hot from Russia, investment funds are cautious in China

The scale and coordination of Western sanctions against Russia, triggered by President Vladimir Putin’s invasion of Ukraine on February 24, stunned financial markets and left managers with billions of dollars in assets that suddenly lost all value overnight.

While such a move against China seems far-fetched given its economic size and the vast amount of foreign money flowing into it, it is a risk many are unwilling to ignore.

“The global investment community is on notice that if another geopolitical event occurs, the precedent for these very restrictive and punitive sanctions has already been set,” said Bill Campbell, portfolio manager at DoubleLine Capital, which manages $122 billion in assets.

Jeffrey Gundlach, CEO of DoubleLine, called China an investment-friendly country because of sweeping regulatory measures, forced divestments and the last-minute suspension in late 2020 of billionaire Jack Ma’s Ant group’s multibillion-dollar initial public offering.

Mr Campbell said there was a “new paradigm” in place where geopolitical events threatened to have an “immediate impact on investments and indices”, pointing to tensions over Taiwan and in the South China Sea as potential flashpoints with the West.

China’s huge weighting in stock and bond indexes means investors, including his company, need some exposure. DoubleLine bought bonds from regional development banks and used other Asian countries as proxies for China to avoid tying up too much money there.

Tensions between China and the United States have simmered for years over issues ranging from international trade to intellectual property rights, but Washington recently told Beijing it would face consequences if it supported Russia’s military effort in Ukraine, which the Kremlin calls a “special military operation.”

The United States says China has largely complied with the restrictions, but last week it blacklisted five Chinese companies for allegedly supporting Russia’s military-industrial base.

A bill introduced in the US Senate also threatens Beijing with sanctions for aggression against Taiwan, an island China claims as its territory.

Flavio Carpentzano, chief investment officer of Capital Group, which manages $2.6 trillion in assets, reduced his exposure to Chinese government bonds after the Russian invasion.

“That doesn’t mean we think China is uninvestable, or that we expect a clash with Taiwan tomorrow, but volatility will remain high and we don’t think profit is priced in that volatility,” Carpentzano said.

BlackRock, the world’s biggest asset manager and a longtime China bull, cut its outlook on Chinese stocks in May, warning that the risks of a military clash with Taiwan would increase as the decade wore on.

PERU RISK

According to the Institute of International Finance, from January to March, investors withdrew more than $30 billion from China.

Lockdowns due to COVID-19, tensions in the real estate sector and rising US Treasury yields are driving these capital outflows, but the IIF also highlighted the “perceived risk of investing in countries with difficult relations with the West”.

Still, the country’s economic recovery, defying recession fears in the West, fueled net inflows of $11 billion into Chinese stocks last month, according to Refinitiv Eikon data.

“There is a dearth of things to buy today that can go up in price,” said Mike Kelly, head of multi-assets at PineBridge Investments, which holds dollar bonds in China’s real estate sector and is among those buying Chinese shares again. .

Mr Kelly said no one would be comfortable buying from China, but he was confident that “if they do anything in Taiwan, it won’t be done in the next two years”.

INDEX GIANT

Many argue that the sheer size of China’s economy and markets makes sanctions less likely because they would hurt the West far more than restrictions on Russia. The implications for global financial markets will also be far greater.

According to JPMorgan estimates, foreigners own 5% of stocks and a smaller share of bonds in the $30 trillion global market.

The amount of foreign cash invested in index-tracking products could prove to be a drag, given that China accounts for 40% of emerging equity indexes and 10% of JPMorgan’s GBI-EM emerging market benchmark.

Before the invasion of Ukraine, Russia had a 6.1% share in the benchmark debt index.

The dispute between Russia and Ukraine has prompted a flood of questions from clients about China risks, particularly in equities, the head of emerging markets strategy at a major bank told Reuters.

The strategist, who declined to stay, said clients valued money to allocate “a market that you can’t get out of quickly.”

The asset manager, WisdomTree, runs a fund that excludes Chinese state companies and “is likely to launch (ex-China strategies) short-term based on our own analysis of market opportunities,” said Jeremy Schwartz, chief executive. investments of the company, which manages assets worth 79 billion dollars.

PineBridge’s Kelly said those investing in China should be prepared for sudden changes.

“The risk is that you invest, they bet on you, and all of a sudden you get caught,” he said.