Evergrande (EGRNF) and its gradual implosion is, understandably, garnering most of the market's attention to China.
After all, one of the world's largest property developers defaulted on hundreds of billions of dollars in debt, causing Chinese homebuilders and real estate sectors to fall sharply and Hong Kong's Hang Seng Index to hover around levels it last saw in the doldrums of 2020's COVID-19 driven crash. Further, the sheer size of Evergrande and its impact beyond real estate is sparking concerns about a contagion, both within China and abroad.
However, it is not these immediate concerns that are causing a war of words to brew between two of the world's most outspoken billionaires: I'm talking about the very public debate between BlackRock (BLK) chairman and CEO, Larry Fink, and Hungarian-born billionaire George Soros on the fundamental ethical concerns that undergird investing itself.
The question that arises from the debate is therefore rather simple: Is investing in China a bold bet on endless opportunity amid some uncertainty or a "tragic mistake" doomed to be destroyed by a newfound bevy of regime-related risks?
BlackRock's Bet on Opportunity
In terms of BlackRock's aims, the rationale is eminently unsurprising. Following years of pronouncements of bullishness on China, recent statements from BlackRock's top brass have only reinforced a widely-known, and widely-held, conviction that China is the land of investment opportunity.
"Our focus on investing for the long term and living our purpose is also reflected in the way we approach growing markets," Fink wrote in a recent letter to shareholders. "The Chinese market represents a significant opportunity to help meet the long-term goals of investors in China and internationally."
He added that China's new opening to foreign firms will be a "win-win" for both BlackRock and the people of China as its mutual funds and investment products seek to aid the massive population of retirees in mainland China. Per state media, 264 million people are over the age of 60 in China, a figure nearly equivalent to the entire population of Indonesia, the fourth most populous nation in the world.
Of course, this is key to BlackRock as it has just raised about $1 billion for its first mutual fund in China, capitalizing on its status as the first foreign asset manager to gain approval for a Chinese mutual fund business, unconstrained by a joint venture, early in the summer. Its management is likely salivating at the prospect of such a prodigious market opportunity sans outside competition.
Nonetheless, the firm remains bullish more broadly, with analysts recently advising investors to triple their exposure to China.
"This story is changing quickly, as policymakers seek to liberalize access to Chinese stock and bond markets while making them more squarely aligned with international standards," a recent report noted. "This has material implications for all investors, whether individuals or large, sophisticated institutional investors. Much is changing in China, and the cost of ignoring this emerging opportunity might prove high, especially over the longer term."
Soros' Opening Salvo
However, famed hedge fund manager George Soros was not convinced recent changes in China have done much to better the opportunity. In fact, he was vocal in his inclination towards the precise opposite reading of the material implications.
"Pouring billions of dollars into China now is a tragic mistake," he wrote in a recent op-ed for The Wall Street Journal. "It is likely to lose money for BlackRock's clients and, more important, will damage the national security interests of the U.S. and other democracies."
While many investors attempt not to color their investing aims in political terms, the reality is investing in China is inescapable. For the Chinese leadership, ideology, namely communism with Chinese characteristics, colors all aspects of life. This includes markets and their participants.
Perhaps most indicative of the importance of ideology was Xi Jinping's speech at the centenary of the Chinese Communist Party in June when he centered the party as critical to the success of China in all aspects of life, including the success of Chinese markets.
"Beijing is intent on strengthening control over private companies and foreign investment, reserving set shares of its market for indigenously produced technologies like semiconductor chips and electric vehicle batteries, and boosting the role of state-owned firms," Atlantic Council Senior Fellow Dexter Tiff Roberts wrote in a brief shortly after Xi's speech. "Beijing sees it as providing a new model of growth for developing countries around the world and as directly competing with a Western free market model that China's leaders believe is becoming increasingly broken."
In terms of Soros' analysis, BlackRock cannot separate itself from this dynamic. At the very least, Chinese leadership is very unlikely to neglect its status at U.S. firms when reviewing activity in China.
More explicitly, Soros added that BlackRock's endorsement of transparency and forthrightness environmental, social, and corporate governance investing principles are oxymoronic in light of their efforts in China. Put more coarsely, the firm is talking out of both sides of its mouth.
