Ex-China: Smart Investors Are Fleeing China for the Rest

A statue of George Washington stands as Federal Hall across Wall Street from the New York Stock Exchange in New York on Oct. 26, 2020. (Mike Segar/Reuters)

Commentary

The investing term “ex-China” has a lovely ring to it. It means everything but China. So for emerging market (EM) investors, many of whom have traditionally invested in China, an EM ex-China fund provides the opportunity to invest in emerging markets, except for China. The largest emerging market economies are Brazil, India, and Mexico, in that order.

In 2021, some of the largest investors have finally accepted the risks associated with China, such as its crackdown on the country’s booming tech sector, opaque accounting, shell companies through which international investments are made, and Beijing’s deleveraging efforts. That’s without mentioning the long-term threat of China to democracy and human rights, which is one of those intangibles that could eventually bite investors where they aren’t looking.

According to a government document from early 2021, the top-20 institutional investors in China had $2.3 trillion tied up in the country. The largest investor was BlackRock, with more than $255 billion invested in China.

On Sept. 6, The Wall Street Journal published an opinion article by billionaire liberal George Soros, “BlackRock’s China Blunder.” You may disagree with Soros on everything else, but he was right in his criticism of BlackRock’s Chinese investments.

“The BlackRock initiative imperils the national security interests of the U.S. and other democracies because the money invested in China will help prop up President Xi’s regime, which is repressive at home and aggressive abroad,” he wrote.

Wake-up calls came in fall 2020, when Jack Ma’s Ant Group IPO, expected to be the largest in history, was canceled. He had become China’s richest billionaire, had publicly criticized China’s financial system as being run on a “pawn-shop mentality,” and had sometimes adopted an anti-establishment look, when serenading his employees in a rock band with a metal-studded leather jacket, for example.

Alibaba Group co-founder and former Chairman Jack Ma attends the World Trade Organization (WTO) Forum "Trade 2030" in Geneva, Switzerland, on Oct. 2, 2018. (Denis Balibouse/Reuters)

Ma’s counter-establishmentarianism, despite his membership in the Chinese Communist Party (CCP), likely didn’t sit well with China’s financial regulators or authoritarian General Secretary Xi Jinping. So, Ma disappeared for three months, almost certainly under duress at the very least. When he returned, he was a toned-down shadow of his former self, better approximating what the CCP thinks an entrepreneur should be.

But investors took notice and disagreed. That month, they penalized Chinese assets by increasing their investments elsewhere. In November 2020, five major EM exchange-traded funds (ETFs) that excluded China hit a one-year record, though still under $200 million. ETFs are securities structured to track a particular type of asset, which in that case were those associated with emerging markets.

In December, that number increased to $277 million. Year-to-date, the total assets in those EM ex-China ETFs rose by 442 percent to $1.5 billion through August 2021. In August alone, the assets in those ETFs surged by 41 percent.

Net July inflows to EM ETFs, in which China is the largest weight by far, decreased to $696 million from an average $4 billion monthly in the first half of 2021.

Then the media blitz came, with some analysts from top international investors claiming that China was overweight, which is another way of saying, “Buy China—it’s a good deal.” A research unit from BlackRock, the largest U.S. investor in China according to government figures from early 2021, claimed in an Aug. 17 report that investors should double or triple their China positions in diversified global portfolios. At the time of writing, the Shanghai Stock Exchange Composite Index has since outperformed the S&P 500 Index by about 3 percent.

But those investors arguably have a conflict of interest, and China’s state-backed investors could have manipulated the stock prices since then to make their predictions true, at least in the short term.

That’s harder to do over a longer term, as indicated by Chinese and Hong Kong indexes. Hong Kong’s Hang Seng index is down by 11 percent over the last three months. The onshore CSI 300 index is down by 8 percent. But the MSCI EM ex-China is holding firm. So the problem isn’t with EMs generally, but with China.

There are other diversified ways to avoid China investment. The Freedom 100 EM ETF (ticker FRDM) has a focus on personal and economic freedom, according to Perth Tolle, the founder of Life + Liberty Indexes.

“We are the only freedom-weighted EM ETF, and have never owned China equities as a natural result of freedom weighting,” Tolle wrote in an electronic communication.

FRDM’s assets rose from $30 million toward the end of 2020, to $87 million by Aug. 31.

Investors thus have the option to put their money into assets that support freedom rather than dictatorship. The smartest ones are and should do so, while they still have any freedoms left. If the CCP achieves its goal of global control over capitalists, on the backs of the very capitalist money they target, those freedoms will be gone.

Soros, and many conservatives before him, has been critical of Wall Street investment in China and said, in their various ways, that laws should be passed or enforced to avoid those investments turning into the rope that hangs us.

“Congress should pass legislation empowering the Securities and Exchange Commission to limit the flow of funds to China,” he wrote.

China risk is clearly accumulating, and some of it is now being manufactured in New York and Washington. The smartest of smart money sees the writing on the wall and is starting to trickle away from China. A deluge of dumb money should follow, or we'll all pay the consequences with our freedom.

Correction: The Freedom 100 EM ETF focuses on personal and economic freedom, not as previously stated, human rights and a respect for property. The index is called Freedom 100 EM ETF, not as previously stated, the Freedom ETF. The Epoch Times regrets the errors. 

Views expressed in this article are opinions of the author and do not necessarily reflect the views of The Epoch Times.