Jing’an century, a housing development with ponds and lush greenery in north Shanghai, China should have been bustling with activity as workers put the finishing touches on flats.
Instead, the area is silent. A two-month lockdown of the city of 25 million people has forced the developer, a large group called Yanlord, to halt construction on the site.
Homebuyers have been on edge for months as some of the country’s largest developers default on bonds and struggle to deliver homes to ordinary Chinese buyers.
Now Yanlord, until recently considered to be in tolerable shape, has been forced to tell customers they will not receive their properties on time.
At least 20 housing developments across the city have announced similar delays.
Many other property projects have been forced to stop selling units. The lockdown has been so severe that roadblocks and police checkpoints have appeared across the city.
Workers, building materials and sales agents have simply been unable to reach construction sites.
Meanwhile, Yanlord’s pre-sales of homes fell by more than 80% in April, compared with the previous year.
China’s property crisis is not new. But growing fears among foreign investors of a grand policy disaster are.
The combination of a serious downturn in the housing market and Chinese President Xi Jinping’s uncompromising zero-covid policy is just one recent conundrum that has led foreign fund managers to question whether China is losing its pragmatic approach to managing the economy.
Xi’s insistence on using prolonged lockdowns to rid China of the Omicron variant, as well as his backing for Russia’s war in Ukraine, are being seen as ideological pursuits that ignore economic and geopolitical realities.
Add in the timing of his crackdown on tech groups such as Alibaba, an e-commerce company, and on the leverage of property giants such as Evergrande, and it helps explain why some of the world’s largest investment groups are questioning the quality of leadership in Beijing.
Many attribute this and other ideological campaigns to preparations for the Communist Party congress set to be held in the autumn, at which Xi is expected to be granted another five years in office.
The events of 2022 could shape how global investors view China for years to come.
In little over a year Xi’s policies have had a profound impact on global markets–and a painful one.
They have knocked US$2 trillion (NZ$3tr) from Chinese shares listed in Hong Kong and New York.
Chinese initial public offerings in these two cities have nearly ground to a halt this year. China’s property firms have sold just US$280 million in high-yield dollar bonds so far in 2022, down from US$15.6 billion during the same period last year, according to Dealogic, a data provider.
Within China, the value of yuan-denominated financial assets held by foreigners fell by more than 1trn yuan (NZ$230b) in the first three months of 2022, the biggest drop ever.
The Institute of International Finance (iif), a bankers’ group in Washington, forecasts that a total of US$300b in capital will flow out of the country this year, up from US$129b in 2021.
Onshore markets were one of the linchpins in China’s relations with the outside world.
The belief that they would continue to open up and yield high returns helped to maintain links with powerful, Western financiers hoping to strike it rich.
Even as relations between America and China soured during the Trump years, and a trade war dampened global sentiment, an exuberance for onshore securities took hold of many of the world’s biggest financial groups.
As relations with the West deteriorated, regulators in Beijing began expediting long-promised reforms, eventually allowing foreign financial groups to wholly own their onshore businesses.
The policies were a clear sign that Beijing meant business. And the West reciprocated. In 2018 msci added Chinese shares to its flagship emerging-markets index.
Several other index inclusions followed, leading to a windfall in inflows into onshore Chinese securities.
Between the start of 2017 and a peak at the end of 2021, foreign financial exposure to yuan-denominated assets (stocks, bonds, loans and deposits) more than tripled from about 3 trillion yuan to 10.8 trillion yuan.
That elation is now quickly dying off. Many foreign investors simply grew too enthusiastic about China in recent years and chose to ignore the risks, says Hugh Young of Aberdeen, an asset manager.
The market is now waking up. The view from many investors is that, although China has never been more open to foreign capital flows, it has also not been this ideologically inflexible in recent memory.
China’s support for Russia’s war in Ukraine has led to concerns over its claim on Taiwan, which it says it will eventually take back by any means necessary.
Geopolitical concerns such as this are part of a broad recalibration of the risks associated with China.
“Policy risk has increased markedly,” says Neil Shearing of Capital Economics, a research firm. That has led to an increase in the risk premia on Chinese assets demanded by investors.
Some top investment groups are becoming more public about these views. BlackRock, a giant asset manager that has been expanding rapidly in China, said on May 9 that it had shifted its 6-to-12-month view of Chinese equities to “neutral” from “modest overweight”.
This is mainly because of the bad economic picture, but also reflects China’s ties to Russia. Julius Baer, a private bank, said in April that it was ending a five-year call that Chinese equities would eventually become a “core asset class”.
This shift has contributed to a foreign sell-off of onshore stocks and bonds. The selldown of yuan-denominated bonds has also been driven by a weaker currency and higher interest rates in America.
The value of foreign-held equities in China has fallen by nearly 20% in the first three months of the year, or by about 755 billion yuan.
Much of this drop is explained by a fall in stock valuations; the csi 300, a key index, is down by more than 17% since the start of the year.
But foreign investors are also scaling back their exposure. Foreign equity holdings as a share of China’s stockmarket fell from about 4.3% at the end of 2021 to just below 4% in March.