“No rule of law”: investors divided in Chinese markets


A clash erupted between two of the world’s most prominent investors this week, reflecting a growing rift on Wall Street over the viability of putting money to work in China.

Fund managers have been cooling off on the world’s second-largest economy since President Xi Jinping launched a flurry of regulatory measures against sectors ranging from education to video games over the past 10 months. The moves wiped out nearly half the value of a basket of US-listed Chinese stocks from Goldman Sachs from a high in early 2021 and halted the once-dynamic flow of Chinese companies listed in New York.

But this week shed light on the disagreement when BlackRock, the world’s largest asset manager, announced on Wednesday that it had raised $ 1 billion for its first mutual fund in China, wowed by the possibility of tapping into the the country’s growing savings market. Just a day earlier, billionaire financier George Soros wrote in the Wall Street Journal that BlackRock’s move to China was a “tragic error”.

“BlackRock is wrong,” said the outspoken 91-year-old former hedge fund manager, after previously warning investors in China were facing “a rude awakening” because “Xi views all Chinese companies as the instruments of a one-party state “.

Managers managing active global equity funds cut their allocations to China and Hong Kong to the lowest level in four years, according to Copley Fund Research, a data provider. Looking at a sample of 381 funds with more than $ 1 billion in assets, Copley calculated that just over a quarter now own more Chinese and Hong Kong stocks than the global benchmark. At the start of 2015, a peak of 45% of investors were holding outsized bets on China.

“You don’t know why Chinese companies are run – profits or government,” a London-based hedge fund manager said. “There is no rule of law. Avoid China – or be an insider.

Cathie Wood, chief executive of Ark Invest and one of the most watched investors, told an audience of institutional fund managers on Thursday that her fund had “significantly” reduced its exposure to China since the end of the year. last.

Chinese authorities are now focusing on social issues and social engineering at the expense of capital markets, she said. Now, its portfolio only contains stocks from the country if companies “seek favor” from Beijing.

The nervousness of foreign investors reflects a 10-month period in China that was marked by a series of sudden offensives by Xi in the commercial and economic sphere. These surprisingly harsh interventions created a sense of unpredictability that some investors and analysts say could make the country’s vast markets uninvestable.

Almost no sector has been left untouched by the Communist Party’s campaign for “common prosperity,” which has included a crackdown on China’s biggest tech companies and real estate speculation, strict limits on the time young people are allowed to stay. playing video games; and a ban on the for-profit education sector.

Chinese officials have also indicated they may crack down on so-called variable interest entities – legal structures that underpin $ 2 billion in the country’s shares in U.S. markets. These vehicles have facilitated foreign investment in companies such as Alibaba and Tencent.

The latest development came in mid-August when a Communist Party committee said it was necessary to “regulate excessively high incomes”, sparking a wave of charitable donations and pledges from major entrepreneurs. of the private sector to show their alignment with political priorities. Shares of the world’s largest luxury goods companies, whose growth was turbocharged by China, also fell on this apparent aversion to conspicuous consumption.

But while some foreign investors have packed their bags, others – many of whom have invested years of investing in the country – are holding out.

Ray Dalio, the founder of Bridgewater Associates, the world’s largest hedge fund, told a Bloomberg event on Wednesday that China and Singapore are “a part of the world that cannot be overlooked and not just because of of the opportunities it offers, but you lose the excitement if you are not there ”.

Those with a more optimistic outlook acknowledge the unpredictable political risk, but maintain that regulatory intervention by Chinese authorities is not new and that its drawbacks are outweighed by the long-term bullish history of increasingly wealthy consumers.

Fund managers don’t just assess whether to invest in Chinese assets. They’re also thinking about how to offer their services to consumers there as well. Alongside BlackRock, foreign investors, including JPMorgan Asset Management and Goldman Sachs Asset Management in the United States, and Europeans Amundi and Schroders are launching in China with joint ventures in wealth management.

BlackRock said in a statement that it is keen to provide “our pension system expertise, products and services” to China, which “is taking action to address its growing pension crisis.” He declined to comment on Soros’ criticism.

From an investment perspective, fund managers who remain loyal to China say their strategy is to try to break through political noise to identify sectors that are aligned with the Communist Party’s stated goals and companies whose valuations are depressed relative to their competitive positions and US or European peers.

“Invesco remains optimistic about the opportunity in China as we believe it will be in growth mode for many years to come,” said Andrew Lo, head of Asia-Pacific at Invesco, an asset manager at 1 , $ 5 billion. It is increasing the amount of money it invests in Chinese stocks and increasing the number of analysts it has to cover the country’s tech companies.

“China is not turning against entrepreneurs and capitalists. . . he remains committed to a healthy domestic capital market and wants thriving private sector innovation, ”he said. Recent regulatory interventions attempt to tackle monopoly tech companies and for-profit tutoring firms for the benefit of long-term growth and social well-being, he added.

Lo added that the regulatory crackdown on Chinese tech giants “could mean more innovative small companies could enter the market and provide a fairer and more balanced playing field. We expect more announcements, more innovation.

Others are also determined to stick to investments as the “common prosperity” policy will herald further growth in China’s consumer sector. “Hundreds of millions of people will join the ranks of the spending middle classes over the next few years,” said Mark Martyrossian, managing director of Aubrey Capital Management, a $ 1.6 billion boutique based in Edinburgh. “If you can find companies with big competitive gaps that can tap into it, you can still make a ton of money.”

Rebasé line chart showing Chinese stocks listed in the US are selling more than the broader market

Another strategy is, like Ark’s Wood, to try to align with government goals. “We have purchased a range of domestic and international China-facing companies that are connected to innovation, consumerism, health and wellness and technology,” said Jack Dwyer, formerly of Soros. Fund Management, who now heads Sydney-based Conduit Capital. “These companies are valued at significant discounts compared to their peers in other jurisdictions.”

Electric vehicles, rare earths and semiconductors are also part of China’s transition to a green economy and the desire to strengthen its domestic supply chain. “When you look at China, I think maybe it’s about what could be going well, rather than thinking the wheels are falling off,” he said.

Additional reporting by Chris Flood in London


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