The long-held view of many investors that China’s currency and markets will one day be central to global finance to match the world’s second-largest economy looks at best worn out after the horrific 2021 and geopolitical earthquake in China. February.
The COVID pandemic has been accompanied by so many left-wing upheavals that continue to be enthusiastic in China during draconian growth-retarding activities that asset managers are forced to reconsider and reconsider their long-term beliefs.
The main debate between foreign funds about China is to what extent the recent investment crisis is cyclical, related to COVID and simply a temporary reset of political priorities – or how it completely destroys the vision.
And for an increasing number of spending units, Russia’s invasion of Ukraine and the dramatic Western financial sanctions that have followed have indeed completely changed the calculations.
Less than three weeks after the Olympic summit of Vladimir Putin and Xi Jinping strengthened an alliance opposed to Western powers in the pursuit of a new world order, the invasion disrupted geopolitics and Beijing refused to condemn the attack on Ukraine or sever ties with Moscow.
The risk of sanctions, whether hypothetical about China’s future military activities or ties to Russian economic entities, has increased for investors.
And all this in addition to China’s 2021 general prosperity campaign, which has suffered a series of repressions over fundraising and profits in its digital, commodity and education sectors.
The collapse of China’s real estate sector and the resulting debt restructuring have only heightened the pressure. Now, “zero” quarantine measures in Shanghai and elsewhere over the past month have led to China’s growth forecast for 2022 being lowered to 4% and below.
As foreign investors have struggled to exit over the past two months, the painful low performance of Chinese stocks has recovered with renewed vigor for most of the past five years, with its core indexes 20-30% lower since 2017.
Moreover, the evaporation of China’s significant margins on US Treasury bond yields – largely due to the Fed’s response to the recent energy price shock – has also led to a flight of investors when the fixed-income market also took over.
And to end the trio, the sudden fall of the offshore yuan against the dollar in April by more than 4% – the largest monthly shift in 12 years – was probably the result of this outflow of capital and largely not diminished by the authorities. .
“In my opinion, this is just the beginning,” said Yves Bonzon, chief investment officer of Swiss asset management manager Julius Baer, adding that the yuan could weaken another 5% fairly quickly.
Graph: Chinese yuan and premium profitability – https://fingfx.thomsonreuters.com/gfx/mkt/akvezynmdpr/Two.PNG
Schedule: Foreign funds seize Chinese bonds – https://fingfx.thomsonreuters.com/gfx/mkt/lgvdwgxokpo/Four.PNG
Graph: Chinese stocks show low for 5 years – https://fingfx.thomsonreuters.com/gfx/mkt/dwvkryjzzpm/Five.PNG
TWICE IN A LIFE
In addition to this tactical call from the market, Mr. Bonzon is one of those who believes that the world has changed and that the invasion of Ukraine means that it is important to consider geopolitics in cross-border investment, for the first time since the fall of the Berlin Wall 40 years ago.
The February invasion was “one of the two most important moments in my career,” he said.
In practice, Julius Baer’s first change in his long-term strategic asset allocation was the complete withdrawal of Chinese stocks as a separate “core” investment – reducing Chinese direct investment in stocks to zero and integrating this risk into broader Asian benchmarks.
China may not be “non-investment”, but from now on it will be only on a tactical or thematic basis.
“Investor capital risks not only being reduced due to the tightening of Chinese government regulation, but also depreciating due to Western sanctions if diplomatic relations deteriorate.”
This view may not yet be unanimous.
Other asset managers believe that this will also happen, and that policies, markets and investment theses may change very quickly.
Matt Quaif, Fidelity’s chief asset manager for many in Asia, said this week that while the next few months will be very difficult for Chinese markets, dizzying gaps between some Chinese technology companies and their Western counterparts and fears at the top may offer a mean . urgent opportunities.
But at the heart of investors’ reluctance is a growing lack of confidence in the political parameters surrounding investment in China more broadly, undermining the whole premise of the internationalization of the yuan as a future means of preserving value or a reserve currency.
PIMCO strategist Gene Frieda believes that the effects of the decision to freeze Russia’s foreign exchange reserves have actually overshadowed the use of the yuan, rather than improving it, as some have claimed in recent months.
“The risk of sanctions against China and, indeed, China’s increasingly conservative economic policies run counter to the growth of the yuan as a reserve currency,” Frieda wrote. “The lesson from Russia is that sanctions on foreign exchange reserves can be strong, effectively forcing the country to make its currency unconvertible.”
“The yuan’s share of world reserves in world reserves, although it is expected to grow, is likely to be limited to single-digit averages.”
Graph: real effective exchange rates – https://fingfx.thomsonreuters.com/gfx/mkt/zgpomljkopd/One.PNG
Graph: Yuan share in world foreign exchange reserves – https://fingfx.thomsonreuters.com/gfx/mkt/byvrjnxqove/Three.PNG
The author is the editor-in-chief of financial and market affairs at Reuters News. All the opinions expressed here are his own.