Rising geopolitical risks are a reason why foreign investors and firms are rethinking their China strategy and de-risking from China.
On Nov. 28, Goldman Sachs CEO David Solomon told the Financial Times at the Global Banking Summit that the Wall Street bank has moved away from a “growth at all costs” strategy towards China as compared to five years ago.
“Today, it’s a more conservative approach [in China] and we’ve probably pared back some of our financial resources there, simply because there’s more uncertainty,” he said.
Goldman Sachs is not the only one becoming cautious about China. Foreign firms and investors are pulling out funds and diversifying from China as they balk at the Chinese Communist Party regime’s poor official economic numbers, account for economic, geopolitical, and other risks, and sour on China’s growth prospects.
Growing pessimism about China is heightening tensions between Xi Jinping and the Party elite as the latter fear the harming of their interests while the former tightens control over the regime to an even greater degree to deal with mounting internal and external crises.
China de-risking
Foreign investors and companies were optimistic about China’s growth prospects in early 2023 as they expected a rebound after Beijing abandoned the “zero-COVID” policy. The optimism, however, gradually waned with the release of lackluster official data over the course of the year.
The early data for November showed continued weakness in the Chinese economy. China’s manufacturing purchasing managers’ index in November fell 0.1 from the previous month to 49.4. This was worse than the median forecast of 49.7 per a Reuters poll. Meanwhile, profits of China’s industrial enterprises above designated size decreased by 7.8 percent from a year ago during the January-October period to 6.11542 trillion yuan. The figures suggest that the PRC authorities’ measures to spur recovery in the third quarter of 2023 were insufficient to the task and the economy is performing worse in some areas as compared to the pandemic year of 2022.
Daniel Zipser, leader of McKinsey’s Asia consumer and retail practice, told CNBC that “there are no signs it should be a strong, V-shaped recovery” in China. Zipser added, “The overall economic recovery and the recovery of the property market has not been what people hoped for. People are aware of the geopolitical tensions, very aware of … exports declining. They don’t yet have the confidence this will be different [in] 2024, 2025.”
Rising geopolitical risks are another reason why foreign investors and firms are rethinking their China strategy and de-risking from China. In particular, foreigners are coming to believe that the PRC will eventually take aggressive action against Taiwan and their interests in China could be hurt by Western sanctions.
Partners Group Holding AG co-founder Urs Wietlisbach told Bloomberg News that geopolitical tensions have been rising in recent years, and the pitting of China, Russia, and others against the U.S. and Europe amounts almost to a cold war. “This definitely has never been as severe as it is today,” he said.
Wietlisbach also noted that his company has not done a transaction in China in two years. “We are more careful. A Chinese deal today just needs to bring a much higher expected return because you take much more risk,” he said.
In a Nov. 30 report, The Wall Street Journal observed that geopolitical risks are “now a top consideration for buyers of Chinese stocks, bonds and stakes in private companies—and are turning many people off investing in China.”
Citing data from Wind Information, the Journal showed that international investors have withdrawn about more than $24 billion from China A shares since August 2023 via the Hong Kong trading link. This was the largest and most sustained net outflow of foreign funds through the link since it was established in 2014. The Journal further noted that the MSCI China Index has lost 10 percent so far in 2023, putting it on track for a third consecutive year of declines.
The Journal added that market strategists at some major Wall Street banks said that “most of the hedge funds and active-fund managers that have sold off their China stockholdings are unlikely to return until there are significant improvements in the country’s growth outlook and U.S.-China relations.”
Political pressures
Foreigners turning cold on China and the resulting capital flight appears to be having an impact on CCP factional politics.
In the last week of November, online Hong Kong media outlet HK01 began publishing a series of commentaries urging the CCP regime to “set forth again with reform,” particularly at the yet unscheduled Third Plenum of the 20th Central Committee. One of the commentaries also indirectly called out to Beijing to break away from the “incorrect line” of long-term “leftism” and again “emancipate the mind, seek truth from facts, and move the Party forward in unity” as was allegedly the case during the Deng-Jiang-Hu era.
HK01 is owned by Yu Pun-hoi, the former owner of the former Beijing-based overseas Chinese language media outlet Duowei News. Duowei was widely regarded as being part of the CCP’s “Great External Propaganda Plan” network. Before Duowei shut down in April 2023 and was folded into HK01, it would sometimes carry messaging that appeared to stem from various interest groups in the CCP elite and frequently publish articles that were very critical of Xi and his policies. HK01 appears to have “inherited” Duowei’s role as a “channel for Xi Jinping’s opposition to vent their dissatisfaction with his rule and conduct political mobilization,” as we earlier analyzed.
We believe that the “anti-Xi coalition” in the Party elite is likely the political force behind the HK01 commentaries calling for “reform and opening up.” Those elites appear to be very concerned that their interests would be sacrificed and they would personally be imperiled if the Xi leadership continues to step up the prevention and control of financial risks, grow the real economy instead of the “financialized” economy, and have finance serve the CCP’s “socialist construction” instead of further lining the pockets of the elite.
Xi, however, is unlikely to heed the signaling of the “anti-Xi coalition” and could even become more focused in eliminating the remnant Jiang Zemin faction and disenfranchising CCP elites as he scrambles for more control to ensure that his measures for rescuing the regime get implemented. Xi’s efforts to rein in his political enemies and the Party elite in general are likely to result in factional struggle escalations with potentially dire consequences for the regime.
‘Butterfly effect’
In a speech to hundreds of senior officials at an internal meeting on Feb. 7, 2023 that was published in early November, Xi Jinping warned that “various risks and dangers are highly correlated, strongly linked, and rapidly transmitted” and that “a little carelessness can cause a butterfly effect.”
“Small risks will become big risks, risks will become general risks, and economic and social risks will become political risks,” Xi added.
Ironically, Xi’s current efforts to curb risks are magnifying them into larger ones. Businesses, investors, and governments must account for mounting China risks and have contingencies for political Black Swans.
