A billionaire investor is urging caution about investing in China, warning that he has been prevented from accessing his money because of Beijing’s strict capital controls.
Mark Mobius, the founder of Mobius Capital Partners, says the Chinese regime has taken “very significant” action to prevent him from withdrawing capital from Chinese equities since his HSBC account is situated in Shanghai.
The U.S. investor thinks the economic landscape has adopted “a completely different direction” from that of the previous leader, market-oriented Deng Xiaoping, explaining that it’s not a good sign for the country’s future if the central government becomes “more control-oriented in the economy.”
“I can’t get my money out. The government is restricting the flow of money out of the country,” he said. “So, I would be very, very careful investing in China.”
As a result of what is transpiring in the world’s second-largest economy, Mobius says the best investment alternatives with tremendous economic opportunity are India and Brazil.
The Biden administration recently confirmed that it intends to inspect U.S. capital flows to China closely. The White House and Congress are exploring proposals to monitor and prohibit U.S. investments in China to address national security concerns.
U.S. Commerce Secretary Gina Raimondo warned that these efforts must strike a balance between strategic and facilitating investments, since many domestic pension funds invest clients’ money in the country.
“You certainly don’t want to do any type of thing that has an unintended consequence, that hurts folks,” Raimondo said in an interview with Bloomberg. “You don’t want to be overly broad. We want commerce, we want trade, we want global investment. Anything that’s overly broad hurts American workers and the economy.”
While it’s a top priority for the administration, it’s crucial to take it slow and “get it right” rather than denying money flows, she said.
Capital Flight
In the fourth quarter of 2022, China posted its first net outflow of funds in more than two years, driven by declines in foreign investments and exports.According to recent data from the State Administration of Foreign Exchange (SAFE), a net of $11.2 billion left China in the October-December period, which was the biggest capital outflow since the third quarter of 2019.
Outflows have increased over the past year as central banks tightened monetary policy, offering more attractive yields.
While the rest of the world has been raising interest rates and reducing balance sheets, China has been employing loosening measures. Last summer, the People’s Bank of China lowered its 1- and 5-year loan prime rates to 3.65 percent and 4.3 percent, respectively. In November, the central bank also trimmed the reserve requirement ratio for most financial institutions by 25 basis points to less than 8 percent.
As a result of officials easing policy, China’s 10-year bond yield is roughly 2.94 percent, compared with the benchmark U.S. 10-year Treasury yield of about 4 percent.
Meanwhile, for the first time in 25 years, the American Chamber of Commerce in China’s “2023 China Business Climate Survey Report” revealed that China is no longer a primary investment destination for most U.S. businesses. The study, which was conducted in the fall of 2022, discovered that the number of U.S. firms starting to relocate or thinking about relocating their sourcing outside of China rose 10 percent from a year earlier.
“After three full years dominated by the COVID-19 pandemic, members expressed concern about their companies’ financial performance and expectations regarding China’s openness and business climate, contributing to a slightly more pessimistic outlook compared to previous years,” the report reads.
Economists suggest that the timing of the start of outflows also coincided with Russia’s invasion of Ukraine.
“Outflows from China on the scale and intensity we are seeing are unprecedented, especially since we are not seeing similar outflows from the rest of emerging markets,” Institute of International Finance chief economist Robin Brooks wrote in a March 2022 report. “The timing of outflows—which built after Russia’s invasion of Ukraine—suggests foreign investors may be looking at China in a new light, though it is premature to draw any definitive conclusions in this regard.”
Goldman Sachs’s chief China economist Hui Shan wrote in a note, “For 2023, investors agree that growth will recover after the removal of zero-Covid policy, although there are disagreements on the strength of the recovery, with consumer confidence, property market, and local government debt being the top concerns.”
