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Foreign investors are right to see China as a trade more than a long-term bet – Financial Times

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Once hailed for its repeated economic miracles that lifted hundreds of millions out of poverty, today China faces a perception of being on more shaky ground © Qilai Shen/Bloomberg

The writer is president of Queens’ College, Cambridge, and an adviser to Allianz and Gramercy

“It’s a trade rather than an investment.” This is how a portfolio manager framed their purchase of Chinese equities on a recent Bloomberg show. It is consistent with a notable shift in the consensus view on foreign investments in China in recent years — from being a destination for long-term investments to more of a short-term speculative stop.

This framing aligns with a broader change in the Chinese economy. Once hailed for its repeated economic miracles that lifted hundreds of millions out of poverty, today it faces a perception of being on more shaky ground, at risk of succumbing to the dreaded middle-income trap — where countries struggle to transition from an economy where growth, typically, is heavily reliant on low costs and sizeable global demand.

Let’s start with the performance of the country’s stock market. After years of lacklustre overall performance, Chinese stocks have recently shown signs of a bounce. Since the start of February, the CSI 300 index is up about 11 per cent. That followed a long 44 per cent decline from 2021 highs. However, despite the recent uptick in Chinese stocks, the interest of foreign investors seems predominantly tactical, more focused on quick profits than long-term investment opportunities.

At first glance, this shift seems preferable for China compared with the prior widespread characterisation in 2022-23 that its markets had become “uninvestable.” That perception stemmed from poor market performance, disappointing management of debt issues and heavy-handed market interventions by authorities in areas like the technology sector that were sometimes hard to comprehend.

Yet this change in sentiment is too small to help China reduce what has become the clear and present danger of the “middle-income trap”. In that outcome, growth momentum dissipates, competitiveness erodes, financial robustness weakens, and long-term foreign investments become even more elusive.

The main reason for these predicaments is that, over the past few years, many of China’s internal and external tailwinds have all turned into headwinds. The current unfavourable alignment includes foreign direct investment at multi-decade lows and persistent outflows of portfolio funds, mounting domestic debt problems, growing economic insecurity among households, greater restrictions on Chinese firms accessing foreign markets and technology, and shaky real estate valuations.

This is being reflected in investor shifts beyond flows. The key benchmark for emerging market investors — the MSCI Emerging Markets index — has been heavily weighted towards China, meaning that every dollar managed passively would have an important part invested in China. But MSCI’s EM index that excludes China, launched in 2017, is gaining increased attention recently from investors. The assets held by the iShares MSCI Emerging Markets ex-China ETF have risen to more than $10bn from just $120mn at the end of 2020. At the same time, the governing boards of a growing number of active institutional investors, including US pension funds, have mandated “ex-China” approaches.

Together, these developments seriously undermine the growth dynamism and financial status of China. They also heighten the costs for Beijing to pursue its non-economic objectives, from military build-up to exerting more influence in what is known as the Global South group of nations.

Also worrisome for China is that it would not take much for it to go from being threatened by the middle-income trap to ending up in it. Contributing factors could include additional domestic policy delays, worsening household confidence, a tightening of US trade and investment restrictions, reduced engagement from multinationals that still have large businesses in the country, and more determined western efforts to counter China’s international influence.

China should find little solace in the recent performance of its stock market. These speculative “tourist flows” are not a leading indicator for more stable, long-term “resident flows”. To attract the latter, the government needs three elements: decisive reform measures to facilitate critically-needed economic transitions, reduced tensions with the US, and a shift away from the expensive expansion of international economic and financial influence. In the interim, foreign investors are justified in regarding their ventures into Chinese stocks as short-term.

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Tesla shares soar more than 14% as Trump win is seen boosting Elon Musk’s electric vehicle company

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NEW YORK (AP) — Shares of Tesla soared Wednesday as investors bet that the electric vehicle maker and its CEO Elon Musk will benefit from Donald Trump’s return to the White House.

