The Darkside of (Global) Investing — Part II
We have a China problem.
China, a heavily populated, heavily controlled country in the world, is terrorizing the investors and tightening its global dominance.
We are bombarded with constant newsfeeds. Here are the top news and why investors need to re-think their investing strategies.
- Chinese developer misses a bond payment.
- Evergrande shares suspended — pending 'major transactions.'
- Dow tanks another 300 points Monday, followed by a rally today.
Between the market's bi-polar tendencies and Chinese developers missing a bond payment, the real panic seeps slowly into Wall Street.
China is an integral part of our global economy.
The relationship between China and the world is akin to a toxic relationship between a narcissist and a co-dependent.
The ruling Communist Party is tightening political control over China's internet giants and tapping their wealth to pay for its ambitions to reduce reliance on the U.S. and European technology. Anti-monopoly and data security crackdowns in late 2020 have shaken the industry, which flourished for two decades with little regulation. Investor jitters have knocked more than $1.3 trillion off the total market value of e-commerce platform Alibaba, games and social media operator Tencent, and other tech giants.* China's anti-monopoly enforcement will be a priority through 2025.
The global investors have no immediate choice, but to acclimate themselves to this new normal. The present global market state is just a hint on what is about to happen to investors' portfolios across the globe. The invisible Chinese grip in the United States capital market is hard to ignore, from retail to real estate.
For two decades, Chinese tech firms have flocked to the U.S. stock market, drawn by a friendly regulatory environment and a vast pool of capital eager to invest in one of the world's fastest-growing economies. But, in July 2021, the juggernaut behind hundreds of companies worth $2 trillion appears stopped in its tracks. Beijing's July 10 announcement that almost all businesses trying to go public in another country will require approval from a newly empowered cybersecurity regulator amounts to a death knell for Chinese initial public offerings in the U.S.
“It’s unlikely there will be any U.S.-listed Chinese companies in five to 10 years, other than perhaps a few big ones with secondary listings,” said Paul Gillis, a professor at Peking University’s Guanghua School of Management in Beijing.
This year, the Chinese companies that went public in the U.S. have tumbled more than 34% on average during Beijing's crackdown on big businesses.
We have analyzed the list of companies that investors are currently exposed to. (check our Bent Ledger).
Chinese domination of the United States financial system is a risk that investors are aware of; however, investors are fearful and clueless on the next step. Chinese stocks listed in the United States are dangerous to hold. Sadly, that is not the main concern for investors — dissecting stocks that have Chinese government backing and investor backings are challenging and time-consuming. The Chinese investment successfully seeped into the core-being of the global financial system. When China makes a decision, the global investors need to worry about their portfolios'.
The Paradox of "Global Village"
It has been nearly 40 years since Marshall McLuhan coined the phrase "global village" in his book The Gutenberg Galaxy. He argued that electronic technology was shrinking the planet, that "Time has ceased and space has vanished." When McLuhan wrote the book, that was not the reality. Now, the wisdom of his words is precise (except that time has not ceased and space has not vanished); technology has shrunk the world we live in.
Globalization has provided investors, innovators, and consumers freedom to choose, invest, innovate and consume — at a price of invisible coercion and control. Yet, the paradoxical nature of globalization is hard to ignore and harder to embrace when one country silently dominates the global economy and the freedom — China.
The COVID-19 is not an anomaly. It is a piece of a bigger puzzle. The year 2020 was not normal. Neither is 2021 — not for the investors and not for the economy. It is prudent to embrace that uncertainty is the new normal, a scary reality for investors, especially when China oppresses the world.
An Exposure to China is a National Security Threat
China is a huge national security threat. Saying this won't make you a racist. It will make you a wise investor. The Evergrande mess, China's decision to reel in Chinese companies from the U.S. shouldn't come as a shock to the investors. China's espionage into U.S. technology and our economy is nothing new. Read the survey of Chinese espionage in the United States since 2000. The report doesn't reflect the full intellectual property theft against Chinese entities in either U.S. or Chinese legal system. However, it is relatively comprehensive and displays that we are exposing our economy and national security to China in return for "cheap" labor. Everything has a price and we are beginning to pay a huge price.
