27-10-2022, 01:31 PM
Avoid regret. Respect the warning signs.
Investors cannot trust their investments in China.
https://www.barrons.com/articles/china-c...1666713641
China’s twice-a-decade Communist Party Congress is over and, as expected, President Xi Jinping solidified his grip on power. Less expected, foreign investors found so little to cheer about that a wave of money rushed out of China-focused funds and equities. Investor misgivings are not misplaced. The flight of capital signals not only a serious question over prospects for China’s growth, but also about the tightly prescribed role for private business and investment going forward. Life is about to become even more difficult for U.S. firms.
Market reaction has been swift and unforgiving. Hong Kong-listed stocks hit their lowest mark in over a decade and the yuan continued to weaken to levels not seen since early 2008. Chinese investors also retreated from the Shenzhen and Shanghai markets, down 5% and nearly 4% respectively from last week’s highs before the meeting concluded with new appointments.
Investors have realized that economic liberalization lost out to Xi Jinping Thought —more command and control, less freewheeling capitalism. This singular ideology guides party, state, and military. Technocrats and reformers have been replaced by staunch loyalists. The debate has ended over the pace of change, the role of state-owned enterprises, engagement with the outside world, and military expansion. Nationalists with a hard-line approach at home and abroad are firmly in command.
This is a stark, but not entirely unsurprising, outcome of Xi’s increasing concentration of control. His image has risen to Mao-like stature. He has stated numerous times that he aims to redistribute wealth, promote China’s system of governance as a direct alternative to the developed West, continue to build a forceful military, and drive domestic innovation.
The sell-off shows that foreign businesses are slower off the mark. They have sunk costs that will be difficult to reverse, and many still see opportunity in a country with such a large, albeit strained, consumer base.
The main risk lies with companies that can be easily targeted by nationalistic sentiment in China, which is any foreign company with operations in China. U.S. firms face a daunting future there as the Biden administration ramps up more trade restrictions that may expand into investments as well.
Beijing has yet to respond to the passage of the U.S. Chips Act, which restricts sales of highly advanced chips and chip-making equipment to China, and puts licensing requirements on U.S. persons working at some Chinese semiconductor fabrication facilities. Now that Xi’s position for a third term is secured, expect more strains on bilateral relations and some sort of retaliatory action.
Foreign-company concerns are well-founded. Beijing has taken quick retribution over issues of far less concern than the future of its technological base. Australian coal and Norwegian salmon exporters that ran afoul of China’s ideology had their sales halted. Japanese businesses including clothing chain Uniqlo were targeted in 2012 over territorial disputes between Tokyo and Beijing that resulted in a consumer backlash and a temporary shutdown of stores. Some, like South Korea’s Lotte department stores, exited the country altogether after China objected to Seoul’s use of a U.S. missile-defense system.
More so than ever, foreign businesses are at risk of being caught in the middle as great power politics trump economics. Cisco , Apple , and Microsoft are among the particularly vulnerable if China decides to crack down on the foreign tech sector, but others may be dragged down by a rise in indiscriminate, anti-U.S. sentiment that can be turned on and off at will through powerful state control.
It’s incumbent on U.S. firms to take these risks seriously and plan accordingly. There is no question which way China is going to take, and it isn’t in a market-friendly, business-focused direction. Whatever profits still accrue by staying will be harder to achieve, and those firms that fit most closely with Beijing’s interests for building domestic industries are the most likely to be rewarded.
It’s no wonder Tesla ’s CEO, Elon Musk, decided to court favor for his vulnerable electric-vehicle sales there. He sided with Beijing by calling for Taiwan to become part of the mainland. That won him accolades in the state-run press, a bellwether for Chinese government sentiment toward foreign firms, and a tax break shortly thereafter. Japan clothing retailer Muji also toed the party line by publicly advertising its use of Xinjiang cotton, indirectly supporting Chinese policies on the Uighur population there that the U.S. government has called forced labor.
Perhaps Presidents Biden and Xi can find some accommodation if they meet at the G20 Summit in Bali this November. That’s still a big if. Strongly aligned interests are increasingly hard to find. And China is bound to react negatively as the U.S. ramps up more pressure on tech transfers. That gives diplomatic agenda-setters a nearly impossible task to orchestrate potential breakthroughs.
The conclusion of the Party Congress in Beijing on Sunday marks a new and more difficult era for commercial interests in China as political ideology becomes more prominent. Foreign businesses and investors will need to shift strategies in response. Capital flight and a weakening yuan are just the beginning of tougher days ahead.
