Global investors have started pouring money into Chinese stocks again, with a record $5.8 billion invested in Chinese equity exchange-traded funds (ETFs) in June.
The figure is a record for China, according to BlackRock, which publishes monthly data on Chinese equity ETFs stretching back to 2012. ETFs are baskets of securities that investors buy through a brokerage.
Money flows into China have been particularly strong since late 2020, according to the data, with the last ETF record reached in January with an influx of $4.3 billion.
International investors in China’s Shanghai and Shenzhen bourses are hopeful based on the easing of COVID-19 lockdowns and signals from Beijing regulators that they will decrease pressure on China’s tech sector and become more collaborative with the industry.
That would improve China’s business environment, boost its economy more generally, and lift its equity prices.
Improved investor sentiment on China has increased its June haul into equity ETFs by a net $4 billion from U.S. ETFs and $1.8 billion from those based in Europe, the Middle East, and Africa (EMEA). Most of that money arguably came from investors pulling out of U.S. and European markets and reinvesting, on a net basis, in China.
They are essentially fleeing negative return markets and piling into a market that skyrocketed in June.
According to Natasha Sarkaria, a BlackRock investment strategist quoted by the Financial Times, “European investors are not really buying US equities, not really buying Europe, but they are buying China. That’s a marked change in global flows.”
The change was from mid-to-late 2019 and early 2020, when ETF investors pulled money out of China on a net basis. The current influx could be seen as a return of those investors.
After COVID lockdowns eased in May, according to another Emea markets expert quoted by the Times, China pumped money into the economy through fiscal stimulus, interest rate cuts, and increased infrastructure spending.
That helped China’s stock market index, the CSI 300, return 9.6 percent in June, while Western markets typically lost between 5 and 10 percent. Markets in Germany, Brazil, Taiwan, and South Korea lost over 10 percent.
Those divergent figures get the attention of international investors, who are thereby incentivized to pull money from Western and allied markets for redeployment to China and Hong Kong. The latter also had positive returns.
Sin Tax on China
While many investors are now chasing returns into China’s equity market, one aspect of their investments that they are not incentivized to consider is the negative externalities that such investments create in terms of empowering the regime in Beijing.
China’s economy runs on the fumes of lax environmental standards and horrible working conditions that, in some cases, approach that of slavery. The regime imposes “forced labor” on Uyghurs, for example, which contributes to its genocide (by the U.N. definition).
The fruits of China’s economy are being reinvested by the regime into the People’s Liberation Army, the biggest military rival to the United States since the fall of the Soviet Union. This is driving a global arms race that is detrimental to the global economy, especially when those arms are used in places like Ukraine. Xi has supported Russia’s war there, despite its fueling of global inflation, food and fuel shortages, political instability, interest rate increases, and the growing risk of recession in the United States and Europe.
By chasing short-term profits in China, Western investors are empowering the very regime that is implacably opposed to the democratic markets upon which they depend. They thus threaten to deprive the goose that laid the golden egg of the investor sustenance it needs to defeat its biggest global rival.
None of these negative externalities are sufficiently included in the balance sheets and decision-making of global investors, who destroy their long-term prospects by following returns with insufficient attention to second-and third-order effects.
That could change if American and European citizens demanded that targeted taxes be imposed on investors in China to correct the negative externalities they create. These “sin taxes” could be on the order of 35 percent of capital gains from China, regardless of whether the gains are repatriated, and in addition to existing taxes.
That would put downward pressure on Western investment in China, decrease China’s economic growth and emissions, pressure the regime to improve its human rights and environmental policies, and weaken its tax base, so its military has less funding for aggression against Taiwan, Japan, and in the South China Sea, for example.
If 35 percent proves too small a tax to have the intended effect, it could be increased.
As long as investing in a totalitarian and genocidal country like China is legal and profitable, investors in the United States and Europe will continue to build their China portfolios on an ethic of investing based almost purely on predicted returns.
Changing investor behavior requires action by American and European citizens to demand what investors can understand: tougher taxes on unethical investments.
