When people are running for the exit, our natural instinct is to join them. Canada’s second-largest pension fund is accordingly retreating from China. Caisse de Dépôt et Placement du Québec (CDPQ) has stopped private investment there. It will close its Shanghai office later this year. It is right to do so.
China’s economy is weakening. A tech cold war with the US will curb gains from innovation. The government has rattled investors with crackdowns on business.
Singapore’s sovereign wealth fund GIC has reduced exposure to Chinese private investment too. Canada’s third-largest pension fund, the influential Ontario Teachers’ Pension Plan has disbanded its China equity investment team.
Foreign investors offloaded China stocks in May. They sold $1.7bn in mainland shares after dumping $659mn in April, according to Refinitiv. The benchmark CSI300 index, trades below 12 times forward earnings, a steep discount to global peers and below its 10-year average.
The sell-off is the flipside of record net buying by foreign investors in January. Hedge funds bet heavily on a post-lockdown economic surge that did not materialise. Pessimists expect growth in low single digits.
Growth opportunities are scarce. Local tech groups provided fat returns for years. Since 2020, market saturation has depressed margins.
Shares of ecommerce groups Alibaba and PDD are down more than 30 per cent from earlier this year. Promising sectors such as AI may fall behind because US export controls have reduced access to advanced chips.
The bigger problem is waning faith in government economic policies. China’s manufacturing activity contracted more than expected in May. April retail sales and factory output missed expectations. Property investment and industrial profits are down. Youth unemployment has surged to a record 20.4 per cent in April, around quadruple the broader rate, according to official data.
Government crackdowns are a further issue. Beijing has attacked everything from tech to tutoring. This makes it difficult to value investments. The problem is compounded by the suppression of critical financial analysis.
Investment would rally if Beijing liberalised the economy, stopped interfering in business and sought a rapprochement with the US. But all three moves would be anathema to president Xi Jinping. Expect the foreign retreat to continue.
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