馃攳
International investors in China鈥檚 companies face growing risks | FT - YouTube
Channel: Financial Times
[2]
Some people are kind of calling
this the Chinese Lehman moment.
[5]
They don't know which
sector might be the next.
[8]
China is very much not
invited to the party.
[11]
It really is a
treacherous market.
[15]
Here's a big question for 2022.
[18]
How on earth do you make
money from investing
[20]
in Chinese stocks?
[22]
2021 was the point where
for global investors
[24]
putting money to work in China
really hit the mainstream.
[28]
This hit the skids
in dramatic fashion.
[30]
In August a clampdown on
profit-seeking education
[33]
companies hammered
stocks in that sector.
[36]
Next came video games.
[37]
Now the big risk
comes from property,
[40]
where developers are crumbling
under mountains of debt.
[43]
Mix in the new variant of Covid,
and does investing in China
[46]
still make sense?
[48]
It's a few months now since
some of the top global investors
[51]
said that China
was uninvestable.
[54]
And yet Chinese stock prices
have been marching higher
[57]
over the past 18 months.
[59]
So some investors are
clearly making money.
[62]
One strategy being employed
by domestic investors
[65]
is to invest along with the
Chinese Communist party.
[70]
But needless to say, this
raises some ethical issues
[74]
for many global investors.
[78]
We're almost living in a
kind of rolling crackdown
[81]
when it comes to
China's approach
[82]
to international investors now.
[84]
The signs have been there
for quite a long time.
[86]
You look back to the end of 2020
and the IPO of Ant Financial
[92]
was torpedoed at
the last minute.
[94]
Last year we had a series
of unexpected salvos
[98]
against all kinds of different
elements of the Chinese stock
[101]
market.
[102]
What is going on?
[104]
Well, I think, really, the
Chinese Communist party
[106]
has decided that private
businesses in China
[108]
represent some kind of a threat.
[112]
In the case of the Ant
Group, this was clearly true
[115]
because it was projected that
Ant Financial was going to have
[119]
a market capitalisation greater
than the biggest state-owned
[124]
Chinese bank.
[124]
There's also another very
significant data privacy
[129]
and data control dimension.
[131]
In other words, the
Chinese Communist party
[133]
is simply not happy with
huge amounts of data
[136]
being in the hands
of private companies.
[138]
It wants greater oversight
and it wants greater control.
[141]
So what we've seen, really, in
this rolling crackdown in which
[146]
the share prices of
Alibaba, Tencent, DiDi,
[149]
and many of the other big
Chinese private tech company
[153]
names have been hit is
a haemorrhage in value.
[157]
Yeah.
[157]
I mean, Chinese
markets clearly lagged
[159]
far behind other big
benchmarks last year.
[163]
You see about a 5 per cent
move in the CSI 300 benchmark
[168]
of Chinese stocks, whereas
the S&P 500 moves up
[171]
something like 26 per cent.
[174]
China is very much not
invited to the party
[176]
when it comes to global stocks.
[179]
Many of the names that I just
mentioned - Alibaba, Tencent -
[182]
they were the go-to stocks
for international investors.
[186]
A lot of people are
saying that there
[188]
is value in the Chinese
market, but it's
[190]
a bit like the Chinese phrase
fishing in murky waters.
[194]
If you delve your hands
into the murky water,
[197]
you might come up
with a big fish,
[199]
but you don't know it's there
before you put your hands in.
[204]
So what a lot of
investors are saying
[205]
is that the way to stay in
China and make money out of it,
[209]
frankly, is to do what Xi
Jinping wants you to do.
[213]
Is to align yourself
with his agenda.
[217]
Now, it strikes me
that that's fine
[218]
as long as you think you really
understand what that agenda is.
[222]
To your mind, what do you
think are the priorities
[224]
and how can investors
coalesce around that?
[226]
There are certain areas
in which this definitely
[229]
seems to be a winning strategy.
[230]
For instance, there are 43
military-themed stock market
[235]
funds in China, and they
saw a 205 per cent increase
[240]
in their value in the year
to the end of June 2021.
[244]
Another one, of course,
in a very different aspect
[246]
of the economy is
climate change.
[248]
China really is
doing an awful lot
[251]
when it comes to deploying
climate-friendly technologies.
[254]
Renewable energy,
electric vehicles,
[256]
and a host of other
things as well.
[258]
And what we're
seeing in that area
[261]
is a huge amount of domestic
Chinese money flowing
[265]
in to funds that
invest in those areas.
[268]
But to be honest with you, a lot
of people are really confused.
[271]
They don't know when the next
bomb is going to explode.
[274]
They don't know
which sector might
[277]
be the next for the Xi Jinping
administration to target.
[280]
And that makes it
really treacherous.
[283]
Speaking of which, the
property sector accounts for,
[286]
what, a third of
the Chinese economy.
[288]
We've obviously seen Evergrande,
the property developer,
[292]
get itself into some real
difficulty with the amount
[294]
of debt that it had taken on.
[295]
But it's not just Evergrande.
[297]
There are plenty of other
property developers in China
[299]
that are in a similar situation.
[301]
And investors don't
feel like they
[302]
have a good sense of whether the
state will step in every time
[307]
to bail them out.
[309]
What's going on there?
[310]
How big of a risk is this
to the Chinese economy
[312]
and also to investors?
