Analysis | Why It’s So Hard for China to Shake the ‘Uninvestable’ Tag

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By Amit


Two years after foreign investors started calling China “uninvestable,” it looked like President Xi Jinping had found a formula to lure them back. His very public pivot away from Covid Zero at the end of 2022 was accompanied by a speech heralding a string of market-friendly reversals for hard-hit sectors like property and Big Tech. Bold steps to shore up the economy paired with a decisive shift in tone from regulators and state media in favor of private enterprise. Yet market confidence remains shaky, revealing just how much damage has been done to China’s credibility abroad. 

1. Where did the ‘uninvestable’ label come from?

In mid-2021, Goldman Sachs Group Inc. said the word was starting to feature in a number of client conversations about the country’s stocks. The context was months of rat-a-tat regulation and state intervention in high-profile initial public offerings, namely Ant Group and Didi Global Inc. China’s shock decision to turn high-growth tutoring companies into nonprofits triggered a collapse in their shares almost overnight. When JPMorgan Chase & Co. analysts last year described Chinese internet companies as “uninvestable” and downgraded a number of stocks, their report helped erase about $200 billion from US and Asian markets. The downgrades were reversed two months later, but jitters remained. Xi’s consolidation of power in October — when he secured a third term as Communist Party chief surrounded entirely by close allies — scared off many international fund managers who feared his greater executive power would increase the risk of a policy misstep.

Yes and no. Xi’s government showed little regard for global investors as it sought to curb the “disorderly expansion of capital,” which complemented his campaign to rein in tech moguls and promote “common prosperity” ahead of last year’s party congress. Then came a series of unexpected moves, including the abrupt U-turn on strict Covid restrictions following a rare outpouring of public anger against the lockdowns. China also began ending a two-year ban on Australian coal imports, easing up on tech giants like Tencent Holdings Ltd. and Didi and dialing back the stringent new rules on how much developers could borrow that exacerbated a property meltdown. In December, a behind-closed-doors speech from Xi impressed upon top officials the importance of attracting and retaining funds from abroad. The question is whether the policy overhaul represents a swing toward the flexibility that helped fuel China’s economic rise over the past four decades, or simply a knee-jerk response to a deteriorating economy and spontaneous protests.

3. How are investors reacting? 

The initial result was a world-beating stock rally in January in Hong Kong, a record winning streak for Chinese junk dollar debt and the strongest momentum in five years for the yuan. Strategists across Wall Street recommended the country’s assets. But it didn’t last long. Bond outflows have resumed and there’s been little follow-through from the steady, long-term institutional players that Xi wants to attract. Mistrust of Xi is particularly acute among once-burned, twice-shy investors from the US, despite a bullish forecast in February from Goldman’s equities team. 

4. Where are things headed?

China’s post-Covid recovery and expectations of more policies to support the economy have revived global interest in Chinese markets. There’s also been a flurry of approvals granted to global financial firms to fully operate their onshore China businesses. But the gulf between China and Western capital remains wide. The disappearance of a high-profile investment banker this year — said later to be assisting Chinese authorities in an unspecified investigation — added to doubts about whether Xi’s crackdown on private enterprise has run its course. Pressure from the Ministry of Finance on state-owned firms to shun the four biggest international accounting firms will further distance foreigners from China’s corporate landscape. The saga of an alleged Chinese spy balloon shot down by the US highlighted the increasing dissonance. Soon after the inflatable was identified hovering over military installations in Montana, the Biden administration expanded its blacklist of Chinese entities that are banned from buying US goods. More restrictions on US investments in China are in the works in Washington and there is no let up from Beijing in its sanctions of US firms. 

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