Moves (Page 63)

As Xi Jinping’s regulators tighten their grip on quantitative trading, they are inadvertently giving global investors another reason to make ill-timed comparisons to 2007.

In August of that year, as US subprime debt troubles were starting to bubble up, a bunch of model-driven hedge funds suffered their own “quant quake,” a phrase now being applied to China.

Drawing such comparisons clearly isn’t Beijing’s intention. But they come at a moment when many global investors wonder if China is having its own “Lehman moment” amid cratering property and stock values.

Odds are, China isn’t, as scores of Asia Times articles have argued in recent months. The market forces in 2007 and 2008 that toppled Lehman Brothers were of a different nature than those plaguing China Evergrande Group or Shanghai trading pits.

Yet the quant crackdown fits with a disturbing pattern that helps explain why foreign investors are so skittish on Chinese markets. It’s a reminder of how mixed messaging can cause confusion at a moment when Xi is struggling to revive foreign interest in the stock market — while doing things that scare investors off.

Forty months on, Wall Street is still trying to figure out what’s going on with Jack Ma and the much-anticipated Ant Group initial public offering. Despite countless tries, Team Xi never managed to explain that episode — or myriad crackdowns on tech platforms since.

By late 2023, stung by debates about whether China is “uninvestable,” it seemed Team Xi was turning the page. In the last 10 days of last year, though, regulators unveiled plans for a crackdown on the gaming industry.

Though Beijing tried to walk back the news, it was too late as investors feared broader curbs on tech platforms. Tencent alone saw tens of billions of dollars fleeing its shares.

And then just when investors started to dip their toes again in Chinese tech shares, Beijing announced it had amended the State Secrets Law to expand coverage to high-tech industries. The pivot is effective May 1.

Even if this step, which Beijing says supports the research and application of new technologies, is a wise one, confusion and mixed signals abound. Meanwhile, headlines concerning Hong Kong’s latest move to implement a new local National Security Law hardly help.

The law, foreign investors fear, would go further to remake what was once the globe’s freest economy in Beijing’s highly controlled image. Its vaguely worded provisions allowing prosecution for offenses from “treason” to “insurrection” to “sabotage” to theft of “state secrets” to “external interference” have investment banks and news organizations in a whirl.

Beijing’s quant ban, meanwhile, is triggering the PTSD of all too many investors still trying to make sense of the events of late 2020. The good news is that next week affords Xi and Premier Li Qiang an ideal opportunity to change the narrative and regain reformist momentum.

The annual National People’s Congress opens on March 5. Along with setting China’s gross domestic product (GDP) target, the NPC is a chance to articulate plans for economic reforms and reboot Xiconomics for the duration of Xi’s third term as party leader.

“We continue to expect an ambitious growth target of around 5% of real GDP growth and more supportive fiscal policy this year,” analysts at Goldman Sachs wrote in a note. “Key topics to monitor during this year’s ‘two sessions’ include discussions about the government’s ‘new model’ for the property sector, local government financing and fiscal reforms, as well as other demand-side stimulus such as support to consumption.”

Both Xi and Li proved in recent months that they know how to calm nerves among the foreign investment set, particularly when it comes to the globe’s most important bilateral trade relationship.

In November, Xi told a ballroom full of top CEOs that China is again open for business and ready to work with the US. “China is willing to be a partner and friend of the United States,” Xi told an audience that included Apple CEO Tim Cook and Tesla CEO Elon Musk.

“If we regard each other as the biggest rival, the most significant geopolitical challenge and an ever-pressing threat, it will inevitably lead to wrong policies, wrong actions and wrong results,” Xi said.

He added that “no matter how the global landscape evolves, the historical trend of peaceful coexistence between China and the United States will not change.”

In Davos in January, Premier Li said that “choosing investment in China is not a risk, but an opportunity.” Li said “investing in China will bring huge returns and a better future” and described the CEOs on hand as “participants, witnesses and beneficiaries of China’s reform and opening up.”

China, Li said, “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.

To Michael Hirson, China economist at 22V Research, the speech was indicative of “Li’s desire to set a confident tone for the global audience.”

Xi’s government, in other words, knows how to talk the talk global investors want to hear. In a January 16 speech to top party officials, for example, Sinologists were intrigued by how much time Xi spent talking about the financial system.

These days, “the financial system is all the rage in policy circles,” Trivium consultancy analysts wrote in a note. That same week, Trivium notes, top Communist Party’s top theorist Qu Qingshan argued that “only by accelerating the construction of our financial power and continuously improving our country’s competitiveness and voice in international finance can we seize the initiative in the game of great powers.”

Yet Xi’s team has significant work to do to clarify where Beijing plans to take the reform process next. At present, many foreign investors are at a crossroads on whether to double down on China or reduce exposure.

