Challenging Week Ahead

Three macro considerations are shaping the investment climate: the evolution of the virus and the response to it, the timeframe of the Fed's tapering, and China's broad regulatory crackdown.

Beijing's new policy initiatives are broader and quicker than generally anticipated. Officials seem to be opening up several different fronts, including anti-trust, data protection, discouraging foreign capital raising, and private education reform. The common element is reining in what officials may see as excesses. It dovetails with other efforts seeking to strengthen the Communist Party's command and control functions.

Beijing seemed unaware or uninterested in the broader implications. The inclusion of the yuan into the IMF's Special Drawing Rights (SDR) and Chinese stocks and bonds into global benchmarks represents a new integration phase. Recent estimates suggest foreign investors have doubled since 2015 to around $550 billion and around the same amount of Chinese bonds.

However, foreign investors have been adversely impacted by the sharp drop in Chinese and Hong Kong equities, and, given the driver, this may have a cooling effect on future allocations. It wasn't until the sell-off in Chinese stocks accelerated to new lows for the year, interest rates jumped, and the yuan sold to new three-month lows that Beijing moved to stabilize the markets.

China is doing what some of its critics were struggling to accomplish, namely, discouraging further integration of China into the global capital markets. A year ago, the Trump administration prohibited federal pension fund investment in China. Ahead of the weekend, the SEC announced it would freeze the application process for Chinese IPOs and the sale of other securities on concerns about the risk disclosure. In addition, Chinese companies face being delisted from US exchanges if they continue to refuse to share audits with regulators. 

There has been a pushback against claims of decoupling by focusing on the trade of goods and services. But trade is a small part of the integration and is stickier than capital flows. Moreover, trade can be a shallow kind of integration. Direct investment, listing on exchanges, patent registrations, and incorporation of industry standards seem to be a deeper commitment.

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Read more by Marc on his site Marc to Market.

Disclaimer: Opinions expressed are solely of the author’s, based on current ...

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