The latest event? In July 2021, the U.S., NATO, and allies accused the P.R.C. of using contract hackers to conduct an ongoing global cyberespionage campaign, including ransomware attacks, cyber extortion, crypto-jacking, and rank theft. Accompanying this accusation were charges against four M.S.S. hackers for engaging in a multi-year campaign to steal trade secrets, business information, I.P., and Ebola vaccine research. Finally, the U.S. government announced they are attributing a March 2021 exploitation of zero-day vulnerabilities in the Microsoft Exchange Server to M.S.S. hackers.**
Last year, the F.B.I. director, Christopher Wary, told a conference the bureau currently had about 1,000 investigations open into Chinese technology theft across its 56 regional offices. He added that China aggressively exploited U.S. academic openness to steal technology, using "campus proxies" and establishing "institutes on our campuses." William Evanina, director of the National Counterintelligence and Security Center, said that China prioritized stealing U.S. aircraft and electric vehicle technology.
Now What?
If you are an institutional investor or a retail investor, you are trapped. Let us see:
- Do you want to hedge your portfolio by shorting Yuan? — You can't. China is opaque and the government controls everything.
- How about performing a "China exposure" cleanse of your portfolio? — You can and you can't. Well, it isn't very easy. The latest survey shows that 55% of Americans own stocks — mostly relying on professionally managed pension funds, mutual funds, or ETFs to run their current investments and retirement accounts. A substantial 20% or more of those investments is generally allocated to international equities, usually in a mix of developed and emerging markets. Over the past few years, approximately $400 billion of new foreign investments into Chinese equities was driven by changes in allocations within the benchmark indexes, with American investors accounting for more than a third of these massive portfolio flows. In aggregate, these significant shifts in fund allocations could automatically grow U.S. portfolio investment in Chinese companies and government securities to more than a trillion by the end of 2021 — without the active consent or knowledge of most Americans.*
3*. It is impossible to ignore China. It is impossible to work with China. We are trapped. China is the second-largest economy in the world, making up about 17% of worldwide G.D.P., surpassed only by the U.S. It was the only major economy to post growth figures in 2020. The Chinese equity market, while young, topped the $10 trillion thresholds last year, and its corporate fixed-income market is around $9.4 trillion.
This kind of growth has been appealing to investors. For example, through December 2020, China's CSI 300 Index, which tracks 300 A-share (read: domestically traded in China) stocks listed on the Shanghai or Shenzhen stock exchanges, trounced the S&P 500:
But the numbers aren't too pretty right now, as a series of sweeping regulatory actions from the government signals more intervention lies ahead — at least for certain sectors. For example, China has homed in on its big tech companies, and it's seeking to address quality-of-life issues like gaming addiction, or cracking down on education companies trying to profit on after-hours tutoring.
All of this has spooked markets. Nearly $1 trillion of value on the Chinese exchanges had disappeared. Stocks of China's biggest tech companies have been plummeting: A.D.R.s of Alibaba Group were down nearly 24% at market close on Sept. 1 from the beginning of this year. China's biggest food delivery company and shopping platform, Meituan, was down nearly 10%. The Nasdaq Golden Dragon China Index, which tracks the largest Chinese companies (or affiliates) trading in the U.S., is down nearly 24%. Some asset managers (including Cathie Wood's A.R.K. Invest) are headed for the door. SoftBank said it was suspending its investments in new China startups.
Here's a second comparison (again, of Chinese companies trading onshore), this time through the end of August 2021:
What are the Options for Investors?
Institutional investors need to reassess the risk versus return and their tolerance to macroeconomic power shift. There is no right model when uncertainty is the norm. However, there is one aspect that retail and institutional investors can control?
- Know how your investments are allocated.
- Dust and read the fine prints from the index funds.
- Ask uncomfortable questions to your allocator. If they do not know the answer, you have a big problem and a decision to make for your portfolios.
There is a thin blurry line between democracy, globalization, and global domination. Presently, China is a serious economic and political trouble for the United States and the rest of the global economy. And we do not have a strategy.
Leave your thoughts in the comments below. We would love to hear what you think - about our current relationship with the world's biggest economy? How secure do you feel about your current portfolios? What do you feel and believe we need to write more about?
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Disclaimer
The content and the analysis belong to Unicus Research and its subsidiaries. The content and analysis provided are for the information purpose only and should not be taken as investment advice. Unicus Research and its subsidiaries are not liable for any investment or other loss arising from the use of the research.
Citations
https://news.yahoo.com/china-tightens-political-control-internet-080947762.html
https://csis-website-prod.s3.amazonaws.com/s3fs-public/210723_Chinese_Espionage.pdf?AYbnRah_Zo7H1k5l5P_wPNV5k27YkcSE
https://foreignpolicy.com/2020/01/14/americans-investment-china-emerging-markets-united-states-trade-war/
https://fortune.com/2021/09/03/what-the-china-crackdown-could-mean-for-your-portfolio/
