A worker disinfects the Sanlitun shopping center in Beijing in June as shops in the area were closed for three days following the Covid outbreak. China is a bigger concern this year, as strict Covid controls continue and backstreet growth takes off. Analysts note longer-term trends in China’s reduced dependence on foreign investment and intellectual property.

Kevin Frayer | Getty Images News | Getty Images

BEIJING — China is just another emerging market player. Now, the country is becoming its own beast – with all the risks and rewards that come with being a world power.

China is a bigger concern this year, as strict Covid controls continue and backstreet growth takes off. Analysts note longer-term trends in China’s reduced dependence on foreign investment and intellectual property.

All this on top of Beijing’s crackdown on the internet technology sector and real estate developers over the past two years.

Foreign investors are responding. The share of Chinese stocks in MSCI’s benchmark emerging markets index fell from a peak of 43.2% in October 2020 to 32% in July 2022, Morgan Stanley analysts indicated.

Meanwhile, exchange-traded funds that track emerging markets — but not China — saw a boom in assets under management from $247 million at the end of 2020 to $2.85 billion in July 2022, the report.

WisdomTree last month became the latest firm to launch a post-China emerging markets fund, following Goldman Sachs earlier in the year.

This mood has shifted from China being one of the most attractive places to invest in the world… to the fact that the competition [with the U.S.] it has introduced an element of uncertainty and a substantial element of risk

Ketin Patel

co-founder and CEO of Greater Pacific Capital

“We definitely hear from clients [saying]maybe because of the current political environment, maybe dial[ing] China may be a better strategy,” said Liqian Ren, head of quantitative investing at WisdomTree.

So far, she said, the number of clients excluding China is “not huge,” and by metrics such as GDP per capita the country is still an emerging market.

The category includes Brazil and South Korea and refers to economies that tend to grow faster than developed economies such as the US – and risk more.

Competition with the US

But what Ren and others say is different for China now is that the United States has been designated as a strategic competitor. Recently, the Biden administration further restricted China’s ability to use US technology to develop advanced semiconductors.

“This mentality changed from China being one of the most attractive places in the world to invest in and how much certainty there was thought to be in policy, that there was competition. [with the U.S.] An element of uncertainty has been introduced and an element of risk is quite significant,” Ketan Patel, co-founder and CEO of Greater Pacific Capital, said last month.

People are not going to ignore China, “but the level of excitement has changed,” said Patel, former head of Goldman Sachs’ Strategic Group.

We have again downgraded our forecast for China's growth, says the IMF

And rather than seeing China as a developing country – which it is especially in rural areas – foreign investors would see it more “as a great power opportunity,” Patel said. He is also the chairman of the Force for Good initiative, which promotes investment as a way to achieve sustainable development around the world.

Beijing is also being presented as a great power.

Chinese President Xi Jinping has pushed the country not only to be self-sufficient in technology and energy, but to lead other nations in other systems – if not in competition – for finance, shipping and international relations. . These include the Global Development Initiative and the Global Security Initiative.

Within China, the government under Xi has increased its role in the economy.

The share of state-owned enterprises in the top 10 Chinese companies rose 3.6 percentage points between 2020 and 2021, despite an overall decline of 10 percentage points over the past decade, according to a report by the Atlantic Council and the Rhodium Group. Overall, the report said those state-owned firms account for more than 40% of the top 10 – well above the open economy average of 2%.

“We also cannot accurately measure informal barriers to market competition – for example, informal discrimination against foreign and private companies, industrial policies, or the presence of Communist Party committees,” the report said.

New party office rules

The growing role of the Chinese Communist Party under Xi is now a bigger concern for finance – an industry where China has recently allowed more foreign ownership.

Chinese law has long required internal party committees — for companies with at least three party members. However, enforcement only began after 2012, according to the Center for Strategic and International Studies.

An internal party committee, or office, brings together company employees who are members of the Chinese Communist Party. They may conduct events such as studying “Xi Thought.”

New rules from the China Securities Regulatory Commission that took effect in June state that securities investment funds in China must establish an internal party office.

When asked about the new rules, the securities regulator said they are in line with the principles of corporate governance and Chinese law, and “there is no need to worry at all” about data security, according to CNBC’s Chinese translation.

Read more about China from CNBC Pro

It is unclear what role such party offices play in business operations, Daniel Celeghin said earlier this year, when he was managing partner at consulting firm Indefi.

But before the pandemic, he said, at least one major Western asset manager decided not to establish a subsidiary in China because it would have required the establishment of a party cell, which “overwhelmed all possible commercial gains.”

China’s appeal

Funds like a few from WisdomTree offer ways to invest in emerging markets without putting investors’ money into state-owned enterprises.

In China, the market capitalization of non-state-owned companies has grown to about 47%, up from 35% a decade ago, according to Louis Luo, director of multi-asset investment at Abrdn.

China’s upcoming Communist Party congress will be more of a “confirmation of what’s in place,” Luo said, adding that he expects some more market-friendly policies to return. Among the sectors he is betting on for the long term are consumption, green technology and wealth management.

Even with slower growth, China’s appeal in the future may lie in offering an alternative to investing in other countries.

Efforts by the US Federal Reserve and other central banks to curb inflation by sharply raising interest rates on world markets have been thwarted. But the People’s Bank of China is going in the opposite direction.

A fundamental difference between emerging and developed markets is how independent they can make their monetary policy from the United States, Luo said. “From that point of view, I think China stands up.”



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