Investing in China

FAN YU is an expert in finance and economics and has contributed analyses on China’s economy since 2015. Fan Yu

‘China Dream’ Ends

Western investors should stop fantasizing about China

Western investors have been very patient, and even persistent, in believing for decades that China will be the new frontier, the investing “holy grail,” even.

After decades of investment and engagement with China, however, the country’s ruling Chinese Communist Party (CCP) hasn’t become more democratic. Now that the 20th Party Congress has come and gone, it’s clear that the regime has become more insular. Xi Jinping’s grip on power is tighter than ever. The government is more authoritarian and top-down than ever before. Its policy direction? Harder to read than at any time since the 1970s.

Investors hoping to get a read on what the CCP will do next, both economically and politically, were left disappointed.

One of the biggest questions in the minds of Western investors leading up to the National Congress— whether the zero-COVID policy would continue—wasn’t answered. Or, more accurately, the answer is that it likely would continue because that’s Xi’s wish.

It was wishful thinking on the part of Western investors hoping otherwise. The CCP’s “grow and get rich” policy under previous Chinese leaders Jiang Zemin and Hu Jintao is no longer the mandate.

“Can China provide support to the global economy? Will China rekindle inflationary pressures?” Those were the questions posed in a recent Morgan Stanley research note on Oct. 31.

The sooner that China can exit from its zero-COVID policy, the better its economic outlook and its investment prospects.

But the truth is, Xi doesn’t care.

It may be a painful realization, but the CCP simply doesn’t play by Western rules. By stacking the Politburo and Standing Committee with his allies, Xi now has a longer leash than ever before. Unlike Western leaders who face ongoing elections every few years, Xi doesn’t need to deliver short-term results. And China’s people? With the tightly controlled media and propaganda environment, they’re far easier to bring into line than, say, Americans.

It appears that foreign investors are finally getting the message. China’s financial markets sold off after the National Congress, both in Shanghai and Hong Kong. It’s striking given that gross domestic product growth was more positive than expected, a sign that some investors are permanently leaving the Chinese market.

And that may be just fine for Xi. He has been steering China to become more nationalistic, more closed-off, and more self-dependent. He’s put an emphasis on security and politics, even at the expense of the economy.

Another big question on the minds of investors concerns the real estate development industry. Many foreign investors are holding dollar-denominated debt issued by Chinese developers, and it would have been great to get some assurances that Beijing has their back.

Well, there was no substantial development on that topic at the National Congress. Authorities are unlikely to allow the housing market to completely collapse. But the policy to de-lever the real estate developers was very deliberate and came straight from the top. The CCP is unlikely to suddenly reverse course, no matter how much Western investors are hoping for it.

There was also no reported easing of the CCP’s regulatory scrutiny over the technology sector, a hotbed of foreign investment activity. Of Xi’s seven appointees to the Politburo Standing Committee, none of them are proponents of the tech industry. The closest one may be Li Qiang, the former Shanghai party boss who orchestrated harsh COVID-19 lockdowns and also oversaw approvals for Tesla’s gigafactory and the tech-friendly Star Market.

Li and others are now more likely to push the adoption of “common prosperity,” “Xi Jinping thought,” and political loyalty than they are tech-friendly policies. It’s no wonder that shares of tech giants such as Tencent and Alibaba sold off sharply following the conclusion of the National Congress.

“The new administration doesn’t look particularly business-friendly. ... There’s every indication that party loyalty trumps everything else,” Richard Harris, CEO of Hong Kongbased Port Shelter Investment Management, told The New York Times in an Oct. 24 report.

Well, isn’t that the understatement of the year. If they haven’t already, Western investors need to abandon their “China dream” quickly.