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China is no longer an emerging market


A worker disinfects the Sanlitun shopping complex in Beijing in June when stores in the area were closed for three days following the Covid-19 outbreak. China needs to be more cautious this year, as Covid’s strict control measures drag and when growth takes a back seat. Analysts note the long-term trend of China’s reduced dependence on foreign investment and intellectual property.

Kevin Frayer | Getty Images News | beautiful pictures

BEIJING – China is no longer an emerging market game. Now the country is becoming its own beast – with all the risks and rewards that come with being a world power.

More caution should be taken towards China this year, as strict Covid control measures entail and because development has a backrest. Analysts note the long-term trend of China’s reduced dependence on foreign investment and intellectual property.

That’s all Beijing has cracked down on internet tech and real estate developers over the past two years.

Foreign investors are reacting. Morgan Stanley analysts point out that the share of Chinese stocks in the MSCI emerging markets index has fallen from a peak of 43.2% in October 2020 to 32% in July 2022.

Meanwhile, exchange-traded funds that track emerging markets – but not China – have seen assets under management grow from $247 million at the end of 2020 to $2.85 billion by the end of 2020. July 2022, the report said.

WisdomTree last month became the latest company to launch a fund outside of China for emerging markets, following Goldman Sachs earlier this 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 is [with the U.S.] introduced an element of uncertainty and a sizable element of risk

Ketan Patel

Co-founder and CEO of Greater Pacific Capital

“We definitely hear customers [saying]maybe with the current political climate, it is possible to dial[ing] Liqian Ren, quantitative investment lead at WisdomTree, said downing to China might be a better strategy.

So far, the number of customers excluding China has not been “overwhelming”, she said, and according to indicators like GDP per capita, the country is still an emerging market.

This category includes Brazil and South Korea and refers to economies that generally grow faster than developed economies like the US – and are more risky.

Rivalry with America

But what Ren and others say for China today is different is that the US already sees the country as a strategic competitor. Most recently, the Biden administration continued China limits its ability to use American technology to develop advanced semiconductors.

“The mood has shifted from China being one of the most attractive places to invest in the world and the degree of certainty that is supposed to be in policy, to the fact that competition [with the U.S.] presented an element of uncertainty and a sizable element of risk,” Ketan Patel, co-founder and CEO of Greater Pacific Capital, said last month.

Patel, a former head of Strategy Group at Goldman Sachs, said people won’t ignore China, but the level of excitement has changed.

IMF says we again downgrade China growth forecast

And instead of seeing China as a developing country – especially in rural areas – foreign investors will see this as a greater power opportunity, Patel said. He also chairs the Force for Good initiative, promoting investment as a way to achieve sustainable development around the world.

Beijing is also presenting itself 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 countries with alternative – if not desired – financial systems, navigation and international relations. say competition -. These include the Global Development Initiative and the Global Security Initiative.

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

The share of state-owned enterprises in China’s top 10 companies has increased by 3.6 percentage points from 2020 to 2021, although overall it has declined by 10 percentage points over the past decade. Rhodium Group said. In total, the report says these state-owned enterprises account for more than 40% of the top 10 – well above the open economy average of 2%.

Nor can we accurately measure informal barriers to market competition — for example, informal discrimination against foreign and private companies, the report says. industrial policies or the presence of Communist Party committees”.

New Party Office Rules

The growing role of the Communist Party of China under Mr. Xi is now of greater concern in finance – an industry that China has recently allowed more foreign ownership to.

Chinese law has long-needed internal party committees – for companies with at least three party members. However, enforcement only started to be implemented after 2012, according to Center for Strategic and International Studies.

An internal committee, or office, gathers company employees who are members of the Chinese Communist Party. They can then organize events like “Xi’s Thoughts” study.

New regulations from the China Securities Regulatory Commission that took effect in June say securities investment funds in China need to set up an internal party office.

When asked about the new regulations, the securities regulator said they were in line with corporate governance principles and Chinese law, and there was “no need to worry at all” about data security, as translated by CNBC in Chinese.

Read more about China from CNBC Pro

Daniel Celeghin said earlier this year, when he was a managing partner at consulting firm Indefi, the role of such party offices in business was still unclear.

But before the pandemic, he said, at least one major Western wealth manager decided not to set up a subsidiary in China because once they knew they would have to set up a party cell, “it was beyond all potential commercial interests.”

China’s Call

Some funds from WisdomTree, for example, 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 increased to about 47 percent, up from 35 percent a decade ago, according to Louis Luo, a multi-asset investment manager. at Abdn.

The upcoming Chinese Communist Party Congress Luo said it would be “confirmation of what happened,” adding that he expected the return of some more market-friendly policies. Areas where he is betting in the long term include consumption, green technology and wealth management.

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

Global markets have been rattled this year as the US Federal Reserve and other central banks attempt to contain inflation by sharply raising interest rates. But the People’s Bank of China has gone in the opposite direction.

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

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