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China is no longer just any emerging market — it has become its own beast

A worker disinfects the Sanlitun shopping complex in Beijing in June as stores in the area were closed for three days after a Covid outbreak. There's greater caution on China this year, as stringent Covid controls drag on and as growth takes a backseat. Analysts note longer-term trends of China's reduced dependency on foreign investment and intellectual property.
Kevin Frayer | Getty Images News | Getty Images

BEIJING — China is no longer just another emerging market play. Now, the country is becoming its own beast — with all the risks and rewards that come with being a world power.

There's greater caution on China this year, as stringent Covid controls drag on and as growth takes a backseat. Analysts note longer-term trends of China's reduced dependency on foreign investment and intellectual property.

That's all on top of Beijing's crackdown on the internet tech sector and real estate developers in the last two years.

Foreign investors are reacting. The share of Chinese stocks in the benchmark MSCI emerging markets index fell from a peak of 43.2% in October 2020 to 32% in July 2022, Morgan Stanley analysts pointed out.

In the meantime, exchange-traded funds tracking emerging markets — but not China — saw assets under management surge from $247 million at the end of 2020 to $2.85 billion as of July 2022, the report said.

WisdomTree last month became the latest firm to launch an emerging markets ex-China fund, following Goldman Sachs earlier in the year.

This mood has shifted from China being one of the most attractive places to invest in the world ... to the fact that the rivalry [with the U.S.] has introduced an uncertainty element and quite a substantial risk element
Ketan Patel
co-founder and CEO of Greater Pacific Capital

"We definitely hear clients [saying], maybe given the current political environment, maybe dial[ing] down China could be a better strategy," said Liqian Ren, leader of quantitative investment at WisdomTree.

So far, she said, the number of clients excluding China isn't "overwhelming," and by metrics such as per capita GDP the country remains an emerging market.

The category includes Brazil and South Korea and refers to economies with generally faster growth than developed economies such as the U.S. — and more risk.

Rivalry with the U.S.

New party office rules

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It's unclear what role such party offices play in business operations, said Daniel Celeghin earlier this year, when he was managing partner at consulting firm Indefi.

But before the pandemic, he said, at least one large Western asset manager decided not to set up a subsidiary in China because once they learned establishing a party cell would be required, "that overcame all of the potential commercial gains."

China's appeal

Funds such as a few from WisdomTree offer ways to invest in emerging markets without putting investors' money into state-owned enterprises.

In China, the market capitalization of non-state-owned companies has grown to about 47%, up from 35% a decade ago, according to Louis Luo, investment director of multi-asset at Abrdn.

The upcoming Chinese Communist Party congress will be more of a "confirmation of what's been in place," Luo said, adding that he expects a return of some policies that are more market-friendly. Sectors he's betting on for the long term include consumption, green tech and wealth management.

Even with slower growth, China's future attractiveness may lie in just offering an alternative to investing in other countries.

Global markets have been roiled this year by the U.S. Federal Reserve and other central banks' attempts to curb inflation by aggressively hiking interest rates. But the People's Bank of China has been going in the opposite direction.

A fundamental difference between emerging markets and developed ones is how independently they can make their monetary policy from the United States, Luo said. "From that point of view, I think China stands up."

Source: https://www.cnbc.com/2022/10/14/china-is-no-longer-just-any-emerging-market.html


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