Is China ‘Uninvestable’ and What Does That Even Mean?

For more than a year, President Xi Jinping inveighed against the “disorderly expansion of capital” as he launched punishing regulatory and antitrust campaigns against the private sector, from Big Tech to after-school tutoring. That’s made life more difficult for investors, who since the global financial crisis had benefited greatly from an economic boom in the world’s second-largest economy. Those who rode the bull market are now saddled with losses as erratic government policies — and a murky information flow — turned China’s financial markets into the most turbulent globally. Some investors gave up and called parts of China “uninvestable.” The question now is whether this year’s apparent shift in rhetoric will convince them that it’s safe to come back.

1. Where did the ‘uninvestable’ label come from?

In mid-2021, Goldman Sachs Group Inc. said the word “uninvestable” was starting to feature in a number of client conversations about the country’s stocks. The context was months of rat-a-tat government regulation and state intervention in high profile initial public offerings, namely Ant Group and Didi Global Inc. In July that year, China’s shock decision to turn high-growth tutoring companies into nonprofits triggered a collapse in their shares almost overnight. A month later Paul Marshall, co-founder of hedge fund Marshall Wace, said that U.S.-listed Chinese companies weren’t worth the risk anymore. When JPMorgan Chase & Co. analysts this year described Chinese internet companies as “uninvestable” and downgraded a number of stocks, their report helped erase about $200 billion from U.S. and Asian markets and prompted one Chinese technology company to downgrade the bank’s underwriting role on an upcoming IPO. (The analysts reversed the downgrades two months later.)

2. What does it cover?

The debate has mostly centered around China’s crackdowns on big companies and alleged monopoly abuses in education, technology and property. But wariness toward Chinese assets in general increased after Russia invaded Ukraine on Feb. 24, just weeks after Xi reinforced a “no limits” bond with Russian President Vladimir Putin at a summit in Beijing. Investors worried Chinese companies could be caught up in Western sanctions against Russia or, more broadly, that exposure to China wouldn’t fit into a responsible-investing framework. Norway’s $1.3 trillion sovereign wealth fund in March said it was excluding Chinese apparel firm Li Ning Co. from its portfolio due to concern that the sportswear maker contributes to human rights violations against ethnic Uyghurs in the Xinjiang region. China’s more assertive rhetoric around Hong Kong and sovereignty claims in the South China Sea contributed to another big investor’s decision to sell all his China holdings.

3. Does China care?

Yes and no. Xi’s government showed little regard for global investors as it sought to curb “disorderly” capital, which complemented his campaign to rein in moguls and promote “common prosperity” ahead of this year’s Communist Party congress, where he’s expected to secure a precedent-defying third term. But the damage to market sentiment may have been more severe — and persistent — than policy makers envisioned. China’s securities regulator convened executives of major investment banks in July 2021 in an attempt to ease fears about the crackdown on tutoring companies — to little obvious effect. Months later, state media ran a front-page commentary assuring readers that China wasn’t turning anti-capitalist. A sweeping set of promises made in March this year to make the regulatory process more transparent and predictable was seen as another appeal to investors, one reiterated in May by Premier Li Keqiang.

4. Are investors convinced?

Not entirely. While it’s clear there’s money to be made for those who carefully read the messages out of Beijing, the market remains vulnerable to the Communist Party’s opaque and unpredictable decision making. There are questions over policy credibility, with investors seeking clarity from authorities — and follow-through — on their pledges to support markets. On the tech front, traders are so nervous that in May, Alibaba Group Holding Ltd. lost $26 billion in value within minutes after an individual who shared co-founder Jack Ma’s surname was accused of endangering national security. (It turned out not to be him.) Xi’s commitment to a Covid Zero strategy, despite the social and economic cost to cities like Shanghai, has also left investors wondering how far the party will go to pursue the priorities of one man.

Author: Sofia Horta e Costa, Bloomberg

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