Why Wall Street is supporting China despite Beijing's tighter grip

This year has been unsettling for Chinese companies. The ruling Communist Party attacks the private sector industry through industry ....


This year has been unsettling for Chinese companies. The ruling Communist Party attacks the private sector industry through industry. The stock markets have taken a huge hit. The largest real estate developer in the country is on the verge of collapse.

But for some of the biggest names on Wall Street, China’s economic outlook looks brighter than ever.

BlackRock, the world’s largest asset manager, has urged investors to increase their exposure to China up to three times.

“Is China investable? Asked JP Morgan, before responding, “We think so.” Goldman Sachs says “Yes,” too much.

Their optimism in the face of growing uncertainty has intrigued Chinese pundits and drawn criticism from a wide political spectrum, from George Soros, the progressive investor, to Congress. Republicans. Mr. Soros called BlackRock’s position a “tragic error” it is “likely to cost its customers money” and “will harm the national security interests of the United States and other democracies.”

But Wall Street sees an opportunity. Even as Beijing tightens its grip on business and the economy, it gives global investment firms greater opportunities serving Chinese companies and investors.

At the height of the market liquidation in late July, China Securities Regulatory Authority Vice Chairman Fang Xinghai called executives from BlackRock, Goldman Sachs and other companies to a meeting, trying to ease investor nervousness over Beijing’s crackdown, according to a memo I reviewed.

Some 20 days later, regulators approved BlackRock’s request to offer mutual funds in China. Around the same time, a BlackRock executive Recount The Financial Times said China was under-represented in global investor portfolios and in global benchmarks. The firm recommended that investors multiply their allocations two to three times.

BlackRock said in a statement that its global clients “may benefit from portfolio diversification that includes more deliberate asset allocation to China,” adding that Wall Street’s expansion in China is in line with policy objectives. from the US government.

Goldman Sachs and JP Morgan declined to comment.

Wall Street now presents itself as a increasingly lonely voice pleading for more engagement with China. The two Americans political parties call for a firmer stance. Positions have hardened other countries, too much. The broader business world has become more ambivalent: it still sees China as a huge market, but issues like trade, intellectual property and that of the government support for local businesses complicated their traditional support.

Wall Street may be right to be bullish. China has defied bearish forecasts in the past. Despite the party’s authoritarian rule in other areas, it has long brought a laissez-faire touch to the economy, promoting growth.

But Xi Jinping, China’s top leader, is bringing the country into a more uncertain era. Party rule is stricter and more authoritarian than before. It hasn’t abandoned market principles as a whole because it needs economic growth to maintain its legitimacy, but it is tinkering with tighter controls. The long-term impact is far from obvious.

This summer, the Chinese private sector suffered its most severe blows from the Communist Party in decades. With only a few abrupt orders, Beijing brought the internet industry to its knees, greatly reduced extracurricular tutoring companies and lead some real estate developers at the edge of the fault.

Didi, the leading carpool company in China, was a wall street darling when it went public in New York at the end of June, raising over $ 4 billion. Its share price fell by almost half after the Chinese government moved to limit its activities two days after its listing, leaving many investors – including US funds – in limbo.

“I don’t think we can use spreadsheet-like thinking to get a perspective on China in the 2020s and beyond,” said George Magnus, China researcher at the University of Oxford. The country is going through “a strong political swerve to the left,” he said, “which creates a deep contradiction between the thirst for political control and the desire for good economic performance and innovation.”

“I think the former,” added Mr. Magnus, “is doomed to win.”

Some of the biggest names on Wall Street disagree. Ray Dalio, founder of the Bridgewater hedge fund, wrote at the end of July that Westerners should not interpret Beijing’s repressions as “the leaders of the Communist Party showing their real anti-capitalist stripes”. Instead, he wrote, the party believed the measures were “better for the country even if shareholders don’t like it.”

The relationship has been good with Bridgewater so far. Mr. Dalio’s company has raised billions of dollars from Chinese clients such as the China Investment Corporation, the sovereign wealth fund and the State Administration of Foreign Exchange, which manages the country’s foreign exchange reserves. (Bridgewater declined to comment.)

It’s a balance that business has played with China for a long time: saying nice things to Beijing, lobbying at home on behalf of China, and then asking for access to markets and capital.

Goldman Sachs became the first foreign bank to seek full ownership of a securities firm in China in December. BlackRock, who describes China as a “undiscovered” Marlet, hiring a former regulator to run its activities in China. So many global financial firms are growing in the country that there is a war for talent.

Wall Street companies argue that despite regulatory risks and slowing growth, China is too big to ignore and its stocks are too undervalued to ignore.

Many investors have listened. U.S. mutual funds and exchange-traded funds investing primarily in China held $ 43 billion in net assets at the end of August, up 43%, or $ 13 billion, from the previous year. according to Morningstar.

Many companies and investors have made a lot of money over the years from China. And despite the frosty talks between the two sides, they still share extensive trade ties. China manufactures iPhones and buys iPhones. Ditto with the Chevrolets. China’s economic growth, while slowing, is still stronger than in most places. This will not change overnight.

But even as Wall Street encourages China, the balance between engaging with Beijing and facing Beijing has broken down. And US lawmakers are starting to scrutinize those links. Elected officials from the Democratic and Republican parties have expressed their concerns about US funds investing in China. A US government pension fund stopped plans to invest in Chinese stocks last year after growing criticism that the move could defeat national security goals.

Matthew Pottinger, deputy national security adviser under former President Donald J. Trump, warned recently in Foreign Affairs that these institutions “cling to self-destructive habits acquired over decades of” engagement, “an approach to China that has led Washington to prioritize economic cooperation and trade above all else.”

Compared to the confidence of Wall Street, the Chinese business community is nervous on what comes next. The richest people pledge to spend millions, sometimes billions of dollars, on charities and other projects in order to stay aligned with Mr. Xi’s “common prosperity” goal.

Access to top Chinese politicians is also not working as much as it used to. Stephen Schwarzman, boss of private equity giant Blackstone, has a long relationship with Chinese leaders. He is close to Liu He, the country’s economic czar. Still, his company was forced to cancel a $ 3 billion deal to buy Soho China, a real estate developer, in September after failing to obtain regulatory approval. Blackstone declined to comment.

Wall Street companies are apparently betting that China’s past successes will continue. They have a long history on their side, but they would do well to remember what they constantly tell their clients: Past performance is not necessarily indicative of future results.

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Newsrust - US Top News: Why Wall Street is supporting China despite Beijing's tighter grip
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