Coronavirus pandemic and US government pressure on investors to avoid China drag capital flows to nine-year low

Investment between the two countries fell to US$10.9 billion between January and June, the lowest level for a six-month stretch since late 2011, study shows
US investors already exposed to China hold firm, while some new investors exploring opportunities turn cautious, panel of investors says

Investing

Alison Tudor-Ackroyd

Published: 8:00am, 18 Sep 2020

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The US government’s pressure on investors to turn away from China, combined with the travel barriers thrown up by the coronavirus pandemic, have sunk cross-border money flows to a nine-year low, according to a consultant’s study and senior money managers.

The Trump administration has been actively discouraging US institutional investors from buying mainland Chinese stocks and bonds this year while the coronavirus pandemic has made travelling internationally to scout out new investment opportunities troublesome.

“People who were beginning to dip their toe into Chinese private markets are now pausing,” said Edward Grefenstette, CEO and chief investment officer at the Pittsburgh-headquartered Dietrich Foundation, which manages about US$1.1 billion.

A divide is opening between old China hands, who are talking about continuing to plough capital into the world’s second-largest economy, and new investors to the market. “There is a bifurcation,” said Grefenstette during a conference on Thursday.

The coronavirus pandemic has pushed foreign firms and governments to reconsider their future with China, according to a report published this month by New York-headquartered consultancy Rhodium Group.

Direct and venture capital investment between the two superpowers dropped to US$10.9 billion between January and June, the lowest level for a six-month stretch since late 2011, it said.

US companies slashed new investment in China in the first half of this year but remained committed to ongoing greenfield projects and previously announced acquisitions. Completed investments plummeted to US$4.1 billion, a year-on-year drop of 31 per cent.

US venture capital investments in Chinese start-ups also fell in the first half, amounting to only US$1.3 billion and 120 transactions, with a particularly notable drop in contributions to early-stage fundraising rounds, Rhodium Group said.

Foreign investment has long played a crucial role in China’s economy, and Beijing has been taking steps to encourage foreign investors to stay rather than hedge their bets. “Those foreign firms are canaries in the Chinese coal mine. Beijing needs the world to see them thriving,” the Rhodium Group said.

Last month the US State Department asked American colleges and universities to divest their holdings of Chinese companies from their more than US$600 billion in endowments. The agency warned in a letter that Chinese companies could face a “wholesale delisting” from American bourses by the end of next year and it would be “prudent” for university endowments to exit their holdings in Chinese firms.

“The letter is very eye-catching,” said Tianhao Wu, director of investments at The Rockefeller University and it prompted discussions among the university endowment’s board members.

The President’s Working Group on Financial Markets recommended last month that foreign issuers be delisted from US stock exchanges if they fail to allow oversight of their audits by January 2022. China was the only non-cooperating jurisdiction mentioned by name in the report.

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The rising tension has caused some US-listed Chinese firms to consider secondary listings closer to home, particularly after Chinese tech firms Alibaba Group Holding, JD.com and NetEase raised nearly US$20 billion combined in their secondary listings in Hong Kong since November.

The Rockefeller University concluded that it would continue to invest in China. “We don’t really see the delisting itself as being a major risk,” said Wu, noting the trend for US-listed Chinese companies to seek a secondary listing in China.

Grefenstette characterised the Dietrich Foundation’s investment plans for China as “steady” even as he steps up monitoring political developments. “We have more policy conversations, for sure, with our [fund managers],” he said.

Stanford University campus in Santa Clara, California. Photo: AP Photo

Foreign stocks played an outsize role in the investing strategy at some of the biggest university endowments in the US last year.

For example, Yale set aside 13.7 per cent of its assets in foreign equity, according to its June 2019 endowment report. Stanford Management Company, which oversees Stanford University’s merged pool of investments, allocated about 20 per cent of its assets to international equities in financial year 2019, according to it most recent financial report.

Investors with exposure to China’s fast-growing markets, however, appear reluctant to bolt and are taking a pragmatic approach to rising geopolitical tensions.

“We’re not yet discounting Chinese companies traded on US exchanges, it’s a watch and wait,” said Sherry Lin, a managing director at Willett Advisors, which manages former New York mayor Mike Bloomberg’s money

“We’re not politicians, we’re investors,” said Lin.

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