Their motivation wasn’t China’s human-rights record, but its economic one. In closed-door meetings at the Council on Foreign Relations, the financiers ticked off their concerns: China’s economic slowdown is deepening. An unprecedented property slump is scaring investors who hold hundreds of billions of dollars of debt issued by Chinese developers. And Chinese leader Xi Jinping’s emphasis on national security has restricted access to data and sparked raids and investigations involving foreign firms assessing investment risks in the country.
The amount of money that institutional investors have in Chinese stocks and bonds has declined by more than $31 billion this year, through October, the biggest net outflow since China joined the World Trade Organization in 2001, official Chinese data show.
Hedge funds, including Bridgewater Associates, whose founder Ray Dalio has long been a China bull, have significantly reduced their holdings of Chinese securities.
Private-equity firms, including
Over the past decade, private-equity funds targeting China have raised an average of nearly $100 billion each year. So far this year, they have raised a meager $4.35 billion, according to data firm Preqin.
For years, U.S. companies have been wary of the risks of doing business in China. Wall Street, however, saw huge profit potential and went all in. The retreat now by the sector that became one of Beijing’s most trusted cheerleaders in the U.S. is more evidence that China’s decadeslong boom is ending.
No one on Wall Street, though, wants to close the door on reversing course if there is money to be made in China again. Publicly, many financiers have signaled they remain committed to China, and they appear to be wary of offending Beijing.
“Wall Street has been very slow and will continue to be very slow to count China out,” said Amy Celico, a partner at Albright Stonebridge Group, a Washington-based consulting firm that advises multinational companies. “They will be ready to ramp up activity as soon as the Chinese economy stabilizes.”meeting with President Biden earlier that day.
Blackstone and BlackRock were among the corporate underwriters of the event, and Dalio was also listed as an individual underwriter.
Executives had hoped for some reassurance from the Chinese leader, whose policies have made it riskier for foreign firms to operate in China. But Xi made no pitch to win back American investors. He spoke blandly about people-to-people exchanges and U.S.-China friendship, disappointing some known China bulls in the room.
The remarks drew compliments from some of the Wall Streeters. “Xi delivered a great speech,” Schwarzman said on his way out, according to people in attendance. A person close to Schwarzman said he appreciated Xi’s comments on the need for a stable U.S.-China relationship.
Dalio said in a written statement that he has been interacting with China for more than 38 years and has been trying to foster mutual understanding between the U.S. and China. “The dinner was great because there were many old friends from both sides gathered in a spirit of camaraderie,” he said.
That two-track approach to China also helps explain why almost all the Wall Street executives who met with Gallagher on Sept. 11 made it a condition of the meeting that their names not be disclosed. The group included representatives of
Wall Street for years has profited enormously from investing in Chinese startups, managing money for Chinese institutions and taking Chinese companies public. Its relationship with Beijing has always been transactional. The prospect of big rewards from its Chinese investments meant Beijing could count on Wall Street to lobby Washington to loosen trade and investment restrictions.
The reduction of that Wall Street money is another blow to a Chinese economy already facing an exodus of foreign manufacturers and other companies. In the third quarter, for the first time since the late 1990s, more foreign investment in assets such as factories and stores left China than flowed in.
When the financiers met in September with Gallagher and his aides, some said China’s policy-making had become harder to predict, and they could no longer rely on historical data to construct China-focused funds.
There has been “a bit of an awakening” among the U.S. financial executives about investment risks in China, said one of the people who attended the discussions.
Not everyone, though, has thrown in the towel. BlackRock and Fidelity International, which have China’s approval to set up mutual-fund businesses in the country, are still hoping to tap in to its trillion-dollar pension market. Still, in an August report, BlackRock warned that China’s growth was set to fall below the trend line before the Covid pandemic.
Wall Street’s interest in China goes back decades. In the late 1990s, then-Premier Zhu Rongji asked American investment bankers to help restructure a mountain of bad debt held by big Chinese banks. Zhu backed the Americans’ proposal to sell stakes in the country’s biggest four state-owned banks to U.S. investors.
China agreed to liberalize its financial sector as part of its entry into the WTO, but for decades American banks, brokerages and others remained bit players in the country. In recent years, Beijing has doled out more licenses for Western financial-services firms to manage Chinese investors’ money.
