Wall Street, investors reject decoupling from China

Strong rebound

On Feb 6, the South China Morning Post reported, "Encouraged by signs of the world's second-largest economy mostly back to pre-pandemic levels of production, they (foreign financial institutions) have snapped up Chinese stocks, bonds, exchange-traded funds and other financial assets available to them under the country's tightly controlled capital account."

UBS Global Wealth Management, which invests $3 trillion for wealthy individuals, expects "China equities, fixed income and currency to shine" amid a strong economic rebound.

According to analysis of Treasury data by Seafarer Capital Partners, at the end of 2019, US investors owned $813 billion worth of stocks and bonds issued by Chinese mainland companies, compared with $368 billion in holdings three years earlier.

Eswar Prasad, an expert at Cornell University on China's financial system, told the Financial Times in October: "Economic imperatives are certainly overriding political concerns. Ultimately, private capital and private financial institutions are going to respond more to economic incentives, irrespective of what political masters say."

Hayden Briscoe, head of fixed income for Asia Pacific at UBS Asset Management, told the newspaper: "Money is starting to pour into China because they're looking for that income. It's a really interesting point in history－the Chinese have opened up and you've got the rest of the world in dire straits."

One wealth manager told Bloomberg in an article on Wednesday, "The rivalry between the US and China means that investors can no longer afford to leave Chinese assets out of their portfolios."

Another investor said, "As both countries test their power and influence in the coming years, investors should build portfolios resilient enough to withstand all possible outcomes."

Billionaire hedge fund manager Ray Dalio sees China's economy outperforming the world, regardless of other nations' attempts to contain it.

"For as long as I can remember, people have said that China cannot succeed. Yet every day we see China succeeding in exceptional ways," he wrote in a post on his LinkedIn page in October.

"Over the past year (2020), its economy grew at almost 5 percent, without monetizing debt (such as the US Federal Reserve does when it buys US Treasuries for its own account), while all major economies contracted.

"China produces more than it consumes and runs a balance of payments surplus, unlike the US and many Western nations."

Dalio said nearly half the world's initial public offerings this year would be in China.

"The world order is changing, yet many are missing this because of a persistent anti-China bias. Whatever criticisms you may have about Chinese 'state capitalism', you cannot say it hasn't worked, even if you strongly disagree with how Beijing has done it," he wrote.

"When I first visited China 36 years ago, I would give $10 pocket calculators to high-ranking officials. They thought they were miracle devices.

"Now, China rivals the US in advanced technologies and will probably take the lead in five years. Since 1984, per capita incomes have risen more than 30 times, life expectancy has increased by a decade and poverty rates have fallen nearly to zero. In 1990, China's first stock market was launched, designed by seven young patriots who I knew. Since then, it has become the second-largest in the world."

Dalio, who manages the $148 billion Bridgewater Associates, the world's largest hedge fund, wrote: "China's fundamentals are strong, its assets relatively attractively priced, and the world is underweight Chinese stocks and bonds. These currently account for 3 percent or less of foreign portfolio holdings; a neutral weighting would be closer to 15 percent.

"This discrepancy is at least in part due to anti-Chinese bias. I think it is about to change. Chinese markets are opening up to foreigners, who can now access at least 60 percent of them, compared with 1 percent in 2015."

Dalio's All Weather China strategy fund has earned a 22 percent return over the past two years.

"In brief, empires rise when they are productive, financially sound, earn more than they spend, and increase assets faster than their liabilities. This tends to happen when their people are well educated, work hard and behave civilly," he wrote.

"The fundamentals clearly favor China," Dalio added.

If the US were to take the road to decoupling, it may not be easy to bring its allies along for the ride.

On Jan 29, an article on the investment website Seeking Alpha said: "Despite US opposition, allies are choosing to do business with China because it is in their best interest to do so. You have to understand that Europe has suffered a decade of economic stagnation and will face another one if they don't get heavily involved with the fastest-growing market in the world.

"On the other hand, Asian nations have no interest in joining the West in confronting China, the growth engine in their own backyard."

The article added: "Even if the elites in the US, Europe or Asia want to contain China, they will find it extremely difficult to rally their people, who will ultimately bear the cost of a confrontation. For Asian nations, it is simple: the population will certainly not support a clash of civilizations against China."