‘Crisis point’: Foreign policy experts and investors are divided on China

Top foreign policy experts expressed grave concerns about the state of U.S.-China relations at a Council on Foreign Relations meeting this week.

“The relationship is one that has now gotten to, I would say, a crisis point that did not have to happen if both nations were more secure about themselves and not willing to blame the other for their self-inflicted problems,” said Stephen Roach, senior fellow at Yale University’s Paul Tsai China Center.

The emergence of alleged Chinese spy balloons over the U.S. has raised serious questions about Beijing’s deep surveillance efforts, leading U.S. Secretary of State Anthony Blinken to postpone his trip to China in a widely-seen setback for the countries’ relations.

“We know that he [Blinken] had quite a robust agenda that he wanted to discuss with his Chinese counterparts, and the more — the very important part of his trip to China wasn’t just his meeting with his counterparts but also the potential for him to meet directly with [Chinese President] Xi Jinping and to relay the U.S. concerns directly,” said Bonny Lin, director of the China Power Project and senior fellow at the Center for Strategic and International Studies on Monday.

However, strategists and fund managers on Wall Street seem less concerned by the geopolitical ripple effects and more fixated on Beijing’s expected economic revival in 2023.

“In China, the focus is still on a potential economic recovery over the course of this year and next — the correlation of Chinese stocks with EM [emerging markets] and global peers is at multi-year lows,” Caesar Maasry, head of EM cross-asset strategy at Goldman Sachs, told CNBC.

The iShares China Large-Cap ETF is up 6% this year. In 2022, the ETF fell over 20%.

Maasry points out that China still remains more attractive than the U.S from a valuation perspective.

“The S&P 500 trades at a multiple just 1% below its end-2019 level (ie. pre-covid), whereas MSCI China trades at an 11% discount compared with end-2019. This discount likely reflects continued foreign investor concerns regarding geopolitics, but we suspect a ‘pro growth’ tone from Chinese policymakers can keep the Chinese equity rally moving from here,” Maasry said.

Gabriel Wildau, managing director at Teneo Intelligence, disagrees that China is uninvestable for foreigners when geopolitical concerns run high.

“Geopolitics matters, of course, but growth is the prerequisite for caring about political risk at all. Investors start thinking about geopolitical risk when they see growth potential, and when growth is strong, they’re more willing to brave political risks,“ Wildau told CNBC.

He argues that there are ways to get selective. 

“It’s less about avoiding Chinese equities because of political risk and more about properly assessing risks and making your bets accordingly. My clients often see opportunities when political risks are rising because they believe they’re better equipped than other investors to assess political risk and to choose companies that are insulated or even benefit from it.”

Julian Emanuel, senior managing director at Evercore ISI, told CNBC that he is expecting the earnings story in China to much better than in the U.S., which will allow Chinese companies to “grow, or more precisely, earn into their valuations.”

His China team likes large-cap tech names including Alibaba, Pinduoduo, JD.com and Baidu.

While down around 6% in February so far, Alibaba is up 60% since the end of October and 20% in the past three months.

Krishna Memani, CIO of Lafayette University’s $1 billion endowment is betting on China to lead emerging markets this year. Memani told CNBC that there is a “focus on growth-oriented focused companies: technology and health care services” specifically.

Memani added: “China’s outperformance comes as India suffers deep losses this year due in part to Indian businessman Gautam Adani facing allegations of corruption and fraud that has weighed on his company’s performance.”

The Adani story has impacted short-term sentiment, according to Memani.

Some experts nevertheless think investors may be too optimistic about China’s economic rebound.

“I certainly agree that there is a case to be made for the short-term reopening play as a way for investors to make a decent return, but I think that the reopening play as well as China’s ability to drive longer-term global growth is not as strong as investors and the business community believes that it is,” Dewardric L. McNeal, Managing Director at Longview Global, told CNBC.

McNeal added that there is a “growing cognitive dissonance” between the security community and the business community, which will likely come to the forefront in the coming weeks.

Apple CEO Tim Cook is set to visit China in March. China’s annual Development Forum is also slated to take place next month and adjourn business leaders from around the world.