Markets (Page 8)

Is the “smart” money still fleeing China? Whether it’s wise to leave Asia’s biggest economy is debatable. What’s not is that the mainland billionaire emigration trend continues and that their ranks have thinned by more than a third in just the last three years.

The latter dynamic, tracked by research group Hurun, spotlights how the fallout from the last few years of government crackdowns, slowing economic growth, volatile equities and property collapse is catching up with Xi Jinping’s policymakers and complicating their efforts to counter Wall Street worries that China has become “uninvestable.”

To be sure, the “avoid-China” vibe isn’t what it was, say, six months ago. As Nicholas Colas, co-founder of research firm DataTrek, notes, the recent “surprise announcement of aggressive fiscal and monetary policy action is spurring a reappraisal of the view” that Chinese equities are uninvestable.

“China’s leadership has finally acknowledged that the country’s economy needs much more monetary and fiscal stimulus if it is to achieve its growth potential over time,” Colas says.

Billionaire David Tepper has been making his own headlines by declaring it time to buy “everything” in China. And after “running around the world” in recent weeks, Kinger Lau, chief China equity strategist at Goldman Sachs, says that “for some investors who haven’t really looked at China over the past one to two years, certainly, the interest level has picked up a lot”

As Lau tells the South China Morning Post, “I’m not saying everyone is buying. But the level of interest has picked up a lot, very much consistent with the flows and positioning.” He’s among many who now see “upside” for Chinese equities.

Where this leaves China’s remaining billionaires in US dollar terms – Hurun says there are now 753 versus a peak of 1,185 in 2021 – is debatable. What’s clear, though, is that the stakes surrounding next week’s gathering of the standing committee of National People’s Congress are rising.

Rarely has there been a better opportunity for Xi’s inner circle to reassure the billionaire set at home and global funds abroad.

“The announcement of the NPC Standing Committee meeting for November 4-8 reflects Beijing’s strategic approach to the major economic policy U-turn underway,” says economist Diana Choyleva at Enodo Economics.

Choyleva noted that “by scheduling the meeting immediately after the US presidential election on November 5, the Chinese leadership has positioned itself to announce fiscal measures with full knowledge of the electoral outcome, enhancing its ability to manage market expectations and responses effectively.”

Next week’s confab will “allow Chinese policymakers to fine-tune their announcements and potentially adjust the scale or presentation of stimulus measures based on the new geopolitical context,” she says.

Choyleva notes that “a better-coordinated approach to policy announcements could actually enhance market stability. Investors should view the timing as a sign of careful planning rather than delay, particularly given the potential for more comprehensive and strategically calibrated announcements.”

Billionaires and global funds alike are craving a “well-thought-out approach” that “sets the stage for more impactful and sustainable market responses,” Choyleva says. “For investors, this timing and a more coordinated policymaking reduces uncertainty by ensuring that China’s fiscal response will be announced with full knowledge of the US political landscape, potentially leading to more stable and sustained market reactions rather than volatile short-term responses.”

The potential wildcard of a Donald Trump 2.0 presidency would be a game-changer for Asia, starting with a 60% tax on all Chinese goods that would upend Asian growth and supply chains.

Derek Holt, Bank of Nova Scotia’s head of capital markets economics, speaks for many when he warns that “Trump’s plans risk being highly destabilizing to world markets in a much more fractured world.”

Investors everywhere are bracing for a supersized US trade war in the event of a second Trump White House, including Europe. Germany’s recession is already casting a pall over European markets.

“In a worst-case scenario of a full-blown tariff war with retaliation, we estimate potential for a mid to high single-digit drag on European earnings-per-share growth,” says Barclays Plc strategist Emmanuel Cau. A “big chunk” of analysts’ worry more than 10% growth in earnings next year could disappear as trade tensions spike, he notes.

One worry is Trump’s desire to add fiscal stimulus via giant tax cuts into an economy that doesn’t need it. “The US economy doesn’t need pump-priming, it’s in excess demand and will remain there next year,” Holt notes. And while “the US needs to assert control over its borders, Trump’s extreme immigration policies would severely damage the US economy.”

Trump’s desire to weaken the US dollar also would increase inflation risks, complicating hopes the Federal Reserve might cut interest rates. Not that Vice President Kamala Harris has a great track record in global market circles, Holt notes. As a US senator in 2020, Harris was one of only a few lawmakers who voted against a revised US-Mexico-Canada trade agreement.

