US economy

Chinese investors have a bigger worry than trade war


Private equity funds hunting for Chinese companies to buy have recently discovered a new pitch when trying to persuade founders to sell: they will get the asking price in foreign currencies. The pitch is seductive.

And not just because the renminbi remains fragile. The trade tensions between the US and China are only part of the reason there are more conversations between sellers and buyers — and at lower prices — than a year ago.

Chinese entrepreneurs will privately admit that a bigger motivation for them to sell their businesses now is the loss of confidence in their own government. For them, the trade war with the US is simply a symptom of an underlying malaise that begins with President Xi Jinping’s approach to the economy.

The anniversary of the Trump administration’s threat to impose tariffs against China is next month, but across the Pacific Ocean, Beijing isn’t absolved of blame. Instead there is concern over a series of ill-advised steps, both political and economic, that may have helped provoke the wrath of the US administration.

“It is political insecurity that is driving the economic slowdown in China, not the dispute with the US,” says Chen Zhiwu, the head of the Fung Global Institute at Hong Kong University.

The errors began with Made in China 2025, the plan that trumpeted Mr Xi’s intention to close the gap with the US in sectors ranging from aerospace and biotechnology to industrial robots and electric vehicles. In a world where much technology has both military and civilian applications, some in China say they saw the manifesto as throwing down a challenge to American supremacy when the wiser choice would have been to discreetly pursue its ambitions to leapfrog the US.

Beijing’s growing embrace of state-owned companies at the expense of the private sector is also causing concern, given the majority of jobs since Mr Xi came to power in 2012 were generated from the latter. That intensified when Mr Xi did away with the two-term limit on the presidency.

For the generation who grew up during the Cultural Revolution the decision was confirmation that Mr Xi, far from being a reformer in the mould of Deng Xiaoping, was actually a would-be Mao Zedong, who was deeply sceptical of financial markets. Mr Deng believed to get rich was glorious. Instead, the current president seems to believe that to get rich is to be corrupt.

Doubt over Beijing’s willingness to respect property rights was a major reason why capital flight became such a problem several years ago — well before the trade war. Despite rigid controls on removing capital from the country, since 2016 an average of $46bn a quarter can’t be accounted for in the balance of payments data, according to figures from JPMorgan, suggesting wealthy Chinese are still finding ways to evade the restrictions.

By contrast, plenty of the inflows into China today represent overseas borrowing by local companies rather than direct foreign investment, or overseas money heading into the country’s markets. Foreigners remain hugely underinvested in both Chinese shares and bonds.

The National Security Law, adopted in 2017, only fed fears that there was little difference between state-owned enterprises and privately held companies as the legislation gave Beijing more power to dictate to the latter group.

While this year’s bounce in the Chinese stock market has been helped by hopes for a resolution to the US-China trade dispute, the heavy hand of Beijing is ultimately a more powerful headwind for investors.

Indeed, many of the business elite say they believe that while Mr Trump is China’s enemy in the short term, in the long term he will, unwittingly, prove to be the country’s best friend. “The reforms he insists on will be in China’s interest,” says one mainland private equity investor residing in Hong Kong. “Ending subsidies for state-owned enterprises, enforcing intellectual property rights, these are all things Chinese reformers support but are too weak today to implement.”

Given the change in approach from the White House and hardening in opinion inside Congress towards China, the flow of Chinese capital into the US will probably subside whether the trade dispute is resolved or not. But, right now, it is the US that is more in need of Chinese money than the other way round.

And in the long run the trade battle holds bigger risks to the US if one effect of China’s response is to make the country a better home for entrepreneurs.

henny.sender@ft.com



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