Commentary
Are global investors rethinking their allocation to China?Initial data suggest just that—investors have been pulling money out of China at a dramatic pace since Russia’s invasion of Ukraine in February.
The Institute of International Finance (IIF) noted in a recent report that investors cut their exposure to Chinese stocks and bonds at an “unprecedented” rate in February, even as flows into the rest of the emerging markets (excluding China) have held up.
“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,” the IIF note reads.
It behooves institutional investors to examine not just what’s happening in the markets today, but what the global economic environment may look like years into the future.
Most Wall Street investment banks have announced that they‘ll pull out of their Russian businesses. U.S. banks including JPMorgan Chase and Goldman Sachs announced that they’ll wind down their businesses in Russia. European banks such as Deutsche Bank and BNP Paribas have followed suit. Credit Suisse, after some initial hesitation, has announced that it too will pull out of Russia—although not before catching the ire of U.S. regulators, which have begun a probe into whether it had followed U.S. sanctions.
Banking and investments are businesses centered mainly around trust. One can’t lose the trust of one’s clients by making head-scratching decisions.
Outside of a few intrepid hedge funds looking to snap up Russian investments on the cheap—making a gamble, effectively—most money managers are wise to follow the crowd and exit Russia. They won’t win the “idea of the year” award, but it also won’t jeopardize their jobs.
Then there’s China.
China is the world’s No. 2 economy and owns a massive—though largely untamed—financial market that Western investors have just recently begun to tap into.
Beijing is also Russia’s closest economic and ideological ally and is trying to thread an impossibly fine needle by refusing to criticize Russia’s actions, yet attempting to maintain normal trade relations with the United States and the West.
For now, this balancing act is ongoing. But the astute smart money may be looking a few steps ahead. We can see the broad construct of a new “global dichotomy” beginning to form, perhaps not as deep as during the Cold War, but certainly familiar enough.
It may seem far-fetched today, but if the Russia–China cohort doubles down on the invasion messaging and leverages this opportunity to create an alternative economic order away from the U.S. dollar hegemony—while prying away a few bystanders such as Saudi Arabia and India—will the United States look to truly decouple away from China?
There isn’t a definitive answer to that question today, but the last thing investment firms want is to be blindsided without a plan.
That’s exactly the topic of discussion I had recently with a high-level executive at a New York investment firm. His firm isn’t pulling out of China yet, but it’s seriously examining several future scenarios where it may need to, as well as how to execute it with minimal negative effect. In the meantime, it could reduce the size of its bets by cutting some China exposure.
This may be relatively easier to pull off for financial institutions where, besides solving for liquidity controls, the only physical assets may be its people. For a multinational corporation with real assets, manufacturing capacity, and logistics inside China, pulling out is a much more difficult calculus. That’s a costlier gamble, and such companies may be better off diversifying their investments (e.g. near-sourcing) to stay nimble.
Regardless of what the plans are, such plans appear to be in motion.
