State-owned investors (SOIs) are dumping their Shanghai-listed A-Shares and rapidly reducing their exposure to Chinese public markets amid rising geopolitical risks and market uncertainty.
Analysis by Global SWF finds that by the end of Q1 2023, SOIs cut their A-Share positions by a third compared to end-2022 to just US$1 billion. The aggregate SOI portfolio is far lower than the US$8 billion peak recorded at end-2021. The global press has widely reported Middle Eastern SOIs buying up shares in certain counters, but overall their Mainland Chinese equity portfolios have shrunk.
Part of the reason for the retreat from China is the impact of the Russian invasion of Ukraine on the global market, but there are specific issues related to the Chinese market. China faced headwinds because of Covid lockdowns, the ongoing real estate downturn, a regulatory clampdown on tech firms, and a challenging external environment.
While the lockdowns have largely ended and the regulatory environment is a lot clearer, there are mounting tensions between China and the West, while the prospect of a Chinese incursion into Taiwan remains on the minds of the global investor community. As such, a full recovery in investment is unlikely, even though there is greater clarity on tech regulation and the draconian lockdown measures have been lifted.
The Abu Dhabi Investment Authority (ADIA) and GIC have led the abandonment of Shanghai between end-2021 and end-Q1 2023. GIC’s total A-share portfolio slashed by US$1.21 billion to just US$74 million between end-2021 and end-Q1 2023, while ADIA cut its position by US$1.23 billion to US$29 million. Norges Bank (NBIM), which owns 1.5% of all shares in the world’s listed companies, also massively reduced its holding by US$908 million to US$32 million.
Canadian public pension funds have significantly slashed their Chinese public equity exposures, reducing their collective positions by US$548 million between end-2021 and end-Q1 2023 to US$121 million. Canada’s biggest PPF, CPP Investments, had a portfolio of US$70 million at end-Q1 2023, unchanged from end-2022 but down from a peak of US$312 million at end-2021. CDPQ’s holdings were worth just US$4 million at end-Q1 2023, which is a drastic cut from US$222 million at end-2021. Over the same period, British Columbia Investments (BCI) held A-Shares worth US$47 million, down from US$127 million, while the Ontario Teachers' Pension Plan (OTPP) had completely exited the market by end-2022, although it was never a significant investor.
The changes in shareholdings are not limited to public equity, but also private markets. Sovereign investment in private equity in China collapsed from US$5.8 billion in 2021 to under US$1 billion in 2022, with a pivot towards the West.
In the case of GIC, Global SWF data shows a massive tilt away from China and towards the USA, UK and Australia in private equity investment. The decline began in 2021 when its investments in Chinese private equity fell 43% from 2020 when the Singaporean fund invested a solid US$3.3 billion. Yet, GIC’s investment in the USA increased 13% to US$14.6 billion, Australia rose 21% to US$2.1 billion, the UK grew by an estimated 260% to US$5.55 billion in 2022. The three developed markets were GIC’s biggest in terms of private markets investment. Nevertheless, China remains the biggest part of GIC’s portfolio, making up 37% of AUM in FY2022, eclipsing Asia (ex Japan) which contributed 25%.
GIC is not the only sovereign investor that is cooler on investment in China. In February, OTPP indicated it was pausing future direct investments in private assets in China due to geopolitical risk. Allocations to China amount to just 2% of its AUM and it will continue to invest in public markets and indirectly in private markets through fund partners and external managers.
US-based state-owned investors are also reconsidering their approach. Washington State Investment Board CEO Allyson Tucker told Reuters in January, “I happen to believe the US-China rivalry will be one of the dominant themes of our times. As a global investor, we have to think about whether or not we continue to be allowed to invest in China. Right now, we have exposure in every single one of our asset classes. It used to be a much larger part of our portfolio than it is today.”
The consensus of SOIs across all geographies – and regardless of the health of bilateral relations with Beijing – is that investment in China carries a high degree of risk that is not balanced by reward potential. Whether Singaporean, Middle Eastern or Western, SOIs are paring back investment in China across all asset classes until they see a return of geopolitical stability, from Ukraine to Taiwan.