In Holt’s view, “it’s a matter of picking the one you think will be less damaging. As a professional economist, I have no doubt that this means voting against Donald Trump and the weak self-serving men behind him.”

Yet risks abound as the US national debt tops the US$35 trillion mark. “America’s fiscal position is living on borrowed time and the more damage that’s done now, the higher taxes will go in the future in a potentially more divided and more dangerous world,” Holt explains.

Reassuring China’s billionaires and overseas funds requires bold and transparent action by Xi’s inner circle. 

Earlier this month, Beijing cut borrowing costs, slashed banks’ reserve requirement ratios, reduced mortgage rates and unveiled market-support tools to put a floor under share prices. Beijing is telegraphing bolder fiscal stimulus steps.

Team Xi also raised the loan quota for unfinished housing projects to 4 trillion yuan (US$562 billion), nearly double the previous amount. The bump was less than markets wanted, but pledges of more come has limited big negative market reactions.

The bigger issue, though, is repairing the balance sheets of giant property developers. Success in devising a mechanism to dispose of toxic assets could go a long way toward reassuring investors.

Xi’s inner circle has surely demonstrated it knows what’s needed to turn things around and reassure its capitalist class: a clear strategy to strengthen the finances of good-quality developers; incentivizing mergers and acquisitions; improving capital markets so that consumers stop seeing property as their only investment option; creating social safety nets so that households spend more and save less.

Beijing also must allay concerns that the tech crackdowns that began in late 2020 are over and done with.

Xi has left it to Premier Li Qiang to make the case for a more dynamic, competitive and predictable China. In January, Li said that “choosing investment in the Chinese market is not a risk, but an opportunity.”

He stressed that “investing in China will bring huge returns and a better future” and described CEOs on hand as “participants, witnesses, and beneficiaries of China’s reform and opening up.”

China, Li added, “stands ready to seriously look into and solve the difficulties and problems encountered by foreign enterprises” operating in the country. “We will take active steps to address reasonable concerns of the global business community,” Li said.

The bottom line, says Fred Hu, CEO of Primavera Capital Group, is that if China “really commits to rule of law and market reforms, I do think the confidence will slowly but surely come back, then the animal spirit will be rekindled.”

One reason the clock is ticking in Xi’s reform plans is that the 10-year mark of his “Made in China 2025” scheme is fast approaching.

When he took the reins of power in 2012, Xi promised to let market forces play a “decisive” role in Beijing’s decision-making. In May 2015, Xi unveiled his ambitious plan to morph China into a high-tech Mecca for semiconductors, renewable energy, electric vehicles, biotechnology, aerospace, artificial intelligence, robotics and green infrastructure.

A decade on, progress has been more sporadic than hoped. Team Xi has often proved better at treating the symptoms of China’s economic funk, not the underlying ailment. 

It’s a lesson Japan taught the world: throwing money at an economy traumatized by plunging property values and deflationary pressures won’t work without supply-side moves to repair cracks in the economy.

Late last year, Xi introduced the buzz-phrase “new quality productive forces.” Though somewhat cryptic, Xi’s inner circle has been selling it as the answer to China’s economic future.

China wants to get its consumers to spend more and save less to keep growth near 5% year after year. That means continuing to raise incomes and building more robust social safety nets to encourage spending. It means creating deeper, trusted capital markets so the average Chinese can invest in stocks and bonds — not just real estate.

Beijing’s extreme focus on boosting consumption over the years has proved counterproductive, economists say. It leaves China susceptible to boom-and-bust cycles that require urgent attention at the expense of moving the economy upmarket. China’s heavy reliance on exports leaves the economy vulnerable to Trump-like antics.

There’s no better alternative to accelerating and broadening China’s evolution into a high-tech powerhouse, development experts say. And indications are, this is precisely the pivot Xi and Li are making as 2025 approaches.

At the NPC in March, Xi’s Communist Party said “it’s imperative to boost the endeavors to modernize the industrial system, and accelerate the development of new productive forces.” Billionaires skittish about China’s prospects couldn’t agree more. The days and weeks ahead offer Xi a ready opportunity to do just that.

Follow William Pesek on X at @WilliamPesek

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