Years of harrowing losses have left Chinese stocks with a diminished standing in global portfolios, a trend that’s likely to accelerate as some of the world’s biggest funds distance themselves from the risk-ridden market.
An analysis of filings by 14 US pension funds with investments in Chinese stocks show most of them have reduced their holdings since 2020. The California Public Employees’ Retirement System and New York State Common Retirement Fund, among the nation’s biggest pension investors, cut their exposure for a third straight year.
What started out as a performance-driven exodus now risks becoming a structural shift due to a toxic combination of doubts over Beijing’s long-term economic agenda, a prolonged property crisis and strategic competition with the US. Money managers at some of the biggest pensions in the US and Australia said in interviews that the prevailing playbook for China is one of caution.
“Foreign investors no longer fear leaving China out of their investment universe,” said Gary Dugan, chief investment officer at Dalma Capital Management Ltd. “We sense that international investors are just giving up trying to read China and will revert to a world-ex-China opportunity set, hence resetting the benchmarks to MSCI World ex-China.” Some are exiting entirely.
Missouri State Employees’ Retirement System in December told its staff to “divest from all of its current global public equity investment in China.” That came a month after the Federal Retirement Thrift Investment Board said it will exclude investments in Hong Kong, in addition to mainland China, from its $68bn international fund. It cited Washington’s increasing investment restrictions on China as a key reason for the decision.
“China is a recurring discussion among US and global CIOs,” Chris Ailman, chief investor officer of the California State Teachers’ Retirement System, said in an interview. “Some have cut their index weight in half to reduce their exposure and a few have dropped China from their emerging market index.” Calstrs’s decision is to “not be overweight nor underweight but index weight,” he said.
His comments come as China’s share in the MSCI Emerging Markets Index dropped to 23.77% as of end-December, the lowest since mainland stocks were added to the gauge in 2018. In the Asia Pacific Index, China now accounts for about 15%, down from 24% in 2020.
A 2023 survey of 100 pension and sovereign wealth managers by London-based think-tank Official Monetary and Financial Institutions Forum found none of them have a positive outlook on China, or see higher relative returns.
It’s a far cry from the late 2010s when the country’s economic ascent and manufacturing prowess made overseas investors eager for a slice of the booming market. If MSCI’s addition of A-shares showcased China’s global acceptance, its falling status speaks to that allure fast fading.
Bloomberg analysed 13F filings by 271 American pension funds with assets over $500mn. Among them, 14 had investments in US-listed Chinese stocks.
Underscoring how Chinese markets are dropping off radars, their low valuations aren’t helping. The MSCI China Index has never been this cheap versus the S&P 500 when looking at forward earnings estimates, trading at a 56% discount. The estimated price-to-earnings ratio is below its five-year average.
Australia’s second-largest pension fund, the A$260bn ($174bn) Australian Retirement Trust, is wary of raising its China holdings beyond what’s needed to stay in line with performance benchmarks.
“In public equities, we are just trying to make sure that we have a benchmark exposure and we do it in a way that doesn’t tie up liquidity unnecessarily,” said ART’s Chief Investment Officer Ian Patrick. “It’s a big economy where valuations are challenged and so there’s definitely opportunity there.” He added the bigger question was how the global order plays out between China and the US, and other countries.