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Risks Accumulate For China Investors, Including Harvard

April 22, 2022 Ogghy Filed Under: THE NEWS, Zerohedge

Risks Accumulate For China Investors, Including Harvard

Authored by Anders Corr via The Epoch Times,

Risk is accumulating for China investors, with private equity in particular trouble. Harvard University, one of the world’s top PE investors, with an endowment of $53.2 billion, recently showed a crack in its veneer on China.

“In a sign of a potential pullback,” according to Bloomberg News, “Harvard University’s endowment is considering tapering its investments in China.” Bloomberg sources, familiar with Harvard’s investment strategy, asked to remain anonymous.

A night view of the Central Business District (CBD) in Beijing, China, on Nov. 10, 2021. (An Xin/Costfoto/Future Publishing via Getty Images)

Publicly, however, 34 percent of Harvard’s endowment in 2021 was in private equity, up from 23 percent in 2020. Harvard declined to tell Bloomberg what percent of its PE investments are in China.

Surveys cited by Bloomberg show that investors beyond Harvard are also getting nervous about China.

In the first half of 2021, according to Bain & Co., only 35 percent of China investment managers viewed the country’s outlook with confidence. Compare that to 60 percent who were confident on Asia more generally.

According to Preqin, a financial data analysis company, about half of alternative investors late last year saw Southeast Asia as the best emerging market opportunity, a 37 percent increase from the year prior.

Political Risk to Private Equity in China

PE invests in companies that are private, for example, that have not gone public through exchanges in financial centers like New York, Hong Kong, and Shanghai. Because PE lacks a mass base of owners, it is in some ways more vulnerable to political risk, especially in China. If the value of companies held by PE firms decreases substantially due to some action by Beijing, there are fewer investors to complain.

Complaining is even more difficult in China, where power is centralized by Xi Jinping and his Standing Committee of just seven top Chinese Communist Party (CCP) Politburo members. The ideology of the CCP has historically been anti-capitalist, which is ultimately against private equity.

Xi, more than past Chinese leaders like Deng Xiaoping, looks backwards with nostalgia to the days of Maoism and state control of the economy.

PE investors in Chinese equities started to realize how vulnerable they were last year when Chinese regulators clamped down on broad sectors of the economy, including technology, ride-sharing, online education, and gaming.

Using the term “common prosperity,” the CCP took aim at the most profitable companies, disappeared some Chinese businessmen, and strong-armed others into massive donations that they would not otherwise have made.

Beijing Sinks Online Education

For example, in 2020, PE-backed investment in Chinese education companies reached $8.1 billion. As pandemic lockdowns denied children the classroom and sent them to their computers instead, online education companies seemed like a good billion-dollar bet. Valuations of some of them doubled within a year.

One such company was Yuanfudao, backed by $3.5 billion from PE investors, including Tencent Holdings, Jack Ma’s Yunfeng Capital, Hillhouse Capital Group, Singapore’s sovereign wealth fund, and Temasek.

A child uses the mobile app of Yuanfudao, a Beijing-based online education startup, on a smartphone in Shanghai, China, on March 31, 2021. (VCG/VCG via Getty Images)

But last summer, in the context of citizen complaints about education being too expensive for Chinese families, and according to the CCP, leading to low birth rates, Beijing took an extraordinary step.

It moved to ban profits among private tutoring companies that teach core school subjects. That any government would ban profits is almost unimaginable for a PE investor or anyone else.

The new rules converted the companies into nonprofit organizations and banned any further domestic or international investment. While enforcement details were hazy, the regulations came as a shock to PE firms that had already invested billions on the assumption that profits were still allowed. The ban risked killing many companies and making a profitable exit through going public, next to impossible.

The debilitating non-market result should have been predicted by Beijing’s regulators. Banning profits should cause investment in the private education sector to decrease. There will be fewer opportunities for children to learn in what has become an ongoing pandemic.

Some of the world’s worst lockdowns and travel restrictions are still on in China, including in Shanghai and Hong Kong, previously some of the freest places in China.

The response of parents to children at home without good online learning might reasonably be to have fewer children or emigrate away from China, both outcomes that put downward pressure on China’s population growth—the opposite of what Beijing intended.

Multivalent Accumulation of Risk to Investment in China

The cavalier and self-destructive attitude of CCP regulators to market principles is rightly giving institutional investors second thoughts about their billion-dollar investments in a totalitarian communist country that they previously liked to imagine was on its way to democracy and open markets. Investors drank their own Kool-Aid and now are paying the price.

