Tom Tull,
Employees Retirement
System of Texas

US President Joe Biden's expanded blacklist of US investments in Chinese firms is unlikely to affect institutional investor strategies and investment flows between the two nations are expected to continue to grow, experts told AsianInvestor.

On June 3, Biden signed an order amending former president Donald Trump’s ban on US investment in Chinese companies, naming firms with ties to China’s military or in the surveillance industry, including Huawei Technologies and the country’s three biggest telecommunications companies. The new ban will take effect in less than two months, on August 2, with investors getting one year to fully divest.

Biden is expanding the list of Chinese firms that Americans will not be allowed to invest in against the backdrop of institutional investors from both countries increasing their asset buying in each other’s market. Experts believe the trend will continue as investors focus on return and performance.

Fifty nine companies are on Biden’s list compared to 31 on Trump’s. The new president had delayed making changes to his predecessor’s list but investors seem to have made up their minds about these stocks. They are determined to put the politics to one side.

Tom Tull, chief investment officer from  $30 billion pension fund the Employees Retirement System of Texas, told AsianInvestor at last week’s Asian Investment Summit that “investors should focus on fundamentals over political noise when investing”.

Tull believes Asia’s economy will rapidly grow in the future, adding that he believes finding a local partner to invest with in China would be crucial for US investors.

Other US pension funds hold a similar view about the importance of Asia, and China in particular, in their portfolios. Gregory Samorajski, chief executive officer of the $35 billion Iowa Public Employees’ Retirement System previously told AsianInvestor that China stood at 20% of the pension fund’s non-US portfolio and this large commitment to the country would continue.

TWO-WAY ALLOCATION

Yoon Ng, Broadridge

Chinese appetites for overseas asset purchases are also picking up.

According to the latest China Navigator Quarterly Review report from Broadridge, outbound investment quotas in China have increased a great deal since September 2020, with a total of $70 billion of Qualified Domestic Institutional Investor (QDII) as well as Qualified Domestic Limited Partner (QDLP) and Qualified Domestic Investment Enterprise (QDIE) quotas being awarded in about seven months.

It is a sign of how regulators have been encouraging fund managers to take the leading role in overseas investment. As a result, Chinese investors have been diversifying their overseas investments more, especially growing their holdings of stocks listed in Hong Kong and the US.

Yoon Ng, Broadridge’s senior director for APAC Insights, told AsianInvestor that, in the first quarter this year, more new technology-focused funds launched with a concentration on Hong Kong and US stocks were launched under the QDII scheme, which is designed to allow certain onshore Chinese investors to invest in offshore assets. This reflects onshore Chinese investors' increasing desire for such assets. 

Ng said investment may become harder if the Biden administration introduces even tougher restrictions on Americans investing in Chinese companies, and the Chinese government reciprocates with its own measures to stop Chinese firms and individuals investing in US companies.

“However, from an investors’ perspective, [investment] performance will still be key,” she added.

Take QDII for instance. “In both 2019 and 2020, US accounted for around 20% of the net flows into QDII funds, compared to 6% in 2018 and 10% in 2017,” she said.

The US has not been the only destination for the money of onshore Chinese investors.

A recent Orient Capital report showed that foreign investors now own 66% of UK-listed shares, up from 64% in 2019. While US investors are the biggest holders, China’s public corporations have also invested heavily in London. Compared to their US counterparts, the numbers are not large, but, according to the report, Chinese firms have more than doubled their holdings from 0.7% in 2019 to 1.7% in 2021.

WORRIES

But it is not easy to ignore the worries about the effect of Biden’s expanded list and further action the US might take against China.

A review of vulnerabilities and gaps in US supply chains of four sectors – semiconductors; batteries for electric vehicles; pharmaceuticals and their active ingredients; and critical minerals used in electronics  – which the US president ordered three months ago, was published on June 8. Though it did not single out China, it clearly identified the country as the US’s biggest competitor in key industries, mentioning it more than 450 times while Japan and Korea, for example, were mentioned much less.

And the worries about possible future US-China relations are having an impact in different markets, say observers.

For instance, a new International Monetary Fund report noted that escalating US‑China tensions are compounding the multiple challenges Hong Kong’s financial system is facing, which it identified as extensive linkages to mainland China, stretched real estate valuations, and exposure to shifts in global market and domestic risk sentiment.