American institutional investors appear ready to ignore increasingly heated political tensions between China and the US as they look to participate in major Chinese equity offerings and look to invest more into the country itself.
The latest testcase of this resolve promises to be the initial public offering of Ant Financial Group, valued at an estimated $200 billion. It is set to go public in Hong Kong in late October, and a handful of US private equity firms will feature among the large investors to likely record substantial paper profits, despite the possibility the company will face US sanctions.
Committed private equity investors Silver Lake Management, Carlyle and Warburg Pincus. Each reportedly spent at least $500 million in Ant Financial's last funding round in 2018, when the operator of Alipay, China's biggest online payment platform, was valued at $150 billion.
In addition, sovereign wealth fund Alaska Permanent Fund Corporation and Calpers, the US's largest state pension fund, have stakes in Alibaba, according to Global Sovereign Wealth Fund (SWF) Capital data. Alibaba is the former parent of Ant and retains a 33% stake in the company.
The foreign investor support of the Ant IPO comes at a moment when tensions between Washington and Beijing are peaking.
US president Donald Trump has wielded tariffs against Chinese products for several years, resulting in a tit-for-tat that still stands today. And Beijing’s initial efforts to hide and then downplay the outbreak of the coronavirus early this year caused a further breakdown in relations – something Trump found politically useful as his government’s response to the virus was widely panned.
One part of the mounting tensions has been increased pressure by the US government on state-linked pension funds to limit US investors’ portfolio flows in China.
The Trump administration explored placing limits in late 2019, and while its efforts did not result in a cap, its hostility to Chinese financial assets remains. In a July 6 report, the US Securities Exchange Commission (SEC) warned about risks investing in Chinese securities, and these include the risks of fraud, default, volatility, lack of transparency, national security breaches, among others.
On August 6, the US Treasury Department released the “Report on Protecting United States Investors from Significant Risks from Chinese Companies”. The document referred to China as a “non-cooperating jurisdiction” and said listed companies from such markets should have their records audited by the Public Company Accounting Oversight Board as a condition to be listed on US stock exchanges. Existing companies have until January 1, 2022 to comply.
The mounting tensions have led several major US-listed Chinese companies to seek secondary listings in Hong Kong. In November last year Alibaba, which had listed on the New York Stock Exchange in September 2014, completed a secondary listing in Hong Kong. In June Chinese technology giants, NetEase and JD.com, also chose Hong Kong for secondary listings.
“US asset owners who hope to gain or retain exposure to Asia's economic growth may be faced with fewer alternatives and increased political pressure,” said Lionel Johnson, president of the Pacific Pension & Investment Institute.
Yet despite the mounting antagonism, US financial firms and investors can read economic forecasts, and know China’s economy is poised to become the world’s largest. That makes IPOs such as Ant Financial’s an appealing investment prospect for US asset owners and fund managers, despite Washington’s bluster.
“US-based asset owners seek investment returns by means of diversification and will continue to be significant investors in Chinese equities,” predicted Diego Lopez, managing director for Global Sovereign Wealth Fund (SWF) Capital, answering emailed questions from AsianInvestor.
Indeed, Ant Financial already boasts a host of international institutional investors, including Canada Pension Plan Investment Board (CPPIB), Khazanah, Temasek and GIC. And GIC at least wants more; the Singaporean sovereign wealth fund is said to be planning to invest at least $1 billion more into Ant via the IPO.
“As the company gears for an IPO, it seems natural that these and other asset owners increase their interest, as it will now be easier to increase or reduce positions on a daily basis,” said Lopez.
In addition, China’s ability to rapidly combat the Covid-19 pandemic has reduced the risk associated with investments into its economy.
“It has been better than any other large country from a Covid-19 risk mitigation perspective,” said Paul Sandu, head of Asia Pacific multi-asset quant solutions and client advisory at BNP Paribas Asset Management.
US institutional investors that do not invest in such deals over political pressure or national security concerns risk losing out on the diversity and potential returns that they may provide.
With technology companies generating huge returns during the pandemic, Sandhu expects Ant's IPO to enjoy strong institutional investor demand, regardless of whether they hail from the US or elsewhere.
Plus, US investors already hold a lot of Chinese financial assets. An SEC report released on July 6 said that 664 US mutual funds hold close to $43.5 billion worth of A-shares and China's domestic bonds. It added that nine of the country’s 10 largest state-level public pensions had allocated funds to track one or more benchmark index with exposure to A-shares—mainly MSCI indexes with A-shares exposure — or directly invested into A-shares.
Meanwhile Calpers has $3.1 billion invested into Chinese equities, or 0.8% of its AUM. Unwinding such positions would be possible, but painful. Given China's economic heft and financial potential, Diego thinks it is very unlikely to happen.
“Unless the decoupling gets quantified with a cap on Chinese investments, US asset owners will continue seeking returns and diversification into the Asian country,” he said.
IPOs like that of Ant Financial look set to remain very appealing to US asset owners, to the chagrin of US administration.