China – Feature
CHINA CRISIS?
There’s big trouble in China, internally and externally. For the first time since Tiananmen Square in 1989, the country is facing mass protests against the regime. Meanwhile, insti- tutional investors who once queued up to get exposure, are now questioning the world’s second largest economy as an investment option.
China faces a crisis on many fronts. And investors are already spooked, selling off $3.8bn (£3.2bn) worth of Chinese bonds in October alone, according to China Central & Depository Clearing. Much of the crisis emanates from property, caused by central government restricting what developers and investors can undertake. It is as if the spirit of Liz Truss has taken over the body of leader Xi Jinping to sink China’s economy, as Truss did to the UK in the 44 days she spent as prime minister. This calamity in property has fed into the markets. The CSI 300 index, which institutional investors observe closely as it includes high-growth sectors, has hit its lowest level in two years. Its sub-indexes – the CSI 100 and CSI 200 – were also down in 2021, by 18% and 23%, respectively. Not a good look. Although, putting this in context, the S&P500 is down 24%, year-to-date, indicating that this is not just a problem in China.
Big problems Then there are the lingering zero-Covid restrictions, which continue to stifle China’s economy. Topping it all, there has been a massive tech sell-off, thanks, in part, to the govern- ment’s regulatory crackdown on the sector.
Other big problems have become lingering elephants in the room: the poor environmental record of China, as well as its
dodgy human rights record in Tibet and concerning the Uyghur Muslims.
It does raise a series of problematical questions for institutional investors and they are responding. The situation has led Den- mark’s largest commercial pension fund, the $100bn (£84bn) PFA, to pull $4.2m (£3.5m) worth of assets in clothing manu- facturers in China, due to exploitative labour practices. In the US, Florida’s public-sector worker fund is no longer investing in the country. It cited past government crack- downs on education and tech companies for the change in its strategy.
There are also global factors at play which are proving to be chal- lenging. China, like every economy, has been affected by a mixture of pressures, resulting in greater volatility and rising inflation. Against this economic backdrop, there are wider and possibly more pressing geopolitical issues to consider. “In the US, poli- cymakers are working to reduce the US’ reliance on Chinese imports and, furthermore, slow China’s economic and techno- logical ascendancy,” says Michael Bourke, a fund manager in M&G’s global emerging markets equities team. US policy concerning its closest challenger for the title of the world’s largest economy, leaves some economies more exposed to the so-called ‘decoupling’ than others. But for Bourke, this is a lose-lose scenario. “In a decoupling scenario, the most exposed economies are Korea and Taiwan, although much of Southeast Asia is likely to be negatively impacted,” he says. The big question, in this scenario, Bourke says, is: “Will there be a degree to which the EU and the UK will follow the US’ example and reduce reliance on China, which could deter- mine whether investors look more carefully at their exposure to the country.”
Issue 119 | December-January 2023 | portfolio institutional | 47
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