hot Russia, investment funds cautious in China

The scale and coordination of Western sanctions against Russia, triggered by President Vladimir Putin’s February 24 invasion of Ukraine, has stunned financial markets and left managers sitting with billions of dollars of assets that suddenly depreciated overnight.

While such a move against China seems far-fetched given its economic size and the sheer amount of foreign money pouring into it, many are reluctant to ignore the risk.

“The global investment community has been warned that in the event of another geopolitical event, the precedent for these very restrictive and punitive sanctions has already been set,” said Bill Campbell, portfolio manager at DoubleLine Capital, which manages $122 billion in assets.

Jeffrey Gundlach, CEO of DoubleLine, called China attractive for investment due to drastic regulatory measures, forced divestment and last-minute suspension at the end of 2020 of billionaire Jack Ma’s Ant group’s multibillion-dollar initial public offering.

Mr Campbell said a “new paradigm” is coming into play, with geopolitical developments threatening to “have a direct impact on investment and indices”, pointing to tensions around Taiwan and the South China Sea as potential points of tension with the West.

China’s huge weight in stock and bond indices means that investors, including his company, need some risk. DoubleLine bought bonds from regional development banks and used other Asian countries as proxies for China so as not to tie up too much money there.

Tensions between China and the United States 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 military action 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 a Russian military industrial base.

The bill, introduced in the US Senate, also threatens Beijing with sanctions for its aggression against Taiwan, an island that China claims as its territory.

Flavio Carpenzano, chief investment officer of Capital Group, which manages $2.6 trillion in assets, cut his holdings in Chinese government bonds after the invasion of Russia.

“This does not mean that we believe that China is uninvestable, or that we expect a clash with Taiwan tomorrow, but volatility will remain high and we do not think that the price is coming back with such volatility,” Carpenzano said.

BlackRock, the world’s largest asset manager and longtime Chinese bull, cut its view on Chinese equities in May, warning that risks of a military confrontation with Taiwan would rise for a decade.

PERU RISK

According to the Institute of International Finance, investors withdrew more than $30 billion from China between January and March.

COVID lockdowns, tensions in the real estate sector, and rising US Treasury yields are fueling this capital flight, but the IIF also highlighted the “perceived risk of investing in countries whose relations with the West are difficult.”

However, the country’s economic recovery, contrasting with recession fears in the West, saw a net inflow of $11 billion into Chinese stocks last month, according to data from Refinitiv Eikon.

“These days, there’s a lack of things that can be bought and that can go up in value,” said Mike Kelly, head of multiple assets at PineBridge Investments, which owns dollar-denominated bonds in China’s real estate sector and is one of those buying Chinese equities again. . .

Mr. Kelly said no one is completely comfortable buying in China, but he is confident that “if they do anything in Taiwan, it won’t be in the next two years.”

GIANT INDEX

Many argue that the sheer size of China’s economy and markets makes sanctions less likely, as they will hurt the West far more than restrictions on Russia. Spillovers to global financial markets will also be much larger.

JPMorgan estimates that foreigners own 5% of stocks and a smaller share of bonds in the $30 trillion global market.

The amount of foreign money invested in index tracking products could prove to be a sticking point given that China accounts for 40% of emerging stock indices and 10% of JPMorgan’s emerging debt benchmark GBI-EM.

Russia’s share before the invasion of Ukraine was 6.1% in the benchmark debt index.

The dispute between Russia and Ukraine has prompted a flood of questions from clients about China’s risks, especially in equities, the head of emerging markets strategy at a major bank told Reuters.

The strategist, who declined to be named, said clients value money to highlight “a market you might not be able to get out of quickly.”

Asset manager WisdomTree runs a fund that does not include Chinese state-owned companies and “will likely launch (ex-China strategies) in the short term based on our own review of market opportunities,” said Jeremy Schwartz, chief executive. an investment by a company that manages $79 billion in assets.

PineBridge’s Kelly said that ultimately, those investing in China must be prepared for the sudden change.

“The risk is that you invest, they put money on you, and you suddenly fall into a trap,” he said.