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THE question of China’s “investability” first came up late last year when Beijing’s harsh regulatory crackdowns on its big tech companies and big real estate developers shaved trillions of dollars off foreign investors’ books.
This discussion is bubbling up again, as Chinese stocks listed in Hong Kong and New York witness their worst sell-offs since the global financial crisis in 2008.
This time, there is an added urgency as the investment landscape for Chinese assets gets worse. Investors are fearful China Inc may get snarled by US sanctions because of ties to Russia.
They are worried that China’s worst Covid outbreak since the start of the pandemic will grind the domestic economy to a standstill. Meanwhile, Beijing’s sweeping regulatory crackdowns don’t seem to have stopped: Tencent Holdings Ltd, which had been largely unscathed, is facing a possible record fine for allegedly violating anti-money-laundering regulations.
The latest selloffs are raising questions about Beijing’s market objectives. Does it want to be associated with Russia’s invasion of Ukraine and be seen as incompatible with Environmental, social and governance (ESG) investing?
Does the government really want to close China Inc’s access to the deep pool of global capital, as well as to the US and European Union, which together account for about 35% of its exports?
The inconvenient truth is that Beijing doesn’t care how much money global investors have lost. It does not care about short-term volatility. It does, however, have its eyes on the big prize of securing its real economy.
And it trusts that its domestic asset management industry will keep the Hong Kong market afloat.
What we are experiencing is a seismic shift in the ownership of Chinese stocks. US institutional investors are still major players, owning 15% and 25% of the Hong Kong and US-listed Chinese stocks respectively, according to estimates by Goldman Sachs Group.
That’s why the entire marketplace shudders when American funds start panic selling on worries about secondary sanctions.
But look at what’s been happening throughout the ongoing Hong Kong market selloff: Chinese investors have been buying on dip.
It’s a sign that the offshore marketplace is not entirely broken. When the dust settles, the Hong Kong market will have become more domestic and retail-driven, not unlike what’s happened to the US stock market since the pandemic began two years ago.
It’s also almost silly to whine about market sell-offs to a president who has grand ambitions to reclaim China’s status as a great world power.
Panic selling by American fund managers is a small price to pay in the grand scheme of things for Xi Jinping.
Unlike former US President Donald Trump who always had an eye on the Dow, Xi doesn’t look at the CSI 300 or Hang Seng Index for validation.
On the other hand, Xi does seem to care about the real economy and is willing to make policy changes. In recent speeches, he has addressed the nation on the potential energy and food crises caused by Russia’s invasion.
China is a large importer of oil and agricultural products. Though he has always cast himself as a champion of green causes, Xi has made concessions on China’s carbon goals, calling for a “realistic” approach and encouraging coal production as a buffer against soaring oil prices.
He has also talked about the importance of food security and emphasised self-sufficiency. “The rice bowl of the Chinese people must be filled with Chinese grain,” he said.
Tellingly, Xi has been silent about the stock market. Meanwhile, the central government is doing more this year to appease small businesses and the lower middle class.
Tax cuts and rebates, which prioritise small and medium enterprises and manufacturers, will amount to 2.5 trillion yuan (RM1.65 trillion), more than doubling last year’s cuts.
The government also plans to build 6.5 million low-cost rental apartments by 2025, in part to accommodate what they called “new citizens,” an estimated 300 million migrant workers.
As long as the bulk of the Chinese society has Xi’s back, why should he care if the Hang Seng Index falls into a bear market?
So, here’s a thought for ESG-minded global investors. Selling their stakes and whining about China becoming “uninvestable” won’t change Beijing’s mind.
But, convincing foreign companies to stop buying Chinese goods and services might. Those moves would hurt the real economy. Perhaps some portfolio reshuffling is in order. — Bloomberg
This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.