The question of China’s “investability” first came up late last year when Beijing’s harsh regulatory crackdowns on big tech and real estate companies wiped trillions of dollars off foreign investors’ books.
Financial markets sent an unequivocal message. US-listed Chinese stocks crumbled Monday, posting their biggest drop on record. The offshore yuan sank to the lowest since the unit started trading in 2010. Equities remained jittery Tuesday. This rout occurred despite China releasing better-than-expected third-quarter gross domestic product figures.
Ironically, investors may not mind a strongman politician. After the 2012 party congress, when Xi first came to power, and the party gathering five years later, when he first started flexing his muscle, Chinese stocks performed well. Financial markets tend to prefer a focused administrative team to in-fighting and competing objectives among politicians.
But investors are having second thoughts this time because they are not sure Xi’s so-called new development model, which centers on narrowing the wealth gap and the role of the state in the economy, will work. Now that there are no dissenting voices at the top, Xi’s aides might drive China’s financial markets into the ground.
When investors flee, they sell indiscriminately. A weaker yuan, for instance, exacerbates outflows from China’s government bond market. Shares of electric vehicle and battery makers, such as BYD Co. and NIO Inc., also slumped even though this sector is favored by policymakers.
As such, Beijing still has an incentive to keep markets open to fund its fiscal deficit and big industrial tech ambition. So how can Xi make China investable again?
At this point, optics matter a lot more than rosy macro data. It only takes a few gentle gestures from Beijing to stabilize the market.
First, show what “common prosperity” is not. This slogan, which aims to broaden the middle class and narrow the wealth gap, got a renewed focus at the party congress. While Xi took pains to explain that it was not egalitarianism and China wanted a bigger economic pie for everyone, investors and businesses are nonetheless spooked, seeing it as a prelude to further wealth destruction. After all, history gave them a bitter pill: This common prosperity drive got elevated amid Beijing’s big tech crackdown last year.
So how about bringing the tech billionaires, such as Alibaba Group Holding Ltd.’s Jack Ma, Tencent Holdings Ltd.’s Pony Ma and Meituan’s Wang Xing, to Beijing for a constructive dialogue? Don’t “summon” them because investors associate this word with further crackdowns. Invite them instead to discuss how China can further its tech frontier and show that Beijing still appreciates entrepreneurship and these self-made billionaires’ contribution to Chinese society.
Second, there is now a perception that China is closing itself to the world. “Dual circulation,” another economic slogan promoted by Xi that focuses on the domestic economy and promotes exports in sectors with higher value-add, is now included in the party constitution. Along with Covid Zero and a border that has been shut for almost three years, investors rightfully worry China is isolating itself. If that was the case, why would China need foreign capital?
Xi says China is still open, so his bureaucrats need to showcase it. How about reopening the border and cutting the number of quarantine days for inbound travelers? Let foreign businesspeople come see China for themselves, and let overseas Chinese go home to visit their families. It’s been too long. The Covid-Zero policy is a fiscal disaster anyhow.
Granted, Xi does not care about optics. If he did, he would have included a woman in the new Politburo or aided a frail Hu Jintao to avoid his predecessor’s unceremonious exit at the party congress.
But optics and gestures matter. To restore confidence in Chinese stocks, bonds and the currency, welcoming self-made billionaires and foreigners to Beijing is the first step Xi can take.
Bloomberg