The biggest American institutional investors are even growing skeptical about investing in specialist Chinese private equity funds. These funds, run by investors with white shoe pedigrees from banks like Goldman Sachs, are struggling to meet deadlines and hit their billion-dollar targets to attract new cash.

Pension funds and endowments are turning away from such China funds, not only due to political and market risks but because of building debt in the economy, COVID-19 restrictions, and the resulting downgrade in earnings expectations.

Xi’s regulation crackdown has hit China’s tech giants, including Tencent and Alibaba, even as the United States is barring production in Xinjiang due to the Uyghur genocide.

People walk past the Tencent headquarters in Shenzhen, southern China’s Guangdong Province, on May 26, 2021. (Noel Celis/AFP via Getty Images)

American regulators are threatening to delist hundreds of Chinese firms listed on U.S. exchanges for failure to provide transparent audits to the U.S. Securities and Exchange Commission. In many instances, Chinese law does not allow such disclosures, putting the companies in an impossible situation of needing to choose which law to violate.

With Russia’s war in Ukraine, apparently supported by the CCP, the risks of secondary U.S. sanctions against China for the war in Ukraine cannot be ignored.

Over the last 12 months, a Pennsylvania state employees pension fund stopped committing new cash to China’s PE funds altogether. It currently has approximately 2 percent exposure to Chinese assets. Florida’s pension system of $253 billion in assets, less than 3 percent of which was in China as of January, has also turned the cash spigot off for new investment in China.

In the first quarter of 2022, U.S. dollar funds invested in China dropped to $1.4 billion, the lowest number since 2018 for that period, according to Bloomberg. Quarter after quarter last year, this sector suffered declines.

Even as the money for China private equity dries up, according to Bain & Co. research, its managers continue to grow in number, reaching approximately 1,200 between 2019 and 2021, an increase of 25 percent over the prior period.

Every day, more China money managers chase less China money in the field.

That will not end well. Billions in private equity funds should be pulled from China and redeployed to countries that have a better track record on human rights, democracy, and the market principles that best assure future profits and real prosperity for all.

Views expressed in this article are the opinions of the author and do not necessarily reflect the views of The Epoch Times.

Tyler Durden
Fri, 04/22/2022 – 17:40

Tagged With: accumulate, China, Harvard, including, Investors, risks

Najafi Companies Closes Deal for Struggling ‘Bad Moms’ Studio STX

April 22, 2022 Ogghy Filed Under: ENTERTAINMENT, Variety

A consortium of investors led by Najafi Companies has closed its deal to purchase STX Entertainment, the beleaguered film and television company behind “Bad Moms” and “My Spy.” The sale ends STX’s unhappy union with Eros, the Indian media company that it merged with in 2020. The goal was to go public, which STXEros did, […]

Tagged With: closed, companies, consortium, deal, Investors, Najafi

Renault Shows Financial Resilience As Industry Negatives Mount

April 22, 2022 Ogghy Filed Under: BUSINESS, Forbes

Renault pleased investors with its first-quarter results, despite the future of its Russian subsidiary and the alliance with Nissan remaining in jeopardy. The shares jumped more than 2% Friday, with investors apparently reassured the operating profit margin would be around 3%.

Tagged With: firstquarter, Investors, pleased, Renault, results, with

Earnings Outlook: CSX, Union Pacific earnings to show if railroads really offer relative respite from turbulent transport sector

April 20, 2022 Ogghy Filed Under: BUSINESS, MarketWatch

Investors will soon find out if shares of railroad operators can continue to offer some relative safety within a transportation sector that has suffered in recent weeks due to concerns that a freight recession was on the horizon.

Tagged With: find, Investors, railroad, shares, soon, will

Woke Investors Threaten The West’s Security

April 20, 2022 Ogghy Filed Under: THE NEWS, Zerohedge

Woke Investors Threaten The West’s Security

Submitted by Rupert Darwall,

Since Russia attacked Ukraine two months ago, Western governments have been learning the hard way about the critical importance of energy to their national security. Germany’s 20-year, trillion-dollar “Energiewende” (Energy Transformation) has made its economy totally dependent on supplies of Russian natural gas and paralyzed its response to Russian aggression. French president Emmanuel Macron faces a tougher re-election fight this month thanks to soaring energy prices and failure to replace the nation’s aging fleet of nuclear power stations. The Biden administration is tapping America’s Strategic Petroleum Reserve in an effort to tamp down energy costs as inflation heads toward double digits. 

