International investors continue to bail out of Chinese securities.
Foreign investors sold a record $12bn worth of Chinese stocks in August as piecemeal support measures from Beijing failed to assuage concerns over slowing growth in the world’s second-largest economy and a worsening crisis in the country’s property sector.
The unprecedented outflows come as figures on Thursday showed China’s manufacturing sector contracted for a fifth consecutive month, despite pledges from leaders in late July to deliver more substantial support measures for the vital property sector, which is typically responsible for about a quarter of annual economic activity.
Simmering tensions with Washington have also dimmed western investors’ appetite for Chinese assets, with US commerce secretary Gina Raimondo warning during a four-day visit to the country this week that American companies were starting to see China as “uninvestable”.
Investors in stocks can, of course, turn on a dime, and frequently do. From their point of view, a stock can be worth buying just for a quick speculative “turn.” Get in. Get out. Pocket the change. Assuming the trade works, there is nothing wrong with that, and, when it comes to investing in Chinese securities (ethical issues aside) that is probably the best approach to take, even if (to quote an old market adage), it might be a little like “picking up pennies in front of a steamroller.”
But that’s not what Raimondo was referring to. Instead, she was talking about U.S. companies investing directly in China, whether by setting up their own operations there or partnering with local businesses.
From another FT report (August 29):
Speaking on the third day of a four-day visit to China, during which she met Chinese leaders including second-ranked official Premier Li Qiang, Raimondo said her trip had reopened communication channels between the world’s two largest economies.
But she said US companies needed results on issues ranging from “traditional” problems such as intellectual property theft and state enterprise subsidies to new areas including fines and raids on offices without due process, revisions to counter-espionage laws, and unclear data and privacy rules.
“Increasingly, I hear from businesses China is uninvestable because it’s become too risky,” Raimondo told reporters. “Actions speak louder than words . . . but I hope that this becomes a moment where we start to see action.”
China has raided the offices of several US-based consultancies this year, detaining local employees of due diligence firm Mintz Group over what it said were national security concerns.
The Beijing regime may announce a few changes (it is keen to encourage foreign capital flows into the country to help it out of its mess), but none of the problems Raimondo mentions are going away. They are intrinsic to the way that China is run, and that will not change. The only model for an enterprise looking to invest in China is (in my view) to borrow a lot from the approach taken by a CEO I spoke to back in the early/mid 90s with regard to his firm’s growing presence in Russia. The firm rented rather than bought, kept capital expenditure to a minimum, and its assessment of the risk/reward of going ahead included assuming that there was a non-negligible risk that any profits they made in Russia would have to be kept in the country and, worse still, that all the assets they had in the country would eventually (one way or another) be stolen.
The FT reported that Raimondo told the Chinese that “the US did not want to decouple from the world’s second-largest economy and instead hoped to expand trade.” I hope that she was just being polite. The U.S. should go a long way toward decoupling its economic relationships with the country that is, dangerously, both its most significant strategic adversary and a supplier of goods that cannot be easily replaced. The former cannot be changed, but, with determination, the latter can. So far as that is concerned, the administration is taking some steps in the right direction, although, over time, much more needs to be done.
“Much more,” obviously, does not include expanding trade between China and the U.S. Fortunately, the disadvantages of doing business in China are now being compounded by the effect that the country’s economic woes are having on the chances of making money there. That should act as a helpful disincentive to investment.
The FT also reported that Raimondo “raised with Chinese leaders the possibility of co-operation to set ‘guardrails’ on AI”:
“The world expects our two countries to work together to keep a lid on the most destructive applications of artificial intelligence and that was met with some receptivity,” she said.
As I recall it, the arrival of Little Red Riding Hood into the forest was met with “some receptivity” by the wolf.