Global investors shun China as Xi's policies bite

HONG KONG • After drawing foreign capital into China's markets for years, President Xi Jinping is now facing the risk of a nasty period of financial deglobalisation. Investors point to one main reason why: Mr Xi's own policies.

Money managers once enticed by China's juicy yields and huge tech companies now say reasons to avoid the country outweigh incentives to buy. They cite everything from unpredictable regulatory campaigns to economic damage caused by strict Covid-19 policies, not to mention growing risks stemming from a wobbly real estate market and even Mr Xi's cosiness with Russian President Vladimir Putin.

It all marks a dramatic about-face for a market that had been developing into a magnet for investors from around the globe, a role that seemed to be China's destiny as the second-largest economy.

"The supertanker of Western capital is starting to turn away from China," said Mr Matt Smith of Ruffer, a US$31 billion (S$43.3 billion) investment firm that recently shut its Hong Kong office after more than a decade because of shrinking demand for on-the-ground equity research.

"It is just easier to put China aside for now when you see no end in sight from Covid-19-zero and the return of geopolitical risk," he added.

Mr Xi's government showed little regard for global investors last year when it unleashed a series of crackdowns on the country's most profitable companies. The result was distrust and confusion over the Communist Party's goals, as well as punishing losses for shareholders.

Wariness towards Chinese assets born during the trade war with the United States also increased this year after Russia attacked Ukraine and as Mr Xi insisted on pursuing a zero-Covid-19 strategy.

The caution is leaving a mark, with allocations to China among emerging-market equity funds falling to the lowest in three years, EPFR Global said in a report this month.

Rather than debate when to buy the dip in Chinese assets, discussions among global investors now focus more on how much to reduce exposure.

A Zurich-based investment manager said some European pension funds and charities no longer want China in their portfolios because of rising geopolitical and governance risks.

Of course, completely divesting from China is not an easy decision, considering it is home to a US$21 trillion bond market and stocks valued at US$16 trillion onshore and in Hong Kong. Its government bonds still offer diversification, according to Pictet Asset Management chief strategist Luca Paolini.

And it is not as though there are a lot of attractive alternatives. Sri Lanka's debt default and ongoing political crisis have fuelled concern about a wave of distress rippling through emerging markets, and the strong US dollar is adding to the pressure, forcing Chile's central bank to intervene last week.

So it is perhaps less surprising that M&G Investments recently increased its exposure to Chinese stocks even if it required "the proper awareness, pricing and sizing of risk", said Ms Fabiana Fedeli, the firm's chief investment officer for equities and multi-asset in London.

Despite all the negativity, Rayliant Global Advisors has seen the assets of its Quantamental China Equity ETF more than double to US$111 million since May.

"We are seeing more contrarians looking to use our funds to rebalance into China," said Rayliant chief investment officer Jason Hsu.

"At this point, cutting out China is not really an investment decision. It is more of an emotional reaction and a career risk/optics decision."

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