[i]Guest commentaries like this one are written by authors outside the Barron’s and MarketWatch newsroom. They reflect the perspective and opinions of the authors. Submit commentary proposals and other feedback to [/i][i]ideas@barrons.com[/i][i].[/i]
Investors cannot trust their investments in China.
https://www.barrons.com/articles/china-c...1666713641
China’s twice-a-decade Communist Party Congress is over and, as expected, President Xi Jinping solidified his grip on power. Less expected, foreign investors found so little to cheer about that a wave of money rushed out of China-focused funds and equities. Investor misgivings are not misplaced. The flight of capital signals not only a serious question over prospects for China’s growth, but also about the tightly prescribed role for private business and investment going forward. Life is about to become even more difficult for U.S. firms.
Market reaction has been swift and unforgiving. Hong Kong-listed stocks hit their lowest mark in over a decade and the yuan continued to weaken to levels not seen since early 2008. Chinese investors also retreated from the Shenzhen and Shanghai markets, down 5% and nearly 4% respectively from last week’s highs before the meeting concluded with new appointments.
Investors have realized that economic liberalization lost out to Xi Jinping Thought —more command and control, less freewheeling capitalism. This singular ideology guides party, state, and military. Technocrats and reformers have been replaced by staunch loyalists. The debate has ended over the pace of change, the role of state-owned enterprises, engagement with the outside world, and military expansion. Nationalists with a hard-line approach at home and abroad are firmly in command.
This is a stark, but not entirely unsurprising, outcome of Xi’s increasing concentration of control. His image has risen to Mao-like stature. He has stated numerous times that he aims to redistribute wealth, promote China’s system of governance as a direct alternative to the developed West, continue to build a forceful military, and drive domestic innovation.
The sell-off shows that foreign businesses are slower off the mark. They have sunk costs that will be difficult to reverse, and many still see opportunity in a country with such a large, albeit strained, consumer base.
The main risk lies with companies that can be easily targeted by nationalistic sentiment in China, which is any foreign company with operations in China. U.S. firms face a daunting future there as the Biden administration ramps up more trade restrictions that may expand into investments as well.
Beijing has yet to respond to the passage of the U.S. Chips Act, which restricts sales of highly advanced chips and chip-making equipment to China, and puts licensing requirements on U.S. persons working at some Chinese semiconductor fabrication facilities. Now that Xi’s position for a third term is secured, expect more strains on bilateral relations and some sort of retaliatory action.
Foreign-company concerns are well-founded. Beijing has taken quick retribution over issues of far less concern than the future of its technological base. Australian coal and Norwegian salmon exporters that ran afoul of China’s ideology had their sales halted. Japanese businesses including clothing chain Uniqlo were targeted in 2012 over territorial disputes between Tokyo and Beijing that resulted in a consumer backlash and a temporary shutdown of stores. Some, like South Korea’s Lotte department stores, exited the country altogether after China objected to Seoul’s use of a U.S. missile-defense system.
More so than ever, foreign businesses are at risk of being caught in the middle as great power politics trump economics. Cisco , Apple , and Microsoft are among the particularly vulnerable if China decides to crack down on the foreign tech sector, but others may be dragged down by a rise in indiscriminate, anti-U.S. sentiment that can be turned on and off at will through powerful state control.
It’s incumbent on U.S. firms to take these risks seriously and plan accordingly. There is no question which way China is going to take, and it isn’t in a market-friendly, business-focused direction. Whatever profits still accrue by staying will be harder to achieve, and those firms that fit most closely with Beijing’s interests for building domestic industries are the most likely to be rewarded.
It’s no wonder Tesla ’s CEO, Elon Musk, decided to court favor for his vulnerable electric-vehicle sales there. He sided with Beijing by calling for Taiwan to become part of the mainland. That won him accolades in the state-run press, a bellwether for Chinese government sentiment toward foreign firms, and a tax break shortly thereafter. Japan clothing retailer Muji also toed the party line by publicly advertising its use of Xinjiang cotton, indirectly supporting Chinese policies on the Uighur population there that the U.S. government has called forced labor.
Perhaps Presidents Biden and Xi can find some accommodation if they meet at the G20 Summit in Bali this November. That’s still a big if. Strongly aligned interests are increasingly hard to find. And China is bound to react negatively as the U.S. ramps up more pressure on tech transfers. That gives diplomatic agenda-setters a nearly impossible task to orchestrate potential breakthroughs.
The conclusion of the Party Congress in Beijing on Sunday marks a new and more difficult era for commercial interests in China as political ideology becomes more prominent. Foreign businesses and investors will need to shift strategies in response. Capital flight and a weakening yuan are just the beginning of tougher days ahead.
[i]Guest commentaries like this one are written by authors outside the Barron’s and MarketWatch newsroom. They reflect the perspective and opinions of the authors. Submit commentary proposals and other feedback to [/i][i]ideas@barrons.com[/i][i].[/i]
