As recently as October some of the world’s money managers were lamenting the loss of China as an attractive investment destination under President Xi Jinping.
(Bloomberg) — As recently as October some of the world’s money managers were lamenting the loss of China as an attractive investment destination under President Xi Jinping.
A lot has happened since then. A series of market-friendly pivots on most of Xi’s landmark policies have seen the country’s assets become the world’s top performers. The MSCI China Index has gained about 50% since October, outpacing every major stock gauge. The nation’s junk dollar debt has returned more than 40% and the yuan has posted a record two-month gain.
While existential panic may be giving way to relief, the underlying bear case hasn’t changed for a swath of investors who’ve withdrawn from Chinese markets over the past two years. Punishing losses have left a mark, especially among US funds who remain just as underweight Chinese stocks as they were in October, Morgan Stanley’s quantitative research shows.
Boston-based Zevin Asset Management, a responsible-investment firm which sold all its China exposure last year, is among the skeptics.
“We are long-term investors and haven’t seen any evidence that the long-term risks of investing in China have fallen,” said Sonia Kowal, president at the fund manager. “The government is still strongly autocratic with a sole central decision maker who is only market friendly when it suits his agenda.”
Series of Crackdowns
Whether China is truly investable again is one of the key questions confronting money managers as 2023 begins. Signs that global economic growth is slowing due to rapid central-bank policy tightening is weighing on markets around the world, and making the China rebound story one of the few bright spots in an otherwise darkening investment landscape.
Beijing showed little regard for global investors when it unleashed a series of crackdowns on its most profitable companies following the onset of the pandemic in 2020. Distrust and confusion over the Communist Party’s goals increased after Russia attacked Ukraine, and as Xi stuck to a Covid Zero strategy abandoned everywhere else in the world.
US-based funds remain underweight China across three main mandates: emerging markets, Asia ex-Japan and global equity, according to the Morgan Stanley analysis. That’s partly because of their more conservative outlook of the nation’s long-term growth, analysts led by Gilbert Wong wrote in a research note this month.
Jean Van de Walle, a 30-year emerging-market veteran who oversees about $100 million at Sycamore Capital, doubts that Chinese stocks can keep outperforming beyond a few months, in part because of policy uncertainties under Xi. He’s underweight Chinese assets within his emerging-market portfolio.
“China is too big, volatile, and uncertain,” Van de Walle said. “China is now a moderate growth economy with a high level of challenges made worse by policy uncertainty and an increasingly ideological self-reliance rhetoric.”
Pessimism toward Chinese assets appears to be a “uniquely American quality,” said Brendan Ahern, chief investment officer at Krane Funds Advisors LLC, a manager of China-focused exchange-traded funds in the US.
Wariness toward Chinese assets reached its zenith in October when Xi secured a third term as president surrounded exclusively by close allies.
Xi has given no indications about giving up his “common prosperity” agenda, one which has seen him exert greater state control over companies and the economy. Some analysts argue the recent pivots are just tactical shifts to revive growth, with his campaign leading to newly defined limits for the private sector. Jack Ma gave up control of his Ant Group Co. just days after approval was granted for a unit to raise funds, while state-owned developers are set to play a bigger role in the sector.
In the short term of course, there are many reasons to be bullish.
Xi’s new government is dismantling Covid Zero, reopening borders, wrapping up the rectification of the country’s tech giants and easing up on the property industry’s deleveraging drive. Geopolitical tensions are also cooling as key trade links with Australia resume, and Beijing’s foreign envoy speaks fondly of his “friends” in the US. Valuations for Chinese assets are still low relative to pricey markets such as the US.
Hang Seng futures contracts pointed to a potential gain of around 1% for Hong Kong stocks on Thursday while the offshore yuan strengthened slightly.
“The China trade is probably the easiest story in the world right now,” said Rob Mumford, an emerging-markets fund manager at GAM Hong Kong Ltd. “Suddenly you got all the key narratives turning positive all at once, with prices at very depressed levels. There’s little controversy there — everyone is on the same page.”
Still, Mumford says many in the market remain wary. Investing in China beyond the rebound is still problematic for asset allocators, largely because of uncertainty around whether Xi’s policy and economic priorities have in fact changed, he said.
–With assistance from Henry Ren.
(Adds Hong Kong stock futures and yuan in third-last paragraph.)
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