State-owned investors continued to slash their Chinese equity holdings in 2023 due to heightened geopolitical risks, poor returns and reduced IPOs.
The reopening of the Chinese economy has been disappointing with a lack of anticipated pent-up demand. In the first quarter of the year, global investors poured billions into US-based mutual funds and ETFs that buy Chinese equities, reversing a trend seen in H2 when they reduced exposure to China. The same investors have started to pull funds away from China again with Refinitiv Lipper noting that total net assets in those funds have fallen by more than 30% since the 2021 peak to under US$22 billion.
State-owned investors have largely followed suit. From a peak of US$8.7 billion investment in Chinese A-shares in December 2021, they have reduced exposure to US$3.5 billion by end-Q3 2023 – a multi-year low.
Canadian public pension funds have largely deserted renminbi-denominated stakes, from US$1.05 billion to US$0.23 billion over the period, following a reduction in operations devoted to China. CPP Investments – Canada’s biggest federal public pension fund - made redundant five investment professionals at its Hong Kong office, in September. It has paused new investments in China, including direct investments as well as those in China-focused fund managers, due to slow economic growth and geopolitical risks. China accounts for nearly 10% of CPP Investments’ total portfolio. In April, Ontario’s OTPP closed down its Hong Kong-based China equity investment team. Québec’s CDPQ is also drawing back from China with plans to close its office in Shanghai.
Europeans have followed suit with NBIM’s A-share holdings dropping from a peak of US$2.1 billion at end-2021 to less than US$0.1 billion by end-September. The sale of its shareholdings was expected after it shut its Shanghai office in September after 16 years of operation – although it insists the decision was “operational” and it would continue to invest both directly and via funds and Singapore would be used as its hub for the region. Over the past two years, interactions between the fund and the Chinese government became increasingly strained as NBIM divested over human rights concerns
While Singapore’s sovereign wealth fund GIC has reduced its total listed assets by US$2.0 billion at end-2022 to US$0.2 billion, its stablemate Temasek has held firm, even slightly raising its position from US$0.8 billion to US$0.9 billion. Bucking the trend, the Kuwait Investment Authority (KIA) has also increased its position from US$0.6 billion to US$0.7 billion, but its investment has not offset the cut in Abu Dhabi Investment Authority’s position by more than a third to US$1.3 billion.
In all, Middle Eastern funds are seeking to increase their exposure to China, if not through public markets then in private equity. In September, the President and CIO of the China Investment Corporation (CIC) Ju Weimin met with the CEO of Abu Dhabi sovereign fund Mubadala Khaldoon Al Mubarak “on potential investment cooperation between the two institutions.” The contents of the talks were not disclosed, but such top-level talks usually result in significant commitments and strong ambitions with Mubadala notable for its interest in strategic alliances and bilateral soft power. Mubadala has around US$5 billion invested in China, which is less than half the US$11 billion estimated for the Qatar Investment Authority.
The overall trend away from Chinese listed equities is unlikely to change amid the burst in the real estate bubble, Country Garden’s debt default and weakening manufacturing performance. Meanwhile, US public equities are looking more stable, while US firms are cutting exposures due to new export controls and China’s move against US tech – notably banning government officials from using iPhones at work, leading to a drop in Apple’s revenue from China.
Beijing may institute a new economic stimulus that will win back investors and precipitate a rally in Chinese stocks. For many foreign investors, this would not address underlying structural problems within the mainland Chinese economy, nor will it overcome geopolitical risks that are heightening between China and the US. For European and North American state-owned investors in particular, there is the added potential for retaliatory action by the Beijing authorities in the event of further cooling of relations between Beijing and Washington – particularly in relation to military tensions in the South China Sea.