‘No Rule of Law’: Investors Divided by Chinese Markets

‘No Rule of Law’: Investors Divided by Chinese Markets

Chinese authorities were now focusing on social issues and social engineering at the expense of capital markets, she said. Now, her portfolio contains stocks from the country only if the companies are “currying favour” with Beijing. Cathie Wood, the chief executive of Ark Invest and one of the most closely watched investors, told an audience of institutional fund managers on Thursday that her fund has “dramatically” slashed its exposure to China since late last year. Foreign investor jitters reflect a 10-month period in China that has been marked by a series of sudden offensives by Xi in the business and economic sphere. These unexpectedly harsh interventions have created a sense of unpredictability that some investors and analysts have said could make the country’s vast markets effectively uninvestable.

Managers running active global equity funds have chopped their allocations to China and Hong Kong to the lowest level in four years, according to Copley Fund research, a data provider. Looking at a sample of 381 funds with more than $1tn in assets, Copley calculated that just over a quarter now hold more Chinese and Hong Kong stocks than the benchmark global index. In early 2015, a peak of 45 per cent of investors held such outsized bets on China. “BlackRock’s wrong,” the famously outspoken 91-year-old former hedge fund manager said, having previously warned that investors in China face “a rude awakening” because “Xi regards all Chinese companies as instruments of a one-party state”. 

“You don’t know what Chinese companies are being run for — profits or the government,” said one London-based hedge fund manager. “There is no rule of law. Avoid China — or be an insider.” But this week threw the disagreement into the open when BlackRock, the world’s largest asset manager, announced on Wednesday it had raised $1bn for its first mutual fund in China, seduced by the chance to tap into the country’s growing savings market. Just a day earlier, billionaire financier George Soros wrote in the Wall Street Journal that BlackRock’s move into China was a “tragic mistake”.

But as some foreign investors packed their bags, others — many of which have poured years of investment into the country — are standing firm.  Ray Dalio, the founder of Bridgewater Associates, the world’s biggest hedge fund, told a Bloomberg event on Wednesday that China and Singapore are “a part of the world that one can’t neglect and not only because of the opportunities it provides, but you lose the excitement if you’re not there”. The latest development came in mid-August when a Communist party committee declared that it was necessary to “regulate excessively high incomes”, spurring a wave of charitable donations and pledges by leading private sector entrepreneurs to show their alignment with the policy priorities. Stocks in the world’s biggest luxury goods companies, whose growth has been turbocharged by China, also dropped on this apparent aversion to conspicuous consumption.

Chinese authorities have also indicated they might clamp down on so-called variable interest entities — legal structures that underpin $2tn of the country’s stocks on US markets. These vehicles have facilitated foreign investment into companies such as Alibaba and Tencent.  Almost no sector has remained untouched by the Communist party’s “common prosperity” campaign, which has included a crackdown on China’s biggest tech companies and on real estate speculation, strict limits on the amount of time young people are allowed to play video games, and a ban on the for-profit education sector. 

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