China’s policies have also led to vast capital outflows and an accelerated sell-off of Chinese stocks. According to the Institute of International Finance, investorsfrom Chinese equities last month, along with US$1.2 billion from the bond market.
Of course, investors’ reactions to economic trends and political developments depend on their portfolios, diversification needs, risk appetites and investment horizons. But prudent investors and business leaders will use this opportunity to assess their portfolio risks and consider what to do about their China positions.
Clearly, the widening gulf between the United States and China, and the broader, will upend how multinational companies run their business. Specifically, companies must rethink how they obtain financing, hire across borders, and allocate capital. They should also consider centralising procurement and building resilient supply chains.
What paths could investors reassessing their China exposure take? One option is to divest all of their Chinese assets, reducing their exposure to zero.
But reducing exposure to China is likely to be a protracted process, whether it involves shrinking a portfolio of publicly traded Chinese stocks or unwinding a private equity investment. Repositioning is also likely be complicated, as sellers must find buyers in an already challenged valuation market.
Moreover, investors looking to unwind their Chinese holdings must consider the effects on their taxes,, and transfer pricing, as well as many other stranded costs. And corporate investors who have long been bullish on China would need to come to terms with the possibility that they might not have any exposure to China’s economy when growth begins to pick up.
Alternatively, investors could accept their sunk costs, write down the value of their investments, and still retain some exposure to China. In essence, this would mean acknowledging that previous investments cannot be recovered while delaying on new ones.
In the context of an equity portfolio, a sunk-cost approach would result in recorded mark-to-market losses, leaving investors with the option of retaining their positions in the event of a market rebound. Similarly, a corporation that owns a factory in China may write down its asset value.
But instead of shutting it down and writing it off entirely, it could run it as a going concern without expanding output or making new capital commitments, thereby maintaining a foothold in China when the economy finally recovers.
Another option is to double down. Investors could not only hold on to their China exposure, but also take advantage of low valuations and market weakness to enlarge their Chinese footprint. But even in this scenario, global investors would be wise to recalibrate their investment strategies by adding a local partner to minimise the risk of expropriation.
Companies that decide to stay and increase their presence in China, however, could be forced to operate as ring-fenced businesses. This is likely to complicate financial reporting and increase their regulatory burdens, particularly in the face ofand regional Balkanisation.
Ultimately, however, investors and corporations committed to investing in China must be innovative in how they do business in – and with – China. They would need to re-evaluate the governance and board-oversight structures of new local entities that may trade only on Chinese stock markets.
They would also have to rely on unconventional metrics, since traditional measures such as macroeconomic statistics, price/earnings multiples, internal rate of return, Sharpe ratios (which measure risk-adjusted returns) and volatility measures similar to the Cboe Volatility Index (Vix) are less reliable in such a fast-moving geopolitical, economic and financial environment.
Whatever choice they make, Western investors in China face a completely different economic terrain than the one in which they operated for more than a decade. This shift reflects domestic political developments such as Xi’s iron grip on power.
Dambisa Moyo, an international economist, is the author of four New York Times bestselling books, including Edge of Chaos: Why Democracy Is Failing to Deliver Economic Growth – and How to Fix It. Copyright:
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