Chinese investors shifting away from US assets

With Sino-US tensions mounting over Donald Trump's plans for trade protectionism, among other things, mainland institutions are seen to be eyeing foreign assets outside America.
Chinese investors shifting away from US assets

Chinese investors are showing less appetite for US assets amid tensions between the two countries, and are increasingly looking elsewhere for foreign exposure, say industry executives. 

Beijing is concerned about the election of Donald Trump as US president related leading to rising American protectionism and about his tacit recognition of Taiwan's sovereignty, among other things. Also affecting flows are the current restrictions on capital outflows from the mainland.

If the US seeks to erect trade and investment barriers in respect of China, Beijing will likely retaliate and mainland investors will move their investment to other countries, said Chi Lo, senior economist for Greater China at BNP Paribas Investment Partners in Hong Kong.  

“There is no lack of alternative investment destinations for Chinese investors, who have started to diversify their investments,” he added.

Moves by the US government to increase scrutiny of inbound investments from China would reduce mainland interest in American assets, agreed Alex Wolf, senior emerging markets economist at Standard Life Investments. 

Geographic diversification

Chinese investors, such as insurance companies – which have recorded very swift asset growth in the region – had already started looking for opportunities outside the US before Trump won, in light of the renminbi weakening against the dollar since August 2015.

For instance, Ping An Asset Management, the investment arm of Chinese insurer Ping An, partnered Australia’s Queenland Investment Corporation in late November with a view to doing more alternatives. The tie-up is an indication of how mainland institutions are diversifying beyond US and UK assets, which are usually their first ports of call overseas.

In fact, many mainland investors are hitting the pause button on overseas deals in general, amid concerns over US-China relations and Trump’s protectionist stance, as well as Beijing’s restrictions on capital outflows, said Fred Hu, chairman of Beijing-based private equity firm Primavera Capital, quoted by Bloomberg last month. This follows a spike in China-into-US M&A deals last year, with volumes of $70 billion last year (see graph below).

Source: Dealogic. Click for full view

Of course, for a privileged few, investment opportunities remain on the table. There were reports this past weekend of a meeting between Jared Kushner, Trump’s son-in-law, and Wu Xiaohui, chairman of China’s Anbang Insurance, about a project to redevelop a building at 666 Fifth Avenue.

Trade retaliation

Meanwhile, Trump may be moving towards greater protectionism, but both Lo and Wolf said a full-blown trade war was unlikely, as it would also hurt US companies.

Wolf said he expected Washington to raise tariffs for selected industries – such as steel, glass, aluminium and solar – rather than impose tariffs across the board or spark a trade war.

What may have an even greater impact is if Trump’s government were to designate China as a currency manipulator, which was one of his campaign promises.

“If China were to be named, it would likely be negative for [the renminbi],” Wolf said. The US Treasury would need to change the criteria for how it judges a country to be a currency manipulator, but if it does so, it risks designating other countries as well as China.

In response to being labelled a currency manipulator, he added, Beijing would likely retaliate with a combination of controlled renminbi depreciation and other measures against American goods and investment in China.

China would prefer not to offload its $1.16 trillion in US Treasuries, noted Wolf, as that could trigger a regional sell-off of US debt and ultimately reduce the value of its own foreign reserves. 

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