The Economist - UK (2022-05-28)

TheEconomistMay28th 2022 Finance&economics 65

peditinglong­promisedreforms,eventu­
allyallowingforeignfinancialgroupsto
whollyowntheironshorebusinesses.
Thepolicieswerea clearsignthatBei­
jingmeantbusiness.AndtheWestrecipro­
cated.In 2018 msciaddedChineseshares
to its flagship emerging­markets index.
Otherindexinclusionsfollowed,creating
a floodofforeigncapitalintoonshoreChi­
nesesecurities.Betweenthestartof 2017
anda peakattheendof2021,foreignfinan­
cialexposuretoyuan­denominatedassets
morethantripledto10.8trnyuan.
Thatelationhasfizzled.Manyforeign
investors simply grew too enthusiastic
aboutChinaandchosetoignoretherisks,
saysHughYoung ofAberdeen,anasset
manager.Butthemarketiswakingup.The
viewfrommanyinvestorsisthat,although
Chinahasneverbeenmoreopentoforeign
capital, ithasalsonotbeenthisideologi­
callyinflexibleinrecentmemory.
China’ssupportforRussia hasfedcon­
cernsoveritsclaimonTaiwan,whichit
vowseventuallytotakebackbyanymeans
necessary.Geopoliticalconcernssuchas
thisarepartofa broadrecalibrationofthe
risksassociatedwithChina.“Policyrisk
hasincreasedmarkedly,”saysNeilShear­
ingofCapitalEconomics,a researchfirm.
Thathasledinvestorstodemanda higher
riskpremiumonChineseassets.
Some leading investment groups are
startingtoairtheseviewsinpublic.Black­
Rock,a giantassetmanagerthathasbeen
expandingrapidlyinChina,saidonMay
9ththatithadshifteditssix­to12­month
viewofChineseequitiesto“neutral”from
“modestoverweight”.JuliusBaer,a private
bank,saidinAprilthatit wasendinga five­
yearcallthatChineseequitieswouldeven­
tuallybecomea “coreassetclass”.
Thisshifthascontributedtoa foreign
sell­offofonshorestocksandbonds.The
unpopularityofyuan­denominatedbonds
hasalsobeendrivenbya weakercurrency
andhigherinterestratesinAmerica.The
valueofforeign­heldequitiesinChinafell
bynearly20%inthefirstthreemonthsof
theyear,orbyabout755bnyuan.Muchof

thedropwasduetoa fallinstockvalua­

tions;thecsi300,a keyindex,isdownby

morethan17%sinceJanuary.Butforeign

investorsarealsoscalingbacktheirexpo­

sure. Totalforeignequityholdingshave

ebbedbyabout2%sofarthisyear,calcu­

latesGavekal,a researchgroup.Asa share

ofChina’sstockmarkettheyfellfromabout

4.3%attheendof 2021 tojustbelow4%in

March.Aninterest­ratecutbythecentral

bankonMay20thdidlittletobuoysenti­

ment.Severalportfoliomanagersexpect

outflowstocontinueuntilthereismore

clarityaroundeconomicpolicy.

Thegloomymoodhasbeenpainfulfor

China’ssmallanddiminishingcohortof

liberaltechnocrats,whoarestillpromot­

ingtheideaofanopenChinathatisatleast

mildlysensitivetotheconcernsofglobal

investors.Foryearsregulatorshaveused

carefully timedreforms to reward loyal

long­terminvestors.Assentimentsoured

inApriltheysucceededindeliveringlong­

awaitedprivate­pensionreformsinanat­

tempttowooassetmanagers.It wasa salve

regulatorshadbeenholdingonto,inthe

expectationthatsentimentwouldworsen

earlythisyear,saysonefundmanager.

