Institutional investors active in China’s real assets markets are reviewing their position in the country following last month’s Chinese Communist Party’s National People’s Congress (NPC).

NPC meetings, held every five years, are significant for the policy directions they unveil. But none more so than this year’s event. Following years of increasing policy uncertainty and the ravages of COVID-19, the meeting could be seen as a ‘make or break’ point in time for some foreign investors.

This year, it was notable for confirming a third term for President Xi Jinping and featuring a rhetoric that reflected the rising geopolitical tensions between China and the West. But it was also important because it did not mark an end to a much-maligned zero-COVID policy for the country. The Chinese people and foreign investors alike will have been disappointed.

Those investors are now mulling the options of freezing existing investments, selling up and leaving China – or hanging around in the hope of a turnaround in political stance.

“Investors were looking for guidance from policymakers, and their hopes were undoubtedly dashed when Xi doubled down on the zero-COVID policy,” said one source, speaking anonymously. “It showed in the markets.”

One investor, which first invested in China in 2011, said: “When [foreign investors] go through the NPC papers – and I speak for myself in particular – there are few positive signals.”

Another investor said he had watched the performance of his US$2bn (€2bn) China portfolio deliver “the worst performance in my career this year”.

The zero-COVID policy had affected people’s ability to shop and to travel and this was affecting overall business confidence in China. “We are in the business of creating assets which people want to use,” he said. “The environment now is such that it is very difficult for our tenants – regardless of whether they are individuals or businesses or retailers or delivery companies. You would be very brave to try to expand in the current environment.”

Sigrid Zialcita, chief executive of the Asia Pacific Real Assets Association (APREA), said: “Cross-border investments in China have held up over the years remarkably well despite a regulatory crackdown and the outbreak of the pandemic. Investments in 2020 and 2021 are still higher than they were at the peak in the years before 2019.

“But this year foreign investment has dipped by close to 30%, a sign that investors are losing confidence. China, relative to most other countries that are unwinding pandemic restrictions, is losing its lustre.”

Global logistics real estate giant Goodman Group is “moderating” its activity in China, chief executive Greg Goodman told analysts today during an earnings call.

“We are conscious that the Chinese market is softer than other markets, like Japan or Australia,” he said, adding that vacancies were high and that in many markets rents were falling.

However, rents in three key markets of Shanghai, Beijing and Shenzhen – where 90% of Goodman’s Chinese projects are located – are holding up. Goodman said he expected rents to continue to grow by 3-4% for prime property.

One Western investor, speaking anonymously, said: “Right now, China is less attractive than elsewhere – and if I look at our current portfolio in China, the performance of that portfolio has been deteriorating for a while.”

Foreign investors have closely watched the cumulative impact of successive anti-business policies in China, and that is contributing to today’s deep business unease. China is moving away from the private sector and the entrepreneurs who injected vibrancy into its economy.

Alicia Garcia-Herrero, chief economist for Asia-Pacific at Natixis, said: “Foreign investors are bound to be much more careful when investing in China. They need to focus on state-owned companies – or private ones that are clearly supported by the state. Foreign companies operating in China need to adapt to this new reality.”

Investors in property say zero-COVID compounds their pessimism, which can be traced back to ongoing restrictions and greater government controls over the Chinese residential market, starting at least five years ago. Rather than taming the sector, these policies have combined to unravel a deeply-leveraged real estate market, leading to defaults – and denying Chinese buyers the ability to move into their new apartments, many of which are already being paid for through mortgage contracts.

“Residential real estate is where people store their wealth,” said one foreign investor. “With the sector in such trouble, people have become risk-averse and their spending is affected. This in turn impacts retail, e-commerce and demand for logistics and retail assets.”

The situation has been worsened by a crackdown on the Chinese tech and education sectors last year. “If you think about Alibaba and Tencent, they are as much tech companies as they are online retailers,” the investor said. “They are major tenants of logistics facilities.”

Chi Lo, senior market strategist for Asia-Pacific at BNP Paribas Asset Management, said the NPC’s “emphasis on macro-economic policy prudence and the existing housing policy stance” – that housing is for living, not for speculative investment – “implies that housing market weakness will continue to drag on the economy in the near term, and that there is not going to be any massive policy easing after the congress”.

For many investors, concerns extend beyond China’s borders to geopolitics and Taiwan. Lo said the most important change emerging from the NCP is the party’s explicit toughening of its policy stance on securing national sovereignty through Taiwan unification, Hong Kong’s ‘one country, two systems’ and military upgrading through technology enhancement.

At the NPC, the party warned about “dramatic changes” in the world, which could be read as rising geopolitical risks. “This is in sharp contrast to the assessment at the 19th party congress five years ago, which saw peace and development remain the major themes,” Lo said.

Volatility is expected to remain in the near term, said Lo, and the rise of China’s political risk premium will continue to dominate foreign investor calculations. The rocky relationship between China and the US, Canada and Australia has already weighed heavily on investors from the West.

One North American investor said: “We continue to invest globally without investing in China because, in the current environment, it does not make sense to do so.

He adds that most North American investors probably share this view. “You’ll see a big drop of investment into China from the West, including Australia,” he said. “The shift among US pension investors away from Chinese equities, for instance, is more marked today than it was a year ago. It is a liquid market, easier to move their capital. Real assets are a different story.”

Middle Eastern investors will continue as their capital is welcomed in China. Politics is not an issue, he said.

Asia is split into North and Southeast Asia. Japan and South Korea, put off by China’s rhetoric on Taiwan and its support for North Korea, are starting to pull back on investing in China. Southeast Asian capital, especially that from Singapore, remains committed to China, in part because a massive amount of capital is already embedded in the market.

While some foreign investors have long been divided on China, some are now forming new judgments. Others, whose capital base is increasingly coming from local investors, remain wedded to China.

CapitaLand told IPE Real Assets that the company was “long on China and we’re committed to our business there”. It said: “We continue to invest to grow our China portfolio.”

Another investor said: “I think China’s economy will rebound for sure with government stimulus. And for those who can – and are willing – to navigate the environment, there will be opportunity. But because of the way that this particular government has signalled its intentions to the rest of the world, China is no longer attractive. It is a high-risk market.”

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