While BlackRock has publicly pushed back on Soros' scathing commentary, this specific point has gone largely unaddressed.
Recency Bias
Regardless of where one falls on the ethical dilemmas presented by the paradoxical pursuit of both ESG ends and investment in an authoritarian security state, or the alarming threats to democracy broadly, there are some fundamental risks associated that even Soros glosses over in pursuit of his legislative goal.
"The danger that Soros doesn't even state explicitly, for some reason, is of the risk that at some future time China, or Xi Jinping, will curtail BlackRock's activities as it has curtailed Alibaba's (BABA) and Didi's (DIDI) recently, or even expropriate them as some totalitarian governments have done in the past," Michael Edesess, managing partner at Hong Kong-based financial modeling firm M1K told Real Money.
Certainly few could have expected the scope and scale of Beijing's successive rounds of crackdowns on industries like tutoring, video games, and casino gaming. At the least, it made investors aware that negative market impacts were not paramount in the governing calculus of the nation's paramount leader.
Instead, a commitment to "common prosperity" that has industry leaders like Tencent (TCEHY), PinDuoDuo (PDD) , and JD.com (JD) emptying their pockets, ostensibly to reduce societal inequality, could create problems for investors expecting free market dynamics. In this case, the dynamics are quite clearly defined by the ambitions of one man, leading one party, now more firmly under one system.
To be sure, Edesess was quick to encourage some skepticism about such drastic measures being realized. Indeed, he and thought leaders like a JP Morgan chief global markets strategist Marko Kolanovic have cautioned investors against broadly extrapolating recent sector-specific regulatory measures too broadly, especially in terms of global impact.
"We view the risk of further regulatory changes in China as a local rather than global problem," Kolanovic's team recently commented in a recent note. "Given the substantial correction in affected market segments, this risk appears to already be priced in and could ease from here, and it poses little threat to our overall risk-on stance in our view."
Still, reviewing the recent spate of bad news now bookended by the biggest real estate failure in history, there is little certainty in any such pronouncements. The lack of transparency into the problems in the plumbing of the Chinese financial system only exacerbates this concern.
The Buck Stops in Beijing
Ultimately, investors from the billionaire class now betting heavily on either side of the China trade to retail investors seeking opportunities amidst uncertainty largely agree on at least one thing: Zhongnanhai has established its supremacy in charting the course for China, its firms, markets, and its largest investors like BlackRock.
For the Evergrande crisis, investors look to the CCP leadership to put a lid on the crisis. For BlackRock's big push into the market, it must seek the blessing of communist leadership. Even outspoken Tesla (TSLA) "technoking" Elon Musk has prostrated himself before Chinese regulators, praising Chinese automakers as "the most competitive in the world". Clearly, this is worlds away from what Musk has said about U.S.-based counterparts like Ford (F) and General Motors (GM) .
Overall, this tells every investor that the behavior of the leadership in Beijing is not capable of being compartmentalized. Many governments around the world have attempted to cordon off issues of human rights from climate change cooperation, governance issues from trade pacts, and more when dealing with China. Increasingly, these leaders are realizing that China makes no such distinctions in reality.
Overall, this tells every investor that the behavior of the leadership in Beijing is not capable of being compartmentalized. Many governments around the world have attempted to cordon off issues of human rights from climate change cooperation, governance issues from trade pacts, and more when dealing with China. Increasingly, these leaders are realizing that China makes no such distinctions in reality.
To quote Xi Jinping, himself reciting a proverb at a recent BRICS conference, "A man of wisdom adapts to changes; a man of knowledge acts by circumstances."
At the very least, investors must recognize the circumstances as they stand after nearly a decade of significant changes under Xi.
In short, there are most certainly arguments to be made about the opportunity available in China, particularly as regulatory uncertainty rocks investor confidence and presents potentially deep discounts. There are also incredibly distressing concerns over the nature of Chinese state control over markets, the authoritarian and repressive nature of the Chinese state, and the now firmly established antagonism between the Chinese system and Western democracies.
Once investors recognize the balance of these realities, they can then make the assessment of whether they would prefer to side with Soros' indignant stance against investing in China or if they back BlackRock's bet on opportunity as outweighing ethical concerns. They just cannot pretend to have their cake and eat it, too.