As the West grapples with the energy implications of a hostile Sino-Russian alliance, the steering group of the Net-Zero Asset Owner Alliance, whose members manage over $10.4 trillion of assets, issued a statement urging Western governments not to sacrifice climate goals for energy security. “The world is still heading for an excess of fossil fuel-based energy use that will vastly exceed the carbon budget needed to meet the 1.5° Celsius Paris agreement goal. This trend must be halted,” the United Nations-backed alliance said in its April 8 statement, arguing that “the national security argument for accelerating the net-zero transition has strengthened considerably.”  

What, one might ask, is the standing of asset managers to opine on national security matters? They have no expertise in this domain. It turns out that their understanding of the economics of energy policy is defective, too.   

The Net-Zero Asset Owner Alliance claims that development of new oil and gas reserves will lock in fossil fuel subsidies, exacerbating market distortions. In fact, the International Energy Agency (IEA) in its 2021 net-zero report states that under its net-zero pathway, tax revenues from oil and gas retail sales fall by about 40% over the next twenty years. “Managing this decline will require long-term fiscal planning and budget reforms,” the IEA warns. Similarly, Britain’s Office of Budget Responsibility estimates that net zero policies will result in the loss of tax receipts representing 1.6% of GDP. So much for the fossil fuel subsidy myth. If fossil fuels were heavily subsidized, eliminating them would mean fossil fuel subsidies disappear. Instead, it’s tax revenues that would melt away to zero. 

The net-zero investors cite figures for the decline in solar and wind energy costs. These numbers are based on so-called levelized cost of energy (LCOE), a metric that aims to measure a plant’s lifetime costs. Wind and solar power are intermittent, but LCOE metrics exclude the costs of intermittency, which increase the more wind and solar are put on the grid. Because wind and solar output responds to weather and not to demand, the value of this output declines the more installed wind and solar capacity is available. It was for these reasons that MIT professor of economics Paul Joskow concluded in a foundational 2011 paper that using LCOE metrics to compare intermittent and dispatchable generating technologies, such as coal and natural gas, is a “meaningless exercise.” 

Wind and solar investors don’t need to understand the economics of the grid to make money – they are shielded from the intermittency costs their investments inflict on the rest of the grid, which is one reason why their views on energy policy can be taken with a pinch of salt. Their economic illiteracy does, however, make it easy for them to subscribe to the green fairy tale of 100% renewables. They’re not responsible for keeping the lights on – that depends on traditional power plants staying fueled up and ready to spin, which is what Germany can’t do without Russian gas. Adopt the net-zero alliance’s call for no new fossil-fuel investment, and the cost of energy is bound to spiral. And if the lights go out, politicians – not woke investors – get the blame.  

Investors’ opinions on energy and national security would matter less if they didn’t have political power. Bloomberg opinion writer Matt Levine argues that asset managers of giant funds form a parallel system of government that exercises overlapping legislative powers with those of governments. These government-by-asset-managers, as Levine calls them, tell companies to do things they think are good for society as a whole, “making big collective decisions about how society should be run, not just business decisions but also decisions about the environment and workers’ rights and racial inequality and other controversial political topics.” 

Foremost among these areas is climate policy. Although the Biden administration has set a net-zero goal, Congress has not legislated it, and it lacks the force of law. The absence of legislation passed by democratically accountable legislators, however, presents no barrier to government-by-asset-managers legislating climate policy for the companies in which they invest. “Investors are making net zero commitments for themselves and demanding that companies issue greenhouse gas reduction targets and transition plans for meeting those targets,” says the Reverend Kirsten Snow Spalding of the not-for-profit Ceres Investor Network on Climate Risk and Sustainability.  

Neither Spalding nor the Net-Zero Asset Owner Alliance make a case that forcing net-zero targets on companies will boost investor returns, demonstrating that this is not about investors’ traditional concerns – making money – but about pursuing politics by other means. In this, the Securities and Exchange Commission (SEC) is working hand in glove with woke climate investors. Commenting on the SEC’s newly proposed rule on climate-risk disclosure, Spalding says that for investors who have committed zero emissions by 2050, “this draft rule is absolutely critical.”  

