China’s rally has faded amid investors wary of Xi’s power

After a year-long exodus of foreign investors from Chinese markets, President Xi Jinping seems to have cracked the formula to revive his economy and attract global funds.

China’s very public pivot from Covid Zero late last year was accompanied by a speech from Xi stressing to top officials the importance of attracting and retaining funds from abroad. Speaking behind closed doors at the Central Economic Work Conference in December – and released in full only this month – the SPEECH announced a series of market-friendly changes for hard-hit sectors such as property and Big Tech – as well as a decisive shift in tone from regulators and state media.

The result was a world-beating stock rally in Hong Kong, a RECORDS streak of gains for Chinese junk dollar debt and the strongest momentum in five years for the yuan. Strategists across Wall Street are recommending the country’s assets. One money manager described it as “easiest” world trade, and even long-time skeptics like Morgan Stanley agreed it was time to buy.

But just two months into 2023, this trade opening has stalled. Hedge funds that rallied late last year are quickly cutting back on risk. Hong Kong’s main stock benchmarks fell more than 10% from their January peaks. Bond outflows continued. And there is little follow-up from the steady, long-term institutional players Xi wants to attract.

New season

“Most market participants we spoke to do not believe that China will return to being as focused as it was in the pre-trade-war era,” said Jon Withaar of Pictet Asset Management. “In the end it comes down to visibility – to policy, income and geopolitics.”

Money managers looking for China to rebuild confidence are getting mixed regulatory messages from a government that is shifting its focus back to geopolitics. Superpower rivalry has risen to levels last seen in the early days of the Trump administration — and investors risk being caught in the middle again. There is also a ANXIETY that Xi’s greater executive power raises the risk of a policy misstep.

Singapore-based Withaar, Pictet’s head of special situations in Asia, said his team decided to reduce the risk to China in mid-2021 due to Xi’s moves against tech and online companies. teaching. The Pictet long-short equity fund he manages has kept its exposure to the country low since then.

Distrust of Xi’s government is particularly acute among investors from the US because of his consolidation of power in October and pursuit of a “common development” agenda that sheds regulatory constraints.

James Fletcher, founder of Ethos Investment Management in Salt Lake City, said he is cautious for the next two to five years, adding that geopolitical tension and the heavy-handed government will continue as usual. Those concerns have been highlighted recently reports that Xi will parachute in key colleagues to lead the central bank.

“We’re investing in an environment with lower checks and balances and higher consolidation of power, which we think means higher regulatory risk,” he said.

Santa Monica-based Belita Ong, the chair of Dalton Investments, said her firm bought some Chinese stocks last year after the market’s sharp losses, but has since divested.

“Entrepreneurs are punished for speaking up and creativity is stifled,” Ong said SAYS on Bloomberg TV this month. “Those things make it very difficult for us to invest in China.”

The Ministry of Finance recently urged state-owned companies to avoid the four largest international accounting firms, which will keep foreigners away from China’s corporate landscape. And the Demise of a high-profile investment banker this month has added to fresh doubts about whether Xi’s crackdown on private enterprise has run its course.

The saga of the alleged Chinese spy balloon shot down by the US underscores the growing discordance in Xi’s efforts to lure back investors from countries that are his direct strategic rivals. Shortly after the wolf was discovered flying over military installations in Montana, the Biden administration expanded it gbyfv of Chinese entities barred from buying US goods.

The number of restrictions on Chinese securities allowed to be owned by Americans has also increased and there is no let up from Beijing in its sanctions on US companies.

All of this means that even as policymakers in Beijing take bolder steps to boost the economy, market confidence remains shaky. There has been a lingering refusal to relocate to the country for a long time, revealing how much damage the traumas of the past two years have done to China’s credibility abroad.

Hope for Pragmatism

Karine Hirn of Sweden-based East Capital Asset Management, who has seen the value of her company’s Russian assets eroded by the war in Ukraine and the sanctions that followed, doesn’t predict anything similar on the horizon for China.

He is betting on Xi being pragmatic and making growth his priority. Hirn didn’t downplay the risks though and added that China and global investors are in “uncharted territory” after the regulatory onslaught that began in late 2020.

The key now is to “listen to market feedback and be more responsive,” said Patrick Law, who leads the way Bank of America Corp.’s foreign exchange trading business. in the Asia-Pacific region. “It’s getting complicated now – once bitten, twice shy.”

There are some clues that the authorities are trying.

The China Securities Regulatory Commission on February 1 sought the public feedback of the draft rules for new stock listings before rolling them out. It also clarifies policies regarding brokerage firms that offer cross-border services. And there is a messy permission granted with the global financial companies to fully operate their businesses offshore China.

Much may depend on the experiences of international visitors who are now visiting mainland China in large numbers for the first time since the pandemic, said Sean Debow, chief executive officer of Eurizon Capital Asia.

Strategists of Goldman Sachs The Group Inc. predicts about a 20% price return from Chinese stocks over the next 12 months, based on the company’s earnings and valuation estimates.

Regardless, it will take a long period of calm on both the regulatory and geopolitical fronts to help rebuild the confidence that investors need, according to Julien Lafargue, chief market strategist at Barclays Plc private bank in London.

“I don’t think it should happen in the short term,” he said. “The healing process will take a long time.”

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