You can show a traitor a noose but you can’t stop him from sticking his head in it. For years I have warned prominent Australian investors not to invest in China and watched as they all lost a lot of money. The reason why is not even China’s deteriorating geopolitical circumstances. It is that sovereign risk under the CCP is extreme.
In just the past few years we have seen equity bubbles and busts purely at the behest of Bejing’s fiat. We have seen entire industries explode into being then literally be executed for doing so. We have watched capital flood global markets then be completely withdrawn. We have witnessed currency liberalisation then the capital account slammed shut.
As Cold War 2.0 heats up, this is going to get worse not better. Why? Because all of the above idiocies were the result of internal policy bumbling. Now China has to wrestle with mushrooming developed market hostility as well.
This has already played out in trade and investment. The US trade war is neither fleeting nor political. It is as ferocious under Joseph Biden as it was under Donald Trump. Indeed, if anything, it has become much more potent as the Biden administration has taken this message to the alliance network. This has already paid dividends as Europe trashed an investment deal that took eight years to negotiate.
Investment is also under pressure from rising nationalism in China as resentment of it builds in the polities of the liberal bloc. This is leading all kinds of firms into a no-win situation in which they face the loss of either business in China or at home if they misstep.
I am of the view that ahead, as well, are investment blockades into China. As China slows into the middle-income trap, and the CCP requires ever more nationalism to cover economic failure, hostility towards Taiwan will intensify. At a certain point in the not very distant future, it is going to become untenable to move any kind of liberal bloc export into China, whether that be commodities, chips or capital.
It is already very difficult to move capital out of China. As links keep breaking with the liberal bloc, this will also get much harder. Not least to prevent a total collapse of the yuan as the economy slows.
Yet none of this seems to register with the Masters of the Universe:
“While China is a strategic market for global banks they can’t afford to miss, reaping handsome profits here is another thing,” said May Zhao, deputy head of research at Zhongtai Financial International Ltd., a Hong Kong-based brokerage. “Winning clients, either from wealth management or investment banking, is challenging in a highly concentrated market gripped by top Chinese brokers.”
For the investment-banking giants, there’s no bigger opportunity than the $54 trillion financial services market in China. The government has gradually allowed firms to take full control of their partnerships with local brokers, while giving them a green light to set up their own asset management companies.
The banks are rushing in. The U.S. firms alone boosted their China exposure to $77.8 billion last year, and are hiring hundreds of staff. Many companies have announced pledges to seek 100% of their joint ventures after China removed the caps in April 2020, and several have had 51% stakes for a few years.
Yet for most, gaining control hasn’t yielded much in the way of earnings, and the foreign ventures remain minnows compared with local players like Citic Securities Co. and Haitong Securities Co. UBS, with the biggest joint venture in China, ranks 89th of more than 120 Chinese brokers in terms of assets, figures from the Securities Association of China show.
“It is very hard — you’re going against Citic, Haitong, all these massive companies that have their own corporate clients,” said Peter Alexander, managing director of Z-Ben Advisors Ltd., a research and data firm in Shanghai. “You’re fighting an uphill battle unless you’re looking to leverage your global clients.”
My advice is very much to miss out on this boom. It is a classic value trap. The market is large. But the profits are dubious and the risks extreme and growing. The CCP is only holding out its hand so it can chop yours off when it suits to bring the pressure to bear on Washington.
I’ll be honest with you. I read Wall St research all day and it is not much better than a chat down the local pub. In fact, it is often worse because it suffers from a serious duration mismatch between careers and firms respective outlooks. This structural problem means individuals can arbitrage the firm’s future for a short-term killing. That is, control fraud is endemic to Wall St.
And it is going to lose in China.