Tue. Oct 19th, 2021

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

Fund managers have cooled over the world’s second-largest economy since President Xi Jinping launched a series of regulatory attacks over the past ten months against sectors ranging from education to video games. The actions listed nearly half the value of a Goldman Sachs basket of Chinese stocks in the U.S. from a peak in early 2021, halting the once-lively flow of Chinese companies in New York.

But this week the controversy opened when BlackRock, the world’s largest asset manager, announced on Wednesday $ 1 billion raised for its first mutual fund in China, seduced by the chance to take advantage of 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 mistake”.

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

Executives operating active global equity funds have reduced 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 an asset of more than $ 1 billion, Copley calculated that just over a quarter now own more shares in China and Hong Kong than the global index. At the beginning of 2015, a peak of 45 percent of investors held such big bets on China.

“You do not know what Chinese companies are run for – profits or the government,” said a hedge fund manager in London. “There is no rule of law. Avoid China – or be an insider. “

Cathie Wood, CEO of Ark Invest and one of the finest-watched investors, told an audience of institutional fund managers on Thursday that her fund was “dramatic” reduced its exposure since late last year to China.

Chinese authorities are now focusing on social issues and social engineering at the expense of capital markets, she said. Now her portfolio contains shares out of the country only if the companies want a favor at Beijing.

Line chart of average exposure to China and Hong Kong (%) showing investors moving away from China

Foreign investment in investors reflects a ten-month period in China marked by a series of sudden insults by Xi in the business and economic spheres. These unexpectedly harsh interventions have created a sense of unpredictability that some investors and analysts have said could make the country’s major markets effectively unreadable.

Almost no sector remained untouched by the Communist Party’s “common prosperity ”campaign, which includes a restriction on the largest technology companies in China and real estate speculation, has strict restrictions on the amount of time young people may play video games, and a ban on the profit motive education sector.

Chinese authorities have also indicated that they entities with variable interest rates – legal structures that support $ 2 tons of the country’s shares in US 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 declared it necessary to ‘regulates excessively high incomes”, What a wave of charitable donations and promises by leading private sector entrepreneurs to show their alignment with policy priorities. Shares in the world’s largest luxury goods companies, whose growth was driven by turbo, also declined on this apparent aversion to conspicuous consumption.

But while some foreign investors are packing their bags, others – many of whom have invested in the country for many years – are stuck.

Ray Dalio, 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 you can not leave behind, not just because of the opportunities what it offers, but you lose the excitement when you are not there ”.

Those with a more outspoken outlook acknowledge the unpredictable political risk, but believe that regulatory intervention by Chinese authorities is nothing new and that its disadvantage outweighs the long-term bull story of increasingly affluent consumers.

Fund managers are not just considering whether to invest in Chinese assets. They are also considering how to offer their services there to consumers. Along BlackRock, foreign investors including JPMorgan Asset Management and Goldman Sachs Asset Management in the US, and Europe’s Amundi and Schroders push China in with joint ventures for wealth management.

BlackRock said in a statement that it wanted to “provide our expertise, products and services” in the pension system to China, which “is taking measures to address the growing retirement crisis”. It declined to comment on Soros’ criticism.

From an investment point of view, fund managers staying with China say their strategy is to look beyond the political noise to identify sectors that are in line with the goals of the Communist Party, and companies whose valuations are lower than their competitive positions and American or European counterparts.

“Invesco remains optimistic about the opportunity in China, as we believe it will be in a growth mode for many years to come,” said Andrew Lo, head of Asia Pacific at Invesco, a $ 1.5-tonne asset manager. This increases the amount of money he invests in securities in China and increases the number of analysts who own technology companies in the country.

“China is not turning against entrepreneurs and capitalists. . . it remains committed to a healthy domestic capital market and wants progressive innovation in the private sector, ‘he said. Recent regulatory interventions attempt to tackle monopolistic technology companies and profitable tutoring companies for the benefit of long-term growth and social well-being, he added.

Lo added that the regulatory constraint of Chinese technology giants could mean more small and innovative businesses could enter the market and provide a fairer and more balanced playing field. We expect more offers, more innovation. ”

Others are equally determined to stick to investments, as the ‘common prosperity’ policy will usher in further growth of the Chinese consumer sector. “Hundreds of millions of people will join the middle class in the coming years,” said Mark Martyrossian, CEO of Aubrey Capital Management, a $ 1.6 billion boutique in Edinburgh. ‘If you can find businesses with large competitive caves, you can still make a lot of money.

Rebased's line graph with US listed China stocks outperforms broader market

Another strategy is to try, just like Ark’s Wood, to fit in with government goals. “We have acquired a range of domestic and international companies facing China that align with innovation, consumers, health and wellness and technology,” said Jack Dwyer, formerly of Soros Fund Management, now operating Conduit Capital in Sydney. “These businesses are valued at material discounts to peers in other jurisdictions.”

Electric vehicles, rare earths and semiconductors are also joining China’s transition to a green economy and the desire to strengthen its domestic supply chain. “When I look at China, I think it might be a question of what can go right, as opposed to the idea that the wheels are falling off,” he said.

Additional post by Chris Flood in London

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