Tesla stands to make significant gains under a Trump administration with the threat of diminished subsidies for alternative energy and electric vehicles doing the most harm to smaller competitors. Trump’s plans for extensive tariffs on Chinese imports make it less likely that Chinese EVs will be sold in bulk in the U.S. anytime soon.

“Tesla has the scale and scope that is unmatched,” said Wedbush analyst Dan Ives, in a note to investors. “This dynamic could give Musk and Tesla a clear competitive advantage in a non-EV subsidy environment, coupled by likely higher China tariffs that would continue to push away cheaper Chinese EV players.”

Tesla shares jumped 14.8% Wednesday while shares of rival electric vehicle makers tumbled. Nio, based in Shanghai, fell 5.3%. Shares of electric truck maker Rivian dropped 8.3% and Lucid Group fell 5.3%.

Tesla dominates sales of electric vehicles in the U.S, with 48.9% in market share through the middle of 2024, according to the U.S. Energy Information Administration.

Subsidies for clean energy are part of the Inflation Reduction Act, signed into law by President Joe Biden in 2022. It included tax credits for manufacturing, along with tax credits for consumers of electric vehicles.

Musk was one of Trump’s biggest donors, spending at least $119 million mobilizing Trump’s supporters to back the Republican nominee. He also pledged to give away $1 million a day to voters signing a petition for his political action committee.

In some ways, it has been a rocky year for Tesla, with sales and profit declining through the first half of the year. Profit did rise 17.3% in the third quarter.

The U.S. opened an investigation into the company’s “Full Self-Driving” system after reports of crashes in low-visibility conditions, including one that killed a pedestrian. The investigation covers roughly 2.4 million Teslas from the 2016 through 2024 model years.

And investors sent company shares tumbling last month after Tesla unveiled its long-awaited robotaxi at a Hollywood studio Thursday night, seeing not much progress at Tesla on autonomous vehicles while other companies have been making notable progress.

Tesla began selling the software, which is called “Full Self-Driving,” nine years ago. But there are doubts about its reliability.

The stock is now showing a 16.1% gain for the year after rising the past two days.

The Canadian Press. All rights reserved.

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S&P/TSX composite up more than 100 points, U.S. stock markets mixed

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TORONTO – Canada’s main stock index was up more than 100 points in late-morning trading, helped by strength in base metal and utility stocks, while U.S. stock markets were mixed.

The S&P/TSX composite index was up 103.40 points at 24,542.48.

In New York, the Dow Jones industrial average was up 192.31 points at 42,932.73. The S&P 500 index was up 7.14 points at 5,822.40, while the Nasdaq composite was down 9.03 points at 18,306.56.

The Canadian dollar traded for 72.61 cents US compared with 72.44 cents US on Tuesday.

The November crude oil contract was down 71 cents at US$69.87 per barrel and the November natural gas contract was down eight cents at US$2.42 per mmBTU.

The December gold contract was up US$7.20 at US$2,686.10 an ounce and the December copper contract was up a penny at US$4.35 a pound.

This report by The Canadian Press was first published Oct. 16, 2024.

Companies in this story: (TSX:GSPTSE, TSX:CADUSD)

The Canadian Press. All rights reserved.

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S&P/TSX up more than 200 points, U.S. markets also higher

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TORONTO – Canada’s main stock index was up more than 200 points in late-morning trading, while U.S. stock markets were also headed higher.

The S&P/TSX composite index was up 205.86 points at 24,508.12.

In New York, the Dow Jones industrial average was up 336.62 points at 42,790.74. The S&P 500 index was up 34.19 points at 5,814.24, while the Nasdaq composite was up 60.27 points at 18.342.32.

The Canadian dollar traded for 72.61 cents US compared with 72.71 cents US on Thursday.

The November crude oil contract was down 15 cents at US$75.70 per barrel and the November natural gas contract was down two cents at US$2.65 per mmBTU.

The December gold contract was down US$29.60 at US$2,668.90 an ounce and the December copper contract was up four cents at US$4.47 a pound.

This report by The Canadian Press was first published Oct. 11, 2024.

Companies in this story: (TSX:GSPTSE, TSX:CADUSD)

The Canadian Press. All rights reserved.

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