due to Beijing’s crackdown on tech and technology companies. tutoring. China is also making compromises that could grant US regulators partial access to audits of Chinese companies listed in the US.

As Wall Street giants such as JPMorgan Chase & Co. and Goldman Sachs Group Inc. rush to take full ownership of their businesses in China, some companies are divesting. In March, Germany’s Fraport AG sold its stake in Xi’an airport to a local buyer, ending a 14-year stint in China. The airport operator said it decided to exit the Chinese market after struggling to expand its business. Fraport also owns a share of St. Petersburg Airport in Russia, which it is currently unable to sell.

Others are preparing for the decoupling of China from the West. Autonomous tech startup TuSimple Inc. is considering splitting its China operations into a separate entity, following concerns from US authorities over Beijing’s access to its data. Oil giant Cnooc Ltd. could cease operations in the United Kingdom, Canada and the United States due to fears that the assets could be subject to sanctions, Reuters reported last week.

Investment professionals at a US private equity fund in Hong Kong are no longer pursuing opportunities in China as aggressively as they used to, even though prices are much lower, according to a person who asked not not be named when discussing internal strategies. Concerns include the difficulty of exiting investments and problems that may arise from tougher stances such as US investment bans or a consumer boycott of Chinese-made products.

As the risks increase and the rewards decrease, adding exposure to China may no longer be a matter of course for global investors. In a speech last week, US Treasury Secretary Janet Yellen called on Beijing to account for its increasingly close relationship with Moscow. action against Russia,” she said.

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