Dalio, who is no longer involved in day-to-day decisions at Bridgewater, first traveled to China in 1984, and in the mid-1990s sent his 11-year-old son to live in Beijing with a local family for a year. He has repeatedly cautioned Bridgewater’s investment researchers against writing outright negative outlooks about China. In 2018, Bridgewater won a coveted license to raise money in China to invest within the country. Its premier China-based fund now has about $4 billion in assets under management.
Lately, Bridgewater has substantially reduced its holdings of Chinese securities. In the third quarter, the fund’s regulatory filings show, it liquidated or reduced its positions in some three dozen Chinese companies, including electric-car maker
“China is in the midst of secular deleveraging that will likely take many years to work through,” it said in a Sept. 30 research report. “Growth remains weaker than desired.”
In 2013, soon after Xi came to power, Blackstone’s Schwarzman donated $117 million to fund a scholarship program to bring U.S. and other international students to Tsinghua University, the Chinese leader’s alma mater. Since then, Schwarzman has been involved in U.S.-China relations and has forged ties to senior Chinese leaders. He was among the financiers who served as an interlocutor during the conflict between the Trump administration and Beijing over China’s trade practices.
Nevertheless, in 2021, during a sweeping regulatory crackdown on private businesses, Blackstone had to scrap a $3 billion acquisition of a majority stake in property developer Soho China as a review by Chinese regulators dragged on.
Gallagher, chairman of the House Select Committee on the Chinese Communist Party, has been critical of Wall Street’s involvement with China.
“Too many American investors—venture capitalists, endowments and asset managers—are funding Chinese companies complicit in human-rights abuses and building weapons for the Chinese military,” he said in a written statement to The Wall Street Journal. “This needs to stop.”
He asked the organizers of the San Francisco dinner—the National Committee on U.S.-China Relations and the U.S.-China Business Council—for lists of individuals and entities that paid to be in the room with Xi. He called their participation unconscionable given what he said were China’s human-rights abuses in Xinjiang. China has denied allegations of mistreatment of Uyghurs and other Muslim minorities in Xinjiang.
In China, the U.S. financiers had long been immune from official criticism.
Now, though, they are facing suspicion in Beijing, especially by Chinese “securocrats” elevated by Xi who watch investors they think are betting against China. Earlier this year, a state-owned newspaper took aim at Goldman Sachs after its analysts recommended selling shares in some big Chinese banks, saying the firm’s analysis was based on “pessimistic assumptions” about the country’s banking sector.
Senior economic officials still meet with Wall Street executives, mostly for the purpose of trying to slow down the pace of capital outflows. On Oct. 20, after measures to lift the property market failed to rebuild investor confidence, China’s central-bank governor, Pan Gongsheng, met with Schwarzman in Beijing to discuss, among other things, the government’s plan to fix the beleaguered sector.
Gallagher has been trying to pressure U.S. businesses with ties to China, arguing that they are enabling China’s superpower ambitions.
He repeatedly invoked Sequoia Capital, an investor in the Chinese owner of TikTok, when saying that American money from Silicon Valley and Wall Street had funded China’s technology companies. Sequoia said in June it would separate its China and U.S. businesses, citing several business reasons for the split.
When Gallagher’s team met with Wall Street executives in September, some acknowledged that the current capital flight out of China likely would be reversed if Chinese markets improve. Gallagher’s committee wants to permanently choke off American investment flows into China, especially investments by Wall Street funds in stocks and bonds of blacklisted Chinese companies.
A decision a few years ago by BlackRock and MSCI, a top stock-market-index compiler, to include Chinese stocks in major indexes helped China attract investment from American pension funds and endowments. Both firms are now under investigation by Gallagher’s committee for allegedly facilitating flows of money into China.
Both BlackRock and MSCI are cooperating with the committee and have produced information relevant to its inquiry, according to people familiar with the firms. BlackRock has said it complies with all U.S. laws, and MSCI has said it is reviewing the committee’s inquiry.
Josh Wolfe, managing partner of venture-capital firm Lux Capital who hosted a luncheon for the Gallagher team in September, said Lux decided five years ago not to invest in China because the government’s increased use of technology for social surveillance seemed an omen of intensified state control.
Wolfe said he believes capital will continue to leave China. “This is a secular shift that can last a long time,” he said.