China Investors Learning How to Profit From Xi’s New Capitalism
- Slowest growth since 1990s leads to greater party intervention
- Green stocks rally shows following the state can be lucrative
Over the past year, President Xi Jinping has ended China’s days of limitless private sector-growth in favor of state-directed “common prosperity.” While that’s made life more difficult for investors, they are slowly learning how to cash in.
Before last year, owning shares of China’s fast-growing private enterprises proved a winning strategy. At its peak in February 2021, the MSCI China Index rose almost 380% since the depths of the global financial crisis, beating a benchmark of global equities by about 140 percentage points. Buying Chinese firms listed in the U.S. was even more profitable, with the Nasdaq Golden Dragon China Index rising more than 670% in the period.
That all changed with Xi’s crackdown on the nation’s tech giants, prompting the MSCI China last year to lag its global equivalent by the most since 1998. Internet bellwether Tencent Holdings Ltd., which returned more than 109,800% for investors from its 2004 initial public offering, has lost about its market value — or $478 billion — since hitting a record high. The Hang Seng Tech Index is down more than 45% in the past year.
To China’s leaders, this is all a success: Last weekend during the annual session of the National People’s Congress, Premier Li Keqiang hailed the prevention of “unregulated expansion of capital” as one of last year’s top achievements. In their eyes, it’s more important than ever for the private sector to be in lockstep with the Communist Party, particularly as economic growth slows to a three-decade low in an increasingly volatile world.
Beijing is becoming more deliberate about which sectors to promote as resources shrink and it seeks to cut dependence on the U.S. due to rising geopolitical tensions — a calculation exacerbated by Russia’s war with Ukraine. The population is aging and labor productivity is weak, while old debt-dependent growth drivers like the property market must be replaced for China to avoid a financial crisis.
“China isn’t growing at 10% anymore — it can’t afford to have a private sector that’s exploring,” said Alicia Garcia-Herrero, Natixis SA chief Asia Pacific economist. “When China needs to choose, social capital becomes essential. The private sector serves the purpose designed by the party.”
Still, there’s money to be made for investors who carefully read the messages out of Beijing. Authorities in recent months have rolled out cash subsidies for high-end manufacturing, affordable housing and sustainable energy in a bid to accomplish Xi’s goals of technological self-sufficiency, income equality and sustainable growth.
A gauge of so-called Chinese red chips — or Hong Kong-listed Chinese companies with significant state control — climbed 20% in six months. Greenlighted industries can quickly overheat: the top performing equity funds in Asia last year all invested heavily on Chinese renewable energy stocks after Xi pledged in late 2020 that China would hit carbon neutrality within 40 years. Some returned more than 40%.
Battery maker Contemporary Amperex Technology Co. rallied 2,650% in just over three years to become one of China’s most valuable companies. Venture capital firms poured at least $8.7 billion in so-called cleantech startups last year, up from $5.6 billion in 2020, according to research firm PitchBook. Sequoia Capital, GIC Private Ltd. and Primavera Capital recently gave more than $1 billion to Shanghai-based Envision Group, which produces wind turbines and batteries.
China’s green bond issuance quadrupled to $83 billion in 2021, according to Bloomberg NEF calculations.
The official stamp of approval is helping a new generation of startups in strategically important sectors such as robotics, quantum computing and semiconductors. These “little giants” are selected under a government program that’s received the personal blessing from Xi, and the initiative will expand this year to almost 8,000 companies. Investment spending on these new infrastructure projects is expected to grow 12% this year, according to Goldman Sachs Group Inc.
Another focus for Beijing is food security, an increasingly pressing topic as the war in Ukraine sends grain prices rocketing. China’s biggest technology companies are being encouraged to invest in rural e-commerce: Rural Taobao, an initiative launched by Alibaba Group Holding Ltd., links farmers directly with urban consumers via an online marketplace. Rival Pinduoduo Inc., which also has a vibrant rural e-commerce operation, has pledged $1.5 billion in profits to Chinese farmers.
‘Next Investment Opportunity’
China is also transforming housing to clamp down on speculation. The government plans to build 6.5 million low-cost rental apartments by 2025, making up an estimated 26% of new home supply at as much as 30% below the market rate. The country’s top financial regulators in early February moved to exempt low-cost rental housing projects from curbs on property lending, with brokerages calling it the “next investment opportunity” for real estate firms.
On March 4, the banking regulators issued a notice to address the financial needs of what they called “new citizens,” an estimated 300 million new migrant workers who haven’t obtained permanent residency status in the cities where live. Local governments are expected to provide affordable rental housing, while banks are to underwrite mortgage loans.
“Ultimately the goal is to achieve a more sustainable model of growth that’s less reliant on debt and property,” said Larry Hu, an economist at Macquarie Capital Ltd. in Hong Kong. “This will be good for China. But common prosperity can’t just be a campaign — it must be a gradual process. You can’t do it all in one go or else you risk scaring off investors and destabilizing the economy.”
Some global investors are endorsing Xi’s new model of capitalism. Ray Dalio, the founder of the $150 billion investment firm Bridgewater Associates, recently praised China’s common prosperity drive and urged countries including the U.S. to follow suit.
Stephen Jen — co-founder of Eurizon SLJ Capital and former head of currency research at Morgan Stanley — said Xi’s plan will ensure long-term stability and socially responsible economic growth. There are “huge opportunities” if investors remember the party is in charge, said Hugh Young, Abrdn’s chairman for Asia in Singapore.
Others are not so convinced. Billionaire philanthropist George Soros, who was upbeat on China’s economy in the aftermath of the global financial crisis in 2009, criticized Xi’s policies in January and even said his leadership was under threat — a claim dismissed by authorities in Beijing.
“Beijing will first have to convince international investors that common prosperity is far more powerful and effective than western models of capitalism,” said Garcia-Herrero from Natixis. “That’s a major uphill battle for China.”