(Bloomberg Opinion) -- There's a big debate going on about China as Xi Jinping’s "common prosperity" campaign shakes up sector after sector: How does this affect foreign capital keen to piggy-back on the second-largest nation’s rising middle class wealth? Well, the answer depends on which legendary western investor you put the most store by.
George Soros, the 91-year old fabled hedge fund owner, is the latest to pipe up with his view that, actually, China might be one to miss. He criticized the world's largest money manager BlackRock Inc. — which is making a big push into China — for putting clients money and even U.S. security interests at risk
Punchy stuff. But the Chinese stock market has been nothing to write home about for the past few years. It is negative this year, paling in comparison to the 20% gains in the S&P500 index. The China discount exists for a reason. Beijing’s latest crackdowns should make even the hardiest investors blanch. Xi is pursuing a social policy agenda without much care for stock market valuations, though the authorities have been careful to avoid a wider market rout.
Soros immediately met with counter-arguments. Mark Mobius, the storied emerging market investor, came out defending the invest-in-China line. As did Ray Dalio, the founder of Bridgewater, the world's largest hedge fund, who has been beating the pro-China drum for awhile now.
So, whose view should we put the most weight on?
For me, the simplest method is to determine who has skin in the game and might be talking their own book — something I have gently questioned Dalio on before. Soros has no particular axe to grind here other than his own trenchant world views but at least he is not trying to whip up business. His take is what I most favor: Return of capital shouldn’t be just some illusory promise. And what we’re dealing with in China is a communist system with a penchant for capital controls and strict crackdowns. There be dragons.
Still, this doesn’t mean both sides can’t be right in different ways. BlackRock has every business reason to tap into domestic Chinese clients. Global investment banks and money managers are queuing up to get a bigger foothold in what is the third-largest stock market, one with massive demographic upside. All the major index providers, including Bloomberg, have increased weightings in recent years towards China, both in equities and bonds. The 2.87% yield on the China Government 10-year is more than double the U.S. 10-year. Bigger returns are always tempting.
This makes investing in China a self-fulfilling prophecy for passive investors. While active managers have to elect not to invest (and thus risk under-performing their benchmark), tracker funds just pile on in. Still, there have been many investing and corporate mishaps in China — where hasn’t there been? — and good local intelligence will pay off for both passive and active investors.
For example, overseas investors were stunned by the semi-controlled implosion of property developer China Evergrande Group but people familiar with the local financial press might have picked up cautionary scents early on. On-the-ground due diligence requires shoe leather; and it costs time, money, trust and expertise to get the best information, especially for funds that are set up oceans and continents away from China.
Foreigners who venture onto the mainland can also easily be caught in the world's biggest geopolitical tussle. There is the specter of Washington delisting Chinese companies on U.S. exchanges. China, in turn, has made it abundantly clear that looking after the welfare of overseas capital is not a priority.
In a Financial Times interview, BlackRock researchers recommended that investors should triple their exposure to China because the People’s Republic is now a fully-fledged developed economy. That does look a bit blinkered: China’s rule of law is not the same as ours. At the very least, if a fund is going in on China, it must alert its customers with a very clear health warning.
Unless he happens to like Cathie Wood of Ark Investment Management, Soros looks rather lonely up against the might and received wisdom of Wall Street and its biggest money managers. But he doesn’t care what you think — which is why I think you should listen to him most.
This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.
Marcus Ashworth is a Bloomberg Opinion columnist covering European markets. He spent three decades in the banking industry, most recently as chief markets strategist at Haitong Securities in London.
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