Submitted by Eric Peters, CIO of One River Asset Management
“They can no longer get their money out,” said the investor, a builder of global institutional portfolios.
“Allocators who made private equity investments in mainland China over the past 5-10yrs are now trapped,” he continued. “Not metaphorically trapped - they’re literally not permitted to move cash proceeds out of China as those investments are sold. The problem is widespread and the sums so large that we now have internal people focused on helping these allocators hedge the exchange rate risk.”
A worse fate than having your capital simply imprisoned in a foreign country, is having it locked-up and then devalued while you plot an escape.
“As investments mature and private equity managers distribute renminbi, they now ask clients who cannot get that money out of China to re-invest in their latest funds.” But even as the globe’s most sophisticated institutional investors find their capital quietly held hostage by Beijing, passive retail retirement savings is flowing into Chinese stocks and bonds at an accelerating pace.
In March 2019, MSCI quadrupled the share of Chinese onshore equities in their indexes. The increase is estimated to force between $80bln-$125bln of overseas savings into Chinese onshore stocks. MSCI left room to go further - to get to their full weighting, another $160bln-$250bln of passive equity flows will move to Beijing. And the Bloomberg Barclays Global Aggregate index introduced a 6% weighting to China’s $13trln domestic bond market for the first time this March. An estimated $125bln-$150bln of inflows followed.
If other bond index providers follow Bloomberg/Barclays, an additional $125bln-$150bln will race in.
After decades of ever rising global capital flows, it is easy to forget that capital enters and exits nations only with the express permission of those in power.
“In the midst of rising East/West conflict and knowing that institutional investors are struggling to get their money out, it is astonishing that MSCI and Bloomberg/Barclays index boards have forced global pensioners to fund the Party.”
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As an aside, we at ZH are quite confident that Kyle Bass - and Trump too, once the trade war theater finally implodes - will agree with all of the above.