[314]
I think the key thing
to understand here
[316]
is that the unwinding
of Evergrande
[318]
is a symptom of a
much bigger issue.
[320]
And that issue is repairing
the Chinese growth model.
[324]
It's as fundamental as it comes.
[327]
This is going to take at
least 10 years to achieve.
[330]
There's a school of thought
that, look, what happens
[332]
in China stays in China.
[334]
This is all interesting
and it's definitely
[337]
a potential economic
drag, but it's not
[339]
likely to have
tendrils that ensnare
[343]
other bits of the
financial system
[344]
globally, whereas some people
are kind of calling this
[347]
the Chinese Lehman moment.
[349]
Is the truth somewhere
in the middle?
[351]
A lot of this stuff is insulated
from the outside world.
[355]
The main expression of
the property meltdown,
[357]
for instance, is in
the offshore bonds
[359]
that have been issued
by property developers.
[361]
And there we are
seeing huge haircuts
[364]
for international investors.
[365]
So that's not nice at all.
[367]
But aside from that we haven't
seen massive spillover effects.
[372]
The one big spillover
effect, I think,
[374]
that will become more
and more apparent
[377]
is going to be simply that China
has for at least two decades
[381]
been the leading generator
of global GDP growth.
[385]
And if the Chinese
economy slows,
[387]
as it is very strongly
now, then, of course,
[390]
that may no longer be the case.
[392]
We may even move to
a situation in which
[395]
the US is leading global
growth rather than China.
[401]
Going back to some of the more
granular Chinese crackdown
[405]
measures, one area that they're
really uncomfortable with
[408]
is overseas listings.
[410]
It's this vast system of
variable interest entities
[414]
where, effectively, Chinese
companies can list abroad
[417]
and global investors
can buy something
[419]
that very much
approximates normal shares
[422]
in these companies, but
without troubling some
[424]
of the restrictions that China
has on foreign ownership.
[428]
Beijing is clearly
keen to see a stop put
[432]
to this outflow of companies
onto public markets elsewhere.
[436]
What is its driving force here?
[440]
This is a really big issue.
[442]
The number of Chinese companies
listed on US stock markets
[447]
has reached over 250.
[449]
And their total market
capitalisation in May last year
[453]
was about $2.1tn US dollars.
[455]
So it's not small change
by any means at all.
[459]
Now, the question is
also pretty fundamental.
[462]
The question is, do these
companies, Chinese companies
[465]
listed in the US, deserve
to be invested in?
[468]
Or are they just
a withering asset?
[472]
Now, while this is all
going on, as you say,
[474]
the inflows into China
globally are still there.
[477]
And there's a number of some of
the biggest asset managers you
[480]
can think of - Goldman Sachs
Asset Management, JPMorgan
[483]
Asset Management,
Schroders, and Mundy
[485]
- all of these
massive global firms
[489]
are trying to get a
foothold in China itself
[491]
to sell their
products, effectively,
[494]
to this new Chinese middle class
and to this huge generation
[497]
of Chinese pensioners
that's coming through.
[500]
They feel like they've
got local partners,
[502]
they've got local expertise,
and this is something
[504]
that they can work on
for the really long term.
[507]
Are they taking on a
huge political risk here?
[511]
Or is this an opportunity?
[513]
I think there are risks
all over the park.
[515]
One is the political risk.
[517]
We spoke about the
ethical questions
[520]
that might surround investing
in a Chinese military-themed
[523]
company.
[524]
That's obvious.
[526]
There are governance questions
that abound in the Chinese
[530]
stock market...
[532]
not just the
relationship of a company
[534]
to the Chinese Communist
party, but also much
[537]
more granular stuff like,
what's the percentage
[540]
of the free float of a company?
[542]
Who's on the board?
[544]
What's the
transparency yardsticks
[546]
that that company adheres to?
[548]
And really, can you
understand their accounts?
[551]
And we haven't even
mentioned the big topic,
[554]
which is regulatory risk.
[556]
The risk that Xi Jinping
will wake up one morning
[559]
and decide that where you've
put all of your client's money
[562]
in China is now off limits.
[565]
It really is a
treacherous market.
[568]
And yet, as we discussed
at the beginning,
[570]
there are major and
very attractive returns
[574]
to be made if you can navigate
through the shoals of all
[578]
of these uncertainties.
[579]
Yeah.
[579]
Similarly, is
there a possibility
[581]
that Xi Jinping could
wake up one morning
[583]
and say, I don't
want western asset
[584]
managers to be selling products
to the Chinese population?
[588]
Chinese stock markets
still need the expertise
[592]
of foreign investors.
[593]
They don't so much
need the money,
[594]
but they definitely
need the expertise.
[597]
And this is what
the technocrats that
[599]
run China's financial system
still often talk about.
[604]
And I think from any objective
standpoint, that's also true.
[607]
So if China remains keen
on modernising its economy,
[611]
on getting the best research
and the smartest money flowing
[615]
in, I think the possibility
that they might just simply shut
[619]
down this avenue for foreign
money to get into Chinese
[623]
stocks is very low.
[625]
But you need nerves of steel.
[626]
It's going to be a
testing few years.
[627]
Thanks very much, James.
[628]
Thank you.
Most Recent Videos:
You can go back to the homepage right here: Homepage