Manyinvestorssee 2022 asa bellwether

yearforthedirectionofpolicy.Theopti­

misticoutlookisthatthisgloomyperiodof

ideology,policymisstepsandslowgrowth

ispartofthepreparationforthepartycon­

gress in theautumn. Once that passes,

pragmatistswillhavemorecontrolofpoli­

cy. Zero­covidwillend.Support for the

economyandtechfirmswillreturn.

Thiscampincludesmanyoftheinvest­

mentmanagerswhohavesloggeditoutin

Chinafordecades.Globalbankshavebeen

tellinginvestorsfor 20 yearsthattheChi­

nesemarketisa one­waybet.Onlya war

overTaiwan,ora hotconflictofthatna­

ture,couldupendthatnarrative,saysone

foreignbankerinChina.

ThepessimisticviewisthatMrXiisse­

riousaboutthedirectioninwhichhehas

takenChinaoverthepasttwoyearsand

thatthefuturewillbefarmoreideological.

s&p, a ratingagency,warnedonMay19th

thatpolicyshockstoeducation,housing,

labourandsocialwelfarecouldcontinue

foryears.Globalinvestorshavebeenslow

tograspthesignificanceofChina’spolicy

changes,saysNikolajSchmidtofT.Rowe

Price,aninvestmentmanager.Itisunlike­

lythingswillreturntonormalsoon.

MrXi’szero­covidpolicyandtheunre­

lentinglockdown ofShanghai havealso

raisedconcernsaboutChina’sleadership.

Someinvestorsworrythatthecountryhas

turneditsbackongrowth;thatzero­covid

couldbea signofa factionalstrugglein

Beijing;orthatitwilleventuallyleadto

one.“Wheninvestorshearthey’regetting

draggedintopolitics,that’swhentheyget

nervous,”saysSeanDebowofEurizonCap­

italAsia,anassetmanager.

Oneprobableoutcomeinthemonths

aheadisa growingdivergencebetweenthe

investors outsideChina andthose with

large offices inside the country. Many

groupsthathave workedfordecades to

openupinChinaarecontinuingtohire

staff.Investorsthathaveaccessedtheon­

shoremarketthroughHongKong,bycon­

trast,maycontinuetoreducetheirexpo­

sure.Ifanything,investinginChinawill

onlybecomemoredivisivethisyear.n

Ebbandflow

China,foreignholdingsofonshoreassets

Yuantrn

Sources: Standard Chartered Research; Wind

12

9

6

3

0

2014 16 18 2220

Loans

Deposits

Equities

Bonds

The roof falls in

China, high-yield bonds issued

Source:Dealogic *To May 20th

60

40

20

0

0.2

0.3

22*192017

Value, $bn

Property Other

200

150

100

50

0

22*192017

Volume

TheIndo-Pacificeconomy

A new pact for Asia

A

mere threedays after being sworn in

as  president  in  January  2017,  Donald

Trump  signed  an  executive  order  with­

drawing  America  from  the  Trans­Pacific

Partnership  (tpp),  a  12­country  free­trade

deal he had railed against on the campaign

trail.  On  May  23rd,  488  days  after  his  own

swearing­in,  President  Joe  Biden  tried  to

reverse some of the damage by unveiling a

new pact, the 13­country Indo­Pacific Eco­

nomic  Framework  (ipef).  That  Mr  Biden

took  so  much  longer  to  launch  his  Asian

trade policyillustrates one basic truth: it is

far easier to tear up agreements than it is to

craft them anew.

Inevitably, one way to look at the ipefis

by  way  of  comparison  to  the  tpp(which

lives on in reduced form, absent America).

Some bits sound rather familiar. One sell­

ing­point for the tppwas that it was a “21st­

century  trade  agreement”  complete  with

high  standards  for  workers’  rights  and  e­

commerce  rules.  The  ipefis  also  “a  21st­

century  economic  arrangement”,  accord­

ing to Jake Sullivan, America’s national se­

curity  adviser.  The  original  tppmembers

accounted  for  nearly  40%  of  global  gdp,

WASHINGTON, DC

Just don’t call it a trade deal