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 sitting on 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 huge amount of foreign money flowing into it, it’s a risk many are reluctant to ignore.
“The global investment community is warned that should another geopolitical event occur, the precedent is already set for these very restrictive and punitive sanctions,” said Bill Campbell, a portfolio manager at DoubleLine Capital, which manages $122 billion. dollars of assets.
Jeffrey Gundlach, CEO of DoubleLine, called China investable due to sweeping regulatory measures, forced stock withdrawals and a last-minute, late-2020 suspension of the multibillion-dollar initial public offering of billionaire Jack Ma’s Ant group.
Mr Campbell said a “new paradigm” was at play, where geopolitical events threatened “to have immediate effects on investments and indices”, pointing to tensions around Taiwan and in the South China Sea as potential points of tension with the West.
China’s huge weight in stock and bond indices means investors, including its 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.
Sino-U.S. tensions have simmered for years over issues ranging from international trade to intellectual property rights, but most recently Washington told Beijing it would face consequences if it supported Russia’s war 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 that China considers its own territory.
Flavio Carpenzano, chief investment officer at Capital Group, which manages $2.6 trillion in assets, reduced its exposure to Chinese government bonds after the invasion of Russia.
“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 returns price in that kind of volatility,” Carpenzano said.
BlackRock, the world’s largest asset manager and a longtime Chinese bull, cut its view on Chinese equities in May, warning that the risks of a military confrontation with Taiwan will increase as the decade progresses.
PERU RISK
Investors withdrew more than $30 billion from China between January and March, according to the Institute of International Finance.
COVID lockdowns, 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 whose relationships with the West are complicated”.
Still, the country’s economic recovery, contrasting with recession fears in the West, drew a net inflow of $11 billion into Chinese-listed stocks last month, according to data from Refinitiv Eikon.
“There’s a shortage of things you can buy these days that can go up in price,” said Mike Kelly, head of multiple assets at PineBridge Investments, which holds dollar bonds in China’s real estate sector and is part of of those buying Chinese stocks again.
Mr Kelly said no one buying from China could be completely comfortable, but he is confident “if they do anything on Taiwan it won’t be in the next two years”.
INDEX GIANT
Many argue that the sheer size of China’s economy and markets makes sanctions less likely, as they would hurt the West far more than restrictions on Russia. The spillovers to global financial markets would also be much greater.
JPMorgan estimates that foreigners own 5% of stocks and a smaller proportion of bonds in a global market of $30 trillion.
The volume of foreign cash invested in index-tracking products could prove a sticking point, given that China accounts for 40% of emerging equity indices and 10% of the emerging debt benchmark JPMorgan’s GBI-EM.
Russia, before the invasion of Ukraine, had a 6.1% share in the benchmark debt index.
The Russia-Ukraine dispute has sparked a flood of questions from clients about China’s exposure, particularly to equities, the head of emerging markets strategy at a major bank told Reuters.
The strategist, who declined to be named, said clients valued the money to allocate “a market you may not be able to get out of quickly.”
An asset manager, WisdomTree, runs a fund that excludes Chinese state-owned companies and “is likely to launch (ex-China strategies) short-term based on our own review of market opportunity,” said Jeremy Schwartz, chief executive. of the company’s investments, which manages $79 billion in assets.
PineBridge’s Kelly said that ultimately those investing in China need to be prepared for sudden changes.
“There is a risk that you invest, they putin’ on you and you suddenly get caught out,” he said.