Why Wall Street cheers China, despite growing business unease

Xi Jinping, China's top leader, is ushering the country into an uncertain era and the party's rule is tighter and more authoritarian than before

By Li Yuan

Published: Oct 7, 2021

Beijing is opening its financial system to foreign banks — and they have maintained their traditional openness to the Communist Party’s rule. (Jialun Deng/The New York Times)

This year has been unsettling for Chinese business. The ruling Communist Party has gone after the private sector industry by industry. The stock markets have taken a huge hit. The country’s biggest property developer is on the verge of collapse.

But for some of the biggest names on Wall Street, China’s economic prospects look rosier than ever.

BlackRock, the world’s biggest asset manager, urged investors to increase their exposure to China by as much as three times.

“Is China investable?” asked JPMorgan, before answering, “We think so.” Goldman Sachs says yes, too.

Their bullishness in the face of growing uncertainty has puzzled China experts and drawn criticism from a wide political spectrum, from George Soros, the progressive investor, to congressional Republicans. Soros has called BlackRock’s stance a “tragic mistake” that is “likely to lose money” for its clients and would “damage the national security interests of the U.S. and other democracies.”

But Wall Street sees opportunity. Even while Beijing tightens its grip over business and the economy, it is giving global investment firms greater opportunities to serve Chinese companies and investors.

At the height of a market sell-off in late July, the deputy chair of China’s securities regulator, Fang Xinghai, summoned executives of BlackRock, Goldman Sachs and other firms to a meeting, trying to alleviate investor nervousness over Beijing’s crackdowns, according to a memo I reviewed.

Some 20 days later, regulators approved BlackRock’s application to offer mutual funds in China. Around the same time, a BlackRock executive told The Financial Times that China was underrepresented in global investors’ portfolios and in global bench marks. The firm recommended that investors boost their allocations by two to three times.

BlackRock said in a statement that its global clients “can benefit from portfolio diversification that includes more deliberate asset allocation to China,” adding that Wall Street’s expansion in China is consistent with U.S. government policy goals.

Goldman Sachs and JPMorgan declined to comment.

Wall Street now stands as an increasingly lonely voice arguing for more engagement with China. Both U.S. political parties are calling for a tougher stance. Positions have hardened in other countries, too. The broad business world has become more ambivalent; it still sees China has a huge market, but issues like trade, intellectual property and the government’s support of homegrown businesses have complicated their traditional support.

Wall Street might be right to be bullish. China has defied bearish predictions in the past. Despite the party’s authoritarian rule in other matters, it has long brought a touch of laissez faire to the economy, helping growth.

But Xi Jinping, China’s top leader, is ushering the country into a more uncertain era. The party’s rule is tighter and more authoritarian than before. It has not abandoned market principles broadly because it needs economic growth to sustain its legitimacy, but it is tinkering with tighter controls. The long-term impact is far from clear.

This summer, China’s private sector suffered its harshest beating by the Communist Party in decades. With just a few abrupt orders, Beijing kneecapped the internet industry, sharply curtailed after-school tutoring businesses and drove some property developers to the brink of default.

Didi, China’s dominant ride-hailing company, was a Wall Street darling when it went public in New York in late June, raising more than $4 billion. Its share price has fallen by nearly half after the Chinese government moved to limit its business two days after its listing, leaving many investors — including U.S. funds — in limbo.

Goldman Sachs became the first foreign bank to seek full ownership of a securities business in China in December. BlackRock, which describes China as an “undiscovered” market, hired a former regulator to head its China business. So many global financial firms are expanding in the country that there is a talent war.

The Wall Street firms argue that, despite regulatory risks and slowing growth, China is too big to ignore and that its stocks are too undervalued to pass up.

Many investors have listened. U.S. mutual funds and exchange-traded funds investing primarily in China held $43 billion in net assets at the end of August, up 43%, or $13 billion, from a year earlier, according to Morningstar.

A lot of companies and investors have made a lot of money over the years from China. And despite the frosty talk between the two sides, they still share extensive business ties. China makes iPhones and buys iPhones. Same with Chevrolets. China’s economic growth, while slowing, is still stronger than in most places. That will not change overnight.

But even as Wall Street cheers on China, the balance between engaging with Beijing and confronting Beijing has fallen out of whack. And Americans lawmakers are starting to scrutinize those ties. Elected representatives from both the Democratic and Republican parties have expressed concerns about U.S. funds investing in China. A U.S. government retirement fund halted plans to invest in Chinese stocks last year after growing criticism that the move could work against national security goals.

Matthew Pottinger, a deputy national security adviser under former President Donald Trump, warned recently in Foreign Affairs that these institutions “cling to self-destructive habits acquired through decades of ‘engagement,’ an approach to China that led Washington to prioritize economic cooperation and trade above all else.”