Investors Cautious of Chinese Assets Amid Growing Political Risk

In the latest instance of strategic concerns outweighing attractive returns, many major fund managers are avoiding Chinese assets, despite the country’s post-COVID surge in the stock market. The Hang Seng index in Hong Kong has risen by 50% in the three months up to January’s end.

However, foreign investment has declined, and brokers believe that much of the rally can be attributed to hedge funds seeking swift profits. In the long term, investors are apprehensive about the conflict between Ukraine and the consolidation of power by President Xi Jinping in China.

Additionally, the growing competition between China and the United States is another cause of concern. Some have noted the increased risk of conflict between Taiwan and China. Others observe that the war in Ukraine has led to the formation of new diplomatic and trade alliances.

As a result, China and the West are increasingly on opposing sides, which introduces new risks when investing in the world’s second-largest economy. “As American investors, we must consider whether we are supporting the economic development of an adversarial government,” stated Kevin Philip, a partner at Bel Air Investment Advisors in Los Angeles, which manages over $9.5 billion in assets for more than 350 high-net-worth families, individuals, and foundations. “For investors who share this concern, there are numerous other opportunities available outside of China.”

Investors Hesitant to Allocate Capital in Chinese Assets

The choppy and fickle price action suggests that other investors are also holding back their money.

According to monthly data, the investment in equity funds focused on China reached its highest point in eight months at $15.4 billion in December but decreased significantly to $4.3 billion in January. The flow of money through the stock Connect scheme, which permits foreign access to companies listed in mainland China, has also slowed down to about 20 billion yuan ($3 billion) this month, down from 64 billion yuan in January.

Goldman Sachs analysts noted that “long-duration capital managers are somewhat hesitant to deploy fresh capital to work,” indicating an uncertain geopolitical situation between the US and China, despite the potential for large returns. The Shanghai Composite rose by 15% between October and January, but there are concerns that this could signal a structural downgrade for Chinese assets.

Will Malcolm, a portfolio manager at Aviva Investors based in Singapore, has raised concerns about the need to be more discerning on exposure to different areas of the Chinese market, despite benefiting from three months of gains. His fund is overweight in Chinese stocks, but he is now reducing that position.

CEO Greg Bond of Man Numeric, which manages assets for sovereign wealth funds, pension plans, foundations, and endowments, has observed that some institutional investors are reconsidering allocations despite the opportunities available. Some clients view the world as China and ex-China when thinking about emerging markets.

Foreign investment in China is cautious

It cannot be denied that foreign interest in China exists, but decision-makers may be waiting for the right opportunity. Recently, Hesai Group, a Chinese sensor manufacturer, garnered $190 million from a U.S. IPO. Although geopolitical concerns are valid, the magnitude of China’s economy cannot be overlooked, according to Alice Shen, a senior associate at Sydney-based fund manager VanEck.

To navigate the situation, she recommends investing in the onshore A-share market, which is relatively more protected from external shocks than ADRs and H-shares. Societe Generale’s Kiyong Seong, the lead Asia macro strategist in Hong Kong, anticipates a significant change in sentiment when economic data shows a resilient recovery in spending and demand.

This could potentially attract investments quickly, but the behavior of large investors thus far indicates that a major shift in sentiment is necessary. One chief investment officer at a U.S. corporate pension fund, who spoke anonymously, commented that China is going to make an effort to draw back investors, but people are cautious due to recent geopolitical incidents. If people were less cautious, there would have been an influx of capital into China.

Source: Reuters

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