To Ray Dalio, $10 Million for China Is Pocket Change

(Bloomberg Opinion) -- As the coronavirus rages in China, the world’s most prominent hedge-fund billionaires are starting to open their wallets. It doesn’t hurt that Shanghai is at the cusp of a bull market. 

Ray Dalio’s family charity and his hedge fund Bridgewater Associates LP are donating $10 million to fight the virus. Earlier this month, Citadel founder Ken Griffin’s hedge fund and securities firm put up $7.5 million. 

It’s high time that U.S. hedge funds start cozying up to China, especially as they suffer at home. Last year, mainland-focused funds returned 23.2%, compared with 9.7% for their global peers, data provided by Nasdaq-owned eVestment Inc. show. Greenwoods Asset Management Ltd.’s $2.2 billion Golden China Fund jumped 47.3%, while Orchid Asia Group Management Ltd.’s China Master Fund rose 32.2%.

As China opens up its financial industry, foreign hedge funds are walking a fine line of making money without alienating regulators. Both sides are happy so long as stocks are rising. But if the market turns sour, regulators could be quick to shut down those who dare to short it. That's why it pays to be in Beijing’s good graces now.

Dalio has always enjoyed a rock-star investor status in China, despite his prescient warning before the spectacular boom-and-bust of mainland shares in 2015. Griffin’s relationship with Beijing is more checkered. In August of that year, officials suspended a Shanghai trading account operated by Citadel Securities, the hedge fund’s brokerage arm, and subsequently launched an investigation into its “malicious short-selling.” Citadel only managed to redeem itself with a $97 million settlement last month. In that light, Griffin’s $7.5 million relief money looks like extra atonement. 

China’s stock market enjoyed a bull run last year, and there’s good reason to believe 2020 will be quite a bit of fun, too. Markets are certainly trading like there’s a big stimulus in the works. 

The blue-chip CSI 300 Index has recouped all of its losses since the prolonged Lunar New Year break, while the new economy-focused ChiNext Index has notched a 19% gain so far this year. China’s 10-year government bond yield has fallen below 3% for the first time since late 2016. 

Traders are latching onto a speech President Xi Jinping made during the Politburo meeting on Feb. 3. He insisted on delivering this year’s economic target — broadly interpreted as keeping gross domestic product growth at around 6% — despite the virus. Given that many factories remain closed and millions are effectively under curfew, that would mean helicopter money now and big-ticket infrastructure spending down the road, when migrant workers are once again allowed to move about. 

Signs are also pointing to the easing of the government’s deleveraging campaign, which charged ahead even as the trade war took an economic toll. Draconian shadow-financing rules, which caused two years of record corporate defaults, may be pushed back. On Monday, the People’s Bank of China cut its underlying benchmark rate for bank loans, signaling the start of a rate-cut cycle. Local governments, meanwhile, are already allowed to issue more than 1.8 trillion yuan ($257.8 billion) of municipal bonds, ahead of the National People’s Congress in early March when fiscal-deficit and bond-issue quotas are announced.

These policy moves are reminiscent of early 2015, when the central bank unleashed a flood of liquidity, which helped engineer mainland shares’ meteoric run. While Chinese households lost billions — or roughly 1.3% of GDP, according to Dalio — those who rode the rally early on and sold at the opportune time would have come out nicely.

For years now, China has been relatively open to foreign funds eager to pour cash into its trillion-dollar markets. These investors can access most mainland stocks and bonds via Hong Kong's connect program, and some tap a broader universe of securities through an earlier-established quota system. But the jarring experience of 2015 will always remind foreigners that the regulators can shut down their accounts any moment. So a bit of public relations now can go a long way.

The coronavirus, which has infected more than 70,000, could be a black swan or a great trading opportunity. For foreign fund managers to capture this moment, however, they need to be on China’s good side. Don’t be shy about sending in masks and protective suits. These virus relief funds are charitable dollars, but also smart money.

To contact the editor responsible for this story: Rachel Rosenthal at rrosenthal21@bloomberg.net

This column does not necessarily reflect the opinion of Bloomberg LP and its owners.

Shuli Ren is a Bloomberg Opinion columnist covering Asian markets. She previously wrote on markets for Barron's, following a career as an investment banker, and is a CFA charterholder.

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