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This year has been unsettling for Chinese companies. The ruling Communist Party has attacked the private sector industry by industry. The stock markets have taken a huge hit. The country’s largest real estate developer is on the brink 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 triple their exposure to China.
“Is China investable? JP Morgan asked, before responding, “We think so.” Goldman Sachs says “yes” too.
Their optimism in the face of growing uncertainty has intrigued Chinese pundits and drew criticism from a wide political spectrum, from George Soros, the progressive investor, to Republicans in Congress. Mr. Soros called BlackRock’s position a “tragic mistake” which is “likely to cost its clients money” and “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 offers global investment firms greater opportunities to serve Chinese businesses 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 told the Financial Times that China was under-represented in the portfolios of global investors 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 is now presenting itself as an increasingly lonely voice pleading for more engagement with China. Both US political parties are calling for a tougher stance. Positions have also hardened in other countries. The broader business world has become more ambivalent: it still sees China as a huge market, but issues such as trade, intellectual property, and government support for local businesses have 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 just a few brutal orders, Beijing has brought the internet industry to its knees, slashed after-school tutoring activity, and drove some real estate developers to the brink of bankruptcy.
Didi, China’s leading rideshare company, was a Wall Street darling when it went public in New York at the end of June, raising more than $ 4 billion. Its share price fell by nearly half after the Chinese government decided 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 in late July that Westerners should not interpret Beijing’s crackdown as “Communist Party leaders 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, which describes China as an “undiscovered” market, has hired a former regulator to run its business 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 concerns about US funds investing in China. A U.S. government pension fund halted plans to invest in Chinese stocks last year after growing criticism that the move could run counter to national security goals.
Matthew Pottinger, deputy national security adviser to former President Donald J. Trump, recently warned in Foreign Affairs that these institutions “cling to self-defeating habits acquired over decades of” engagement, “an approach to China, which 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 about what will happen 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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