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Aug 23 (Reuters) - The conventional wisdom used to be that integrating China into the world economy would lead to the political liberalization of the country, but those hopes have faded as President Xi Jinping has set a hardline course on issues like the fate of Taiwan or workers’ rights.
The resulting risks for investors run throughout this week’s newsletter, including a most-read story about a fine against the U.S. investigative firm Mintz Group after an office raid and a look at how U.S. ETF investors are souring on putting money into China. You’ll also find some company news on China Evergrande and some stats on how the anti-ESG movement may not play well outside of U.S. Republican circles, ahead of tonight’s first party presidential debate. As always you can follow me on LinkedIn where I’ll welcome comments and feedback. If you have a news tip, potential content, or some general thoughts email me at:
This week's most read
* Investor pressure group urges G20 to reform agricultural subsidies
Investors have already heard Washington’s message on China Skepticism toward investing in China has become a rare point of U.S. bipartisan agreement, driving actions like an executive order from President Joe Biden prohibiting some holdings and congressional demands to big companies like BlackRock and MSCI. But many financial firms and investors are already convinced – BlackRock and MSCI included. Data from LSEG Lipper shows new support for “ex-China” emerging-market funds that exclude the country but otherwise give investors international exposure like the $4.9 billion iShares MSCI Emerging Markets Ex-China ETF and new ones like the $154 million Strive Emerging Markets Ex-China ETF. In all, such U.S.-based ex-China ETFs had net new deposits of $1.89 billion through July 31, easily on track to exceed their $2.4 billion of net inflow for all of 2022. Moreover that money accounted for 20% of all emerging-market inflows to U.S. ETFs so far this year, double its 10% share for all of 2022. “I think investors are avoiding allocation to China but still want a piece of the emerging markets sector,” said Jack Fischer, LSEG Lipper Senior Research Analyst. You could debate whether political tensions or performance risk is driving away money, but the two cannot be separated when it comes to investing in authoritarian countries. Fischer said a primary factor is uncertainty on what holdings Washington will allow. But he also noted China’s weak real estate and healthcare sectors, pulling down performance. The average total return of emerging market ETFs with less than 0.2% allocation to China through July was 12.38%, beating all emerging markets ETFs which had a total return of 11.8% over the same period. (China regional ETFs averaged just 1.3%). MSCI referred questions to BlackRock, which declined to comment. Strive Asset Management CEO Matt Cole said the risks of investing in China dwarf climate risk concerns and cited the “variable interest entities” used by U.S. investors to access many Chinese companies, lacking equity ownership. “In my view, the VIE risk is potentially the largest governance “G” risk in the investment universe right now, is completely unhedgeable, and makes China as a country uninvestable as a US investor,” Cole said. Others including H.K. Park, managing director for Washington consultancy Crumpton Global , see the ex-China ETFs themselves as a form of hedging, and said investors seem to be pausing new investments in China or shifting to ex-China investment strategies. While some of his firms’ clients continue to invest in China, Park said they are being more careful such as by checking to make sure target companies have no ties to the country’s army. ”They are now asking us to conduct rigorous national security assessments of Chinese companies as part of their investment calculus,” he said.
China’s markets could reverse course and reward investors who stay. But doing so means bucking public opinion. Consider that under a new law the Indiana Public Retirement System (INPRS) plans to divest from Chinese stocks, a move that system spokesman Dimitri Kyser told me will cost it $5.3 million in the first year and $700,000 thereafter in administrative and transaction expenses. Kyser added that “From a return perspective, the System may earn a lower rate of return by divesting from restricted holdings as the divestment reduces the geographic diversity of INPRS’s investments.” Company News