“Low valuations are typically associated with higher future returns, although of course there are no guarantees,” says Henry Ince, an analyst at Hargreaves Lansdown. “Our conversations with fund managers have painted a mixed picture: some remain cautious on the outlook ahead but others believe some companies offer compelling value at current market prices.”

The confusion of recent months – years, actually – also has many Chinese innovators unsure on how to proceed. As Fred Hu, CEO of Primavera Capital Group, tells Bloomberg, “Chinese entrepreneurs are lying low, or lying flat. This sense of insecurity, in my observation, in the Chinese entrepreneur community, is really — I have not seen it like this since 1978.”

That was the year then-leader Deng Xiaoping launched epochal reforms to propel China from the Cultural Revolution era. Hu notes that “the single biggest priority in my mind is legal reform, is really to establish true rule of law that is essential for the healthy function of a modern market economy, which China is.” That, Hu says, means ensuring that entrepreneurs feel protected from “arbitrary political interference and worse, even prosecution.”

The bottom line, Hu says, 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.”

The NPC is a timely opportunity for Xi to allay fears that he plans to continue concentrating power and enabling state-owned industries to grow their dominance. All this means the most powerful Chinese leader since Mao Zedong is on the clock with markets as never before.

Li, too. Seen by many as a champion of high-tech entrepreneurship, the hope is that Li will have more clout and autonomy with Xi to raise China’s innovative game than his predecessor, Li Keqiang. That might enable Xi’s “common prosperity” plan to gain greater traction to raise living standards at all income levels.

Beijing could do so next week by signaling an acceleration in steps to repair the property sector, strengthen capital markets, champion the private sector, recalibrate growth engines from exports to domestic demand, internationalize the yuan and build bigger social safety nets to encourage households to save less and spend more.

It’s vital, too, that Xi and Li reassure global asset managers that the roughly US$7 trillion stock rout between 2021 and last month is over. And not just because Beijing deployed the “national team” of state funds to buy shares but due to renewed confidence.

Odds are, “recent market turmoil may prompt more decisive and quick moves by the national team to help restore confidence and prevent a self-fulfilling cycle,” HSBC economists write in a note.

It’s more important, though, that Beijing win back global investors’ trust with a renewed commitment to raise China’s financial game.

One area of keen interest is China’s $3 trillion trust industry, which has emerged as yet another threat to financial stability. Beset by scandals, China’s trust companies remain a major thorn in the side of regulators.

Last July, Beijing faced sizable protests after private wealth giant Zhongzhi Enterprise Group and its affiliate Zhongrong International Trust suspended payments on a variety of high-yield investment products.

In November, China tweaked rules to increase risk prevention. Yet Xi and Li have more work to do to prod trust firms to prioritize offering wealth management services over acting as broader channels to markets, which can imperil portfolios.

At the moment, too much of what Beijing is doing to modernize the economy is getting lost in translation with global investors voting with their feet. Some of the concern is China’s economic trajectory in 2024.

“The fragility of the economic recovery” was signaled in February by the authorities’ “stepped-up support for the economy and housing market” via an “unusually large” 25 basis-point reduction in the five-year loan prime rate, a benchmark interest rate that commercial banks use for long-term lending, says Lan Wang, an analyst at Fitch Ratings.

Wang adds that “we expect the rate cut to squeeze net profit at banks, while delivering a minor boost to economic activity.” A bigger one may be needed amid “tepid external demand, slower manufacturing” and disruptions from the Red Sea conflict are likely to slow cargo and container throughput growth for Chinese port operators, Wang notes.

In February, mainland home sales dropped sharply despite Beijing’s efforts to boost the market. New home sales, as reported by the 100 biggest real estate companies, plunged 60% last month year on year, after dropping 34.2% in January. In recent days, officials cut key mortgage reference rates.

“We doubt that those measures alone will be sufficient to restore confidence in the property market,” says Serena Zhou, an economist at Mizuho Securities. “Unconventional measures will likely be essential.”

Meanwhile, Sino-US relations are a big wild card. This week, US President Joe Biden’s Commerce Department opened a probe into perceived national security risks posed by China-made hardware and software in smart cars.

With the November 5 election approaching, China can expect a slew of fresh efforts in Washington to toss sand in its economic gears as candidates on both sides of the political divide vow to get tough on China.

But taking a longer-term perspective, change is indeed transforming China’s economy. Economist Louise Loo at Oxford Economics notes that Xi’s team is making progress in elevating the “new three” industries – electric vehicles, lithium-ion batteries and solar cells – to create new jobs and generate disruptive forces. 

At the upcoming NPC, Xi and Li have a unique window of opportunity to spotlight these dynamics and others — and to divert attention from the policy confusion of recent years. China’s leaders would be wise to use it. Otherwise, Beijing’s lost-in-translation problem might sow even more doubt and foreign investor flight.

Follow William Pesek on X, formerly Twitter, at @WilliamPesek

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