American companies are quietly pulling out of the Chinese market, including pulling out as much as $68 billion in international funds from Hong Kong.
Global Funds Reduce China Investments
Bloomberg analyzed reports on the positions of 14 U.S. pension funds with more than $500 million invested in Chinese stocks and found that most of them have reduced their holdings since 2020, with the California Public Employees’ Retirement System and the New York State Common Retirement Fund, the largest pension investors in the United States, cutting their investments in China for the third consecutive year.Some funds are pulling out of the China market altogether. Last December, the Missouri State Employees’ Retirement System told its staff to “divest from all of its current global public equity investment in China.”
Initially, the withdrawal of these funds was simply a matter of performance, according to the reports, but the current trend is likely to evolve into a structural change as a result of a combination of factors, including heightened skepticism on China’s long-term economic overview, the failing Chinese real estate sector, and the growing U.S.-China rivalry. Some large pension fund managers in the United States and Australia have also cautioned about future investments in China.
Demand from global investors for funds that exclude China is growing due to increased geopolitical risk and a sluggish recovery in the world’s second-largest economy since the pandemic.
Gary Dugan, chief investment officer at Dalma Capital Management Ltd., told Bloomberg that they would reset the benchmarks to Morgan Stanley Capital International (MSCI) ex-China, so “foreign investors [would] no longer fear leaving China out of their investment universe.”
Chris Ailman, chief investment officer of the California State Teachers Retirement System (CalSTRS), said in an interview that China is a recurring topic of discussion among CIOs in the United States and worldwide.
Some have cut their index weight in half to reduce their exposure, and a few have dropped China from their emerging market index,” Mr. Ailman said. “The CalSTRS decision was not being overweight nor underweight but index weight.”
In a statement on Nov. 14 last year, the FRTIB reported that it had decided to change the benchmark index for its International Stock Index Investment Fund (I-Fund) after a routine review of its Thrift Savings Plan (TSP). The decision to change the basis of its I-Fund means that in addition to China, the FRTIB will also exclude Hong Kong from its $68 billion international fund. The report said Washington’s increased restrictions on investments in China were the main reason for the decision.
Hong Kong’s Integration Into China
On Jan. 11, Zheng Yanxiong, director of the Hong Kong Liaison Office, the official representative office of the Chinese regime in Hong Kong, traveled to Guangzhou to meet with Chinese Communist Party (CCP) officials to discuss the economic future of the Guangdong-Hong Kong-Macao Greater Bay Area (GBA).Last year, Chinese leader Xi Jinping expressed that he was hoping for the Hong Kong Liaison Office to accelerate the market integration process in the GBA and deepen cooperation in industry and technology. In other words, Xi Jinping is seeking further integration of Hong Kong into mainland China.
Hong Kong was under British rule until 1997, when the British government transferred Hong Kong’s sovereignty to China. Under the Sino-British Joint Declaration, China promised to retain Hong Kong’s rule of law and system of governance for at least 50 years. However, in 2020, China imposed the National Security Law on Hong Kong without consent from Hong Kong’s legislature, which was viewed as a blatant violation of Hong Kong’s rule of law and a violation of China’s handover promise to the UK.
Ji Da, a veteran commentator on China affairs, told The Epoch Times that international investment cutbacks in China have a huge impact on Hong Kong, pushing it to integrate its economy further with mainland China.
Selling Off Chinese Stocks
Global long-only funds offloaded China equities in December at the fastest pace in 2023 to meet redemption requests and to move away from the world’s second-largest economy, according to Morgan Stanley analysts.China and Hong Kong equities saw combined net outflows of $3.8 billion from active global long-only fund managers last month, $2 billion of which was caused by investors redeeming their funds, with the rest driven by managers rebalancing overseas, Morgan Stanley’s quantitative research team said in a report to clients on Jan. 2. The report said it was the worst month in 2023 and the third-largest monthly outflow on record.
According to the report, China and Hong Kong’s stock markets ended 2023 as the worst performers among the world’s major indexes, weighed down by geopolitical risks, a weak economic recovery, and political uncertainties.
China’s benchmark blue-chip CSI300 Index slumped 11 percent in 2023, while Hong Kong’s Hang Seng Index tumbled 14 percent, marking the fourth consecutive year of declines since its launch in 1969.
Despite a series of measures introduced by the Chinese regime in recent months to boost the economy, analysts say they were not enough to restore market confidence.
European fund managers, in line with their U.S. counterparts, are also catching up with the pace of investment reductions in China, according to Morgan Stanley.
