OPINION: Why we need to talk about China

By MICKEY ALAM KHAN

Investors are preparing themselves for the next steps in the Chinese Communist party’s crackdown on the private sector, which has already hit the property, ecommerce, education, fashion, media, fintech, taxi-hailing and gaming industries.

Beijing’s crackdown, under President Xi Jinping’s new “Common Prosperity” agenda, has pushed Hong Kong’s Hang Seng index down more than 16 percent year-to-date, while the onshore CSI 300 index has fallen 6 per cent over the same time, even as the MSCI EM ex-China index has held firm.

It is an understatement to say the Chinese clampdown has hugely impacted the country’s economy. The most at risk industry is real estate, particularly the residential sector.

China has experienced an unprecedented property boom over the past 20 years, but it now looks like this is coming to an abrupt end. Evergrande, the largest real estate firm in China, has reported massive debts and is in real danger of going bust.

One of the main causes is China’s birth rate – in reality, it is significantly lower than the figures show.

A key reason why middle-class Chinese families are not willing to have more than one child is that they want to make sure that their offspring will have a prosperous future.

As a result, a nationwide tutoring industry has blossomed, overseen by Chinese companies that are backed by U.S. investors. These examples of commercial education businesses were recently banned in the country and subsequently became a key element in the sell-off in New York-listed Chinese companies. 

Behind the scenes the Chinese government took a stake and a board seat in TikTok owner ByteDance earlier this year. The move gives China one seat on a three-seat board of directors and access to the inner workings of a company that has one of the globe’s biggest storerooms of personal data. 

The market has been aware that the Chinese government is taking influential stakes in Alibaba and its subsidiaries. 

However, it seems Beijing does not fully understand how these markets operate. As a result, the sell-off was allowed to go too far and began to impact Chinese objectives in the world.

Recognising this, Beijing’s financial authorities have moved heaven and earth to reassure overseas investors. International markets have responded with a powerful show of confidence.

But could this all be a deception?

It is well-known the country’s leader, Mr. Xi, regards all Chinese firms as instruments of the state.

Indeed, investors buying into Chinese companies could face a rude awakening. This includes not only those investors who are conscious of what they are doing, but also a much larger number of consumers who have investment via pension funds and savings. 

Beijing’s pension fund managers claim that they factor environmental, social and corporate governance (ESG) standards into their investment decisions.

However, the MSCI All Country World Index (ACWI) – the benchmark most widely followed by global equity asset allocators – begs to differ, with Chinese companies representing just a third of total investments.

So how can we deal with Beijing?

The United States Congress could pass a bill requiring that asset managers invest only in companies where actual governance structures are both transparent and aligned with stakeholders. This rule could apply to the performance benchmarks selected by pensions and other retirement portfolios.

If Congress were to enact these measures, it would give the U.S. Securities and Exchange Commission the tools it needs to protect U.S. investors, including those who are unaware of owning Chinese stocks and Chinese shell companies. That would also serve the interests of the U.S. and the wider international community of democracies.

Many influential economists have warned the public of the risks that they take by investing in China.

Yet, foreign investors who choose to invest in China find it remarkably difficult to recognise these risks. They have seen China confront many obstacles and always come through with flying colours. But Xi Jinping’s China is not the China they know.

President Xi is putting in place a rebooted version of Mao Zedong’s party.

No investor has any experience of this China because there were not even stock markets in Mao’s time. Hence the potential false dawn that awaits them.

Some comments from this article originally appeared in CoStar News.

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