This year has been a tumultuous one for the sugar business. The ruling Communist Party has gone after the private sector industry by industry. The stock markets have suffered a tremendous setback. The country’s largest property developer is on the verge of collapse.
But for some of Wall Street’s biggest names, China’s economic prospects are looking better than ever.
BlackRock, the world’s largest asset manager, urged investors to triple their investments in China.
“Is China Investable?” “We think so,” asked JPMorgan before answering. Goldman Sachs also says yes.
His bullishness in the face of rising uncertainty has stunned Chinese experts and drawn criticism from a broad political spectrum, from progressive investor George Soros to congressional Republicans. Soros called BlackRock’s stance a “tragic mistake” that is “likely to lose money” for its customers and “would harm the national security interests of the US and other democracies.”
But Wall Street sees opportunity. Even as Beijing tightens its grip on trade and the economy, it is giving global investment firms more opportunities to serve Chinese companies and investors.
At the height of the market sell-off in late July, the deputy chair of China’s securities regulator, Fang Jinghai, called executives from BlackRock, Goldman Sachs and other firms to a meeting, trying to ease investor panic over Beijing’s action. , according to a memo I reviewed.
Some 20 days later, regulators approved BlackRock’s application to offer mutual funds in China. Around the same time, a BlackRock executive told The Financial Times that China was under-represented in global investors’ portfolios and in global benchmarks. The firm recommended that investors increase their allocation by two to three times.
BlackRock said in a statement that its global clients “could benefit from portfolio diversification that includes more deliberate asset allocation to China,” adding that Wall Street’s expansion into China is in line with the policy goals of the US government.
Goldman Sachs and JPMorgan declined to comment.
Wall Street now stands as the single voice arguing for greater engagement with China. Both American political parties are demanding a tough stand. In other countries the situation has become dire. The broader business world has become more ambivalent; It still sees that China has a huge market, but issues such as trade, intellectual property and government support of domestic businesses complicate their traditional support.
Wall Street may be right to be bullish. China has disregarded recession predictions in the past. Despite the party’s authoritarian rule in other respects, it has long brought a touch of laissez-faire to the economy, helping growth.
But China’s top leader, Xi Jinping, is leading the country into a more uncertain era. The party’s rule is stricter and more authoritarian than ever. It has not widely abandoned market principles because it needs economic growth to maintain its legitimacy, but it is tinkering with tighter controls. The long-term impact is far from clear.
This summer, China’s private sector suffered its hardest hit by the Communist Party in decades. With only a few abrupt orders, Beijing brought the Internet industry to a knee, sharply cutting back on after-school tutoring businesses and pushing some property developers to the brink of default.
Didi, China’s leading ride-hailing company, was a darling of Wall Street when it went public in New York in late June, raising more than $4 billion. Its stock price has fallen by nearly half after the Chinese government limited its trading two days after listing, leaving many investors – including US funds – in limbo.
“I don’t think we can use spreadsheet-type thinking to take a view on China in 2020 and beyond,” said researcher George Magnus of China from Oxford University. The country is passing through “a sharp left-wing leaning in politics”, he said, “which is creating a profound contradiction between the craving for political control and the desire for good economic and innovation outcomes.”
“I think the former,” said Magnus, “is bound to win.”
Some of Wall Street’s biggest names disagree. Ray Dalio, founder of hedge fund Bridgewater, wrote in late July that the West should not interpret Beijing’s actions as “communist party leaders showing their true anti-capitalist stripes”. Instead, he wrote, the party believed those moves were “better for the country, even if shareholders don’t like it.”
Relations with Bridgewater have been good so far. Dalio’s firm has raised billions of dollars from clients in China such as China Investment Corp, Sovereign Wealth Fund and the State Administration of Foreign Exchange, which manages the country’s currency reserves. (Bridgewater declined to comment.)
It’s a balance that trade has played with China for a long time: say nice things to Beijing, lobby on China’s behalf back home, then ask for access to markets and capital.
Goldman Sachs in December became the first foreign bank to seek outright ownership of a securities business in China. BlackRock, which describes China as an “overlooked” market, has hired a former regulator to head its China business. There is a talent war with so many global financial firms expanding into the country.
Wall Street firms argue that, despite regulatory risks and slow growth, China is too big to ignore and its shares too undervalued to pass up.
Many investors have heard. According to Morningstar, US mutual funds and exchange-traded funds investing primarily in China have net assets of $43 billion at the end of August, up 43%, or $13 billion, from a year earlier.
Many companies and investors have made a lot of money from China over the years. And despite cold talks between the two sides, they still share extensive business ties. China makes iPhones and buys iPhones. Same with Chevrolet. China’s economic growth, at a slower pace, is still stronger than in most places. It won’t change overnight.
But while Wall Street is cheering on China, the balance between engaging with Beijing and facing Beijing has struck. And US lawmakers have launched an investigation into those ties. Elected representatives of both the Democratic and Republican parties have expressed concern about the investment of US funds in China. A US government retirement fund halted plans to invest in Chinese stocks last year as criticism grew that the move could work against national security goals.
Matthew Pottinger, a deputy national security adviser under former President Donald Trump, recently warned on foreign affairs that these institutions “cling to self-destructive habits acquired during decades of engagement,” an approach to China. Which prompted Washington to prioritize economic cooperation and trade. And above all.”
Compared to Wall Street’s confidence, China’s business community is worried about what lies ahead. The wealthiest people are pledging to spend millions, sometimes billions, of dollars on charities and other projects to keep up with Xi’s goal of “shared prosperity.”
Access to senior Chinese policymakers doesn’t work its magic like before. Stephen Schwarzman, the head of private equity giant Blackstone, has a longstanding relationship with the Chinese leadership. He is tougher than the country’s economic czar Liu He. Still, his firm was forced to withdraw a $3 billion deal to buy Soho China, a property developer, in September because they failed to obtain regulatory approval. Blackstone declined to comment.
Wall Street firms are clearly betting that China’s past successes will continue. They have a long track record, but they do well to remember what they consistently tell their customers: Past performance is not necessarily indicative of future results.