US Funds Remain Cautious of Investing in China Despite Xi's Assurances

As recently as October, some of the world's money managers were lamenting the loss of China as an attractive investment destination under President Xi Jinping. However, many believe that the country still has great potential for investment.

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Since then, a lot has changed. Xi Jinping has made a series of market-friendly changes to his landmark policies, and as a result, China's assets have become some of the best performers in the world. The MSCI China Index has gained about 50% since October, outperforming every other major stock index. China's junk dollar debt has returned more than 40%, and the yuan has posted a record two-month gain.

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Although the initial panic may be subsiding, the underlying case for a bearish investment outlook on Chinese markets has not changed for many investors who have withdrawn from these markets over the past two years. Significant losses have taken their toll, especially among US funds who remain just as underweight Chinese stocks as they were in October, according to Morgan Stanley’s quantitative research.

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Zevin Asset Management, a responsible-investment firm based in Boston, sold all its China exposure last year and is among the skeptics.

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Sonia Kowal, president at the fund manager, said that they are long-term investors and haven't seen any evidence that the long-term risks of investing in China have fallen. She noted that the government is still strongly autocratic, with a sole central decision maker who is only market friendly when it suits his agenda.

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As 2023 begins, one of the key questions confronting money managers is whether China is truly investable again. Signs that global economic growth is slowing due to rapid central-bank policy tightening is weighing on markets around the world, but the China rebound story is one of the few bright spots in an otherwise darkening investment landscape.

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Beijing's decision to crack down on its most profitable companies following the onset of the pandemic in 2020 showed little regard for global investors. This move caused distrust and confusion among investors about the Communist Party's goals, especially after Russia attacked Ukraine. Xi's decision to stick to a Covid Zero strategy while other countries abandoned it only made matters worse.

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US-based funds are still not investing heavily in China, according to a Morgan Stanley analysis. This is because they are more conservative about the country's long-term growth prospects, the analysts said in a research note this month.

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According to Brendan Ahern, chief investment officer at Krane Funds Advisors LLC, a manager of China-focused exchange-traded funds in the US, pessimism toward Chinese assets appears to be a "uniquely American quality."

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The wariness toward Chinese assets reached its zenith in October when Xi secured a third term as president surrounded exclusively by close allies. This made many people concerned about what would happen next, as it seemed that Xi was consolidating his power.

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Xi Jinping has given no indication that he is willing to abandon his "common prosperity" agenda, which has seen him exert greater state control over companies and the economy. Some analysts argue that the recent pivots are just tactical shifts to revive growth, with his campaign leading to newly defined limits for the private sector. Jack Ma gave up control of his Ant Group Co. just days after approval was granted for a unit to raise funds, while state-owned developers are set to play a bigger role in the sector.

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As the global economic outlook brightens, more and more investment funds are turning to China for opportunities. This is a trend that is likely to continue, as China's economy continues to grow at a rapid pace.This influx of capital is providing a boost to China's economy, and is helping to finance a number of important projects. These include the development of new infrastructure, the expansion of existing businesses, and the launch of new ventures. All of this is helping to create jobs and drive economic growth.

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China's credit crunch has eased for big borrowers after President Xi Jinping's recent policy pivot. This is good news for the country's economy, which has been struggling in recent months. The credit crunch had been one of the main factors weighing on the economy, so this easing will be welcomed by businesses and consumers alike.

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Xi Jinping's unpredictable leadership style has led to a $100 billion rally in the Chinese stock market, as investors try to anticipate his next move. This has led to some abrupt shifts in the market, as investors attempt to second-guess the Chinese leader.

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Morgan Stanley has joined Goldman Sachs in issuing a bullish call on Chinese assets. Both firms believe that the Chinese economy is on track for a strong recovery, and that this will lead to higher prices for stocks, commodities, and other assets.

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There are many reasons to be bullish in the short term. Of course, the stock market has been on a tear lately, and many believe that there is still room to run. Additionally, corporate earnings have been strong, and the economy is showing signs of life. All of these factors point to a positive outlook in the short term.

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Xi's new government is dismantling Covid Zero, reopening borders, wrapping up the rectification of the country's tech giants and easing up on the property industry's deleveraging drive. Geopolitical tensions are also cooling as key trade links with Australia resume, and Beijing's foreign envoy speaks fondly of his "friends" in the US. Valuations for Chinese assets are still low relative to pricey markets such as the US.

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According to Rob Mumford, an emerging-markets fund manager at GAM Hong Kong Ltd., the China trade is currently one of the most favorable opportunities available. "Suddenly you got all the key narratives turning positive all at once, with prices at very depressed levels," he said. "There's little controversy there - everyone is on the same page."

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Mumford says that many investors remain cautious about investing in China beyond the current rebound. He notes that there is still a great deal of uncertainty surrounding whether or not Xi's policy and economic priorities have actually changed. This makes it difficult for asset allocators to make decisions about investing in China in the long term.