It’s no coincidence that SEC chair Gary Gensler chose Ceres to make his first appearance to talk about the SEC’s proposed rule. Of course, Gensler didn’t justify it in the same terms as Spalding. To have done so would have heightened the risk of the courts striking down the rule in subsequent litigation. Instead, Gensler attempted to justify the rule as bringing “some standardization to the conversation” and putting material climate information – the SEC issued guidance in 2010 on how companies should disclose such risks – in one place, saving investors the bother of piecing together the information from different sources. Gensler’s explanation, to put it politely, is an implausible one for imposing on corporate America what amounts to a parallel climate-reporting regime to the established framework of financial reporting. Whatever Gensler might say in public, the effect of the SEC rule – if implemented – would be to empower investors to impose net-zero targets on companies, to monitor progress in meeting them, and to hold company boards to account for them.  

Unlike elected politicians, woke climate investors are not accountable for the effects of their climate policies: They exercise power without responsibility. This arrangement weakens America’s ability to respond to the geopolitical challenges of a revanchist Russia and an expansionist China. “We are on a war footing – an emergency,” Energy Secretary Jennifer Granholm declared at the CERA energy conference in Houston last month. “We have to responsibly increase short-term supply where we can right now to stabilize the market and to minimize harm to American families.” Addressing oil executives in the audience, Granholm told them: “I hope your investors are saying these words to you as well: In this moment of crisis, we need more supply . . .  right now, we need oil and gas production to rise to meet current demand.” 

As Granholm suggested, woke investors have been trying to do the opposite. Despite the war in Ukraine, there has been no let-up in investor pressure on oil and gas companies to scale down their operations. Whatever criticisms might be made of the Biden administration’s handling of the war in Ukraine, it is responsible for taking the awesome decisions that war involves. Investors, by contrast, have no responsibility for the nation’s security and America’s ability to lead the West. By helping investors impose their desired energy policies on American oil and gas companies, the SEC is undermining the national security prerogatives of the Biden administration and eroding America’s ability to meet the challenges of a dangerous world. The SEC is playing in a domain that it has no business being in. 

*  *  *

Rupert Darwall, is a senior fellow at RealClearFoundation, researching issues from international climate agreements to the integration of environmental, social, and governance (ESG) goals in corporate governance.

Tyler Durden
Wed, 04/20/2022 – 00:05

Tagged With: Investors, security, Submitted, Threaten, West's, Woke

Market Snapshot: U.S. stock futures waver as earnings season heats up

April 19, 2022 Ogghy Filed Under: BUSINESS, MarketWatch

U.S. stock futures were unsettled Tuesday, as investors awaited to see if a raft of corporate earnings results will help markets break out of a recent rut.

Tagged With: futures, Investors, stock, Tuesday, Unsettled, were

What Is Elon Musk’s Plan B For Gaining Control Of Twitter?

April 18, 2022 Ogghy Filed Under: BUSINESS, Forbes

Investors in Twitter seem to be happy with the board of directors rebuffing Elon Musk’s $54.20/share bid for the company, driving the shares up 7.5% on 4/18 to $48.45, although the stock is still 10.6% below the $54.20/share offer which is currently on the table.

Tagged With: board, happy, Investors, seem, Twitter, with

Outside the Box: Even if stocks rise in the months ahead, the market has limited upside potential

April 16, 2022 Ogghy Filed Under: BUSINESS, MarketWatch

The Federal Reserve has created a serious headwind for investors.

Tagged With: created, federal, headwind, Investors, Reserve, serious

TaxWatch: Did you invest in crypto last year? Make sure you answer these 3 questions before filing your taxes

April 15, 2022 Ogghy Filed Under: BUSINESS, MarketWatch

Approximately three quarters of crypto investors weren’t ready to file their taxes as of late March.

Tagged With: approximately, crypto, Investors, quarters, Three, weren't

Are Macro Investors Idiots?

April 14, 2022 Ogghy Filed Under: THE NEWS, Zerohedge

Are Macro Investors Idiots?

By Russell Clark, published in Capital Flows and Asset Markets

Personally, I have always preferred macro investing, and hence I am one of the idiots referred to in the title. Quality investing however has been the place to be for the last 10 years.

Various popular investing themes can easily be grouped under the “quality” theme include, but not limited to, TINA, FANG, Dividend Aristocrat, Compounders, Moat Investing, or just buying the S&P 500. Leading practitioners of quality investing would include Warren Buffett, Chris Hohn and Terry Smith, