Xi has made China a pariah for global investors

On a recent trip to London, Citigroup’s Asia-based research team found what they called a “surprisingly low level” of client engagement toward China. Discussions that analysts Gaurav Garg and Johanna Chua had with macro investors centred on the direction of China’s growth and stimulus policies, the analysts wrote in a July 7 report. Clients were largely focused on India and Korea markets instead, they said.

Krane Funds Advisors LLC – a manager of China-focused exchange-traded funds – faced significant pushback from clients at a roadshow in May, Xiaolin Chen, who manages KraneShares’s business outside the US, said at a recent roundtable hosted by Funds Europe/Funds Global Asia. Investors said they didn’t have the confidence to invest in the country, according to Chen.

Carlyle Group’s new $US8.5 billion Asia fund will have a lower-than-normal exposure to China with markets such as South Korea, Southeast Asia, Australia and India picking up the slack, people familiar with the matter told Bloomberg this month. UK investment firm Artemis Investment Management LLP has less than 4 per cent of its global fund directly invested in China, mainly in state-controlled lender China Construction Bank, according to the fund’s manager Simon Edelsten.

Of course, completely divesting from China is not an easy decision, considering it is home to a $US21 trillion bond market and stocks valued at $US16 trillion onshore and in Hong Kong. Its government bonds still offer diversification, according to Pictet Asset Management’s Luca Paolini.

And it’s not as though there are a lot of attractive alternatives. Sri Lanka’s debt default and ongoing political crisis has fuelled concern about a wave of distress rippling through emerging markets, and the strong US dollar is adding to the pressure, forcing Chile’s central bank to intervene last week. Idiosyncratic risks – such as South Africa’s largest fuel producer declaring force majeure on the supply of petroleum products – are also still rife.

So, it’s perhaps less surprising that M&G Investments recently increased its exposure to Chinese stocks even if it required “the proper awareness, pricing and sizing of risk,” said Fabiana Fedeli, the firm’s chief investment officer for equities and multi-asset in London. And despite all the negativity, Rayliant Global Advisors saw the assets of its Quantamental China Equity ETF more than double to $US111 million since May.

“It’s become incredibly challenging to build a bullish structural story on Chinese assets.”

Ruffer’s chief economist Jamie Dannhauser

“We are seeing more contrarians looking to use our funds to rebalance into China,” said Jason Hsu, chief investment officer at Rayliant. “At this point, cutting out China is not really an investment decision. It is more of an emotional reaction and a career risk/optics decision.”

Such risks carry more weight at a time when making money in China has become difficult. The CSI 300 Index of stocks is down about 27 per cent from a peak 17 months ago, lagging the S&P 500 by almost 26 percentage points. Policy divergence with the US has wiped out China’s yield advantage over Treasuries for the first time since 2010, driving the yuan lower. Investors in China’s high-yield dollar bonds are sitting on year-to-date losses of 34 per cent – worse than even last year’s returns.

In the longer term, Ruffer’s team plans to implement its views on China’s economy via equities in Japan, the US and Europe instead. Similarly, Edelsten at Artemis says his fund opted for exposure through western consumer goods and Japanese automation companies with large Chinese order books.

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“Even if you have a positive macro view on China, it’s very, very hard internally to sell Chinese stocks,” Jamie Dannhauser, Ruffer’s chief economist, said in the same meeting last week. “It’s become incredibly challenging to build a bullish structural story on Chinese assets.”

Bloomberg

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