Is China “uninvestable” and what does that mean?

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For more than a year, President Xi Jinping has spoken out against “the disorderly expansion of capital” by launching punitive regulatory and antitrust campaigns against the private sector, from Big Tech to after-school tutoring. This made life more difficult for investors who, since the global financial crisis, had largely benefited 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 news flow – have turned China’s financial markets into the most turbulent in the world. 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 it’s safe to return.

1. Where does the “uninvestable” label come from?

In mid-2021, Goldman Sachs Group Inc. said the word “non-investable” was starting to crop up in a number of client conversations about equities in the country. The backdrop 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 of that year, the shock decision of China to turn high-growth tutoring companies into nonprofits has triggered a meltdown. into their shares almost overnight. A month later, Paul Marshall, co-founder of hedge fund Marshall Wace, said Chinese companies listed in the United States were no longer worth the risk. When analysts at JPMorgan Chase & Co. this year called Chinese internet companies “uninvestable” and downgraded a number of stocks, their report helped wipe an estimated $200 billion from U.S. and Asian markets and prompted a Chinese tech company to downgrade the bank’s underwriting role on an upcoming IPO. (Analysts reversed the downgrades two months later.)

The debate has mostly centered on China’s crackdown on big business and alleged monopoly abuses in education, technology and property. But distrust of Chinese assets in general grew after Russia invaded Ukraine on Feb. 24, just weeks after Xi cemented a ‘limitless’ bond with Russian President Vladimir. Putin at a summit in Beijing. Investors feared that Chinese companies would be caught up in Western sanctions against Russia or, more broadly, that exposure to China would fit into a responsible investment framework. Norway’s $1.3 trillion sovereign wealth fund said in March it was excluding Chinese clothing company Li Ning Co. from its portfolio over concerns the sportswear maker could contribute to human rights abuses against the Uyghurs in the Xinjiang region. China’s more assertive rhetoric around Hong Kong and claims of sovereignty in the South China Sea contributed to another major investor’s decision to sell all of its holdings in China.

Yes and no. Xi’s government has shown little respect for global investors as it seeks to rein in ‘disorderly’ capital, complementing its campaign to rein in moguls and promote ‘common prosperity’ ahead of this year’s Communist Party Congress. year, where he should get a third defying the previous ones. term. But the damage to market sentiment may have been more severe — and lingering — than policymakers anticipated. China’s securities regulator summoned top investment bank executives in July 2021 to try to allay fears about a crackdown on tutoring firms — with little obvious effect. Months later, state media ran a front-page commentary assuring readers that China was not turning anti-capitalist. A sweeping series of promises made in March this year to make the regulatory process more transparent and predictable were seen as another call to investors, reiterated in May by Prime Minister Li Keqiang.

4. Are investors convinced?

Not entirely. While it is clear that there is money to be made for those who carefully read Beijing’s messages, the market remains vulnerable to the Communist Party’s opaque and unpredictable decision-making. There are questions over the credibility of the policies, with investors seeking clarification from the authorities – and follow-up – on their promises to support the markets. On the technology front, traders are so nervous that in May, Alibaba Group Holding Ltd. lost $26 billion in minutes after an individual who shared the last name of co-founder Jack Ma was charged with endangering national security. (Turns out it wasn’t 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. will go to pursue one-man priorities.

More stories like this are available at bloomberg.com

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