TheEconomistMay28th 2022 Finance&economics 65
peditinglongpromisedreforms,eventu
allyallowingforeignfinancialgroupsto
whollyowntheironshorebusinesses.
Thepolicieswerea clearsignthatBei
jingmeantbusiness.AndtheWestrecipro
cated.In 2018 msciaddedChineseshares
to its flagship emergingmarkets index.
Otherindexinclusionsfollowed,creating
a floodofforeigncapitalintoonshoreChi
nesesecurities.Betweenthestartof 2017
anda peakattheendof2021,foreignfinan
cialexposuretoyuandenominatedassets
morethantripledto10.8trnyuan.
Thatelationhasfizzled.Manyforeign
investors simply grew too enthusiastic
aboutChinaandchosetoignoretherisks,
saysHughYoung ofAberdeen,anasset
manager.Butthemarketiswakingup.The
viewfrommanyinvestorsisthat,although
Chinahasneverbeenmoreopentoforeign
capital, ithasalsonotbeenthisideologi
callyinflexibleinrecentmemory.
China’ssupportforRussia hasfedcon
cernsoveritsclaimonTaiwan,whichit
vowseventuallytotakebackbyanymeans
necessary.Geopoliticalconcernssuchas
thisarepartofa broadrecalibrationofthe
risksassociatedwithChina.“Policyrisk
hasincreasedmarkedly,”saysNeilShear
ingofCapitalEconomics,a researchfirm.
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 five
yearcallthatChineseequitieswouldeven
tuallybecomea “coreassetclass”.
Thisshifthascontributedtoa foreign
selloffofonshorestocksandbonds.The
unpopularityofyuandenominatedbonds
hasalsobeendrivenbya weakercurrency
andhigherinterestratesinAmerica.The
valueofforeignheldequitiesinChinafell
bynearly20%inthefirstthreemonthsof
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
outflowstocontinueuntilthereismore
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
economyandtechfirmswillreturn.
Thiscampincludesmanyoftheinvest
mentmanagerswhohavesloggeditoutin
Chinafordecades.Globalbankshavebeen
tellinginvestorsfor 20 yearsthattheChi
nesemarketisa onewaybet.Onlya war
overTaiwan,ora hotconflictofthatna
ture,couldupendthatnarrative,saysone
foreignbankerinChina.
ThepessimisticviewisthatMrXiisse
riousaboutthedirectioninwhichhehas
takenChinaoverthepasttwoyearsand
thatthefuturewillbefarmoreideological.
s&p, a ratingagency,warnedonMay19th
thatpolicyshockstoeducation,housing,
labourandsocialwelfarecouldcontinue
foryears.Globalinvestorshavebeenslow
tograspthesignificanceofChina’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 offices 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 TransPacific
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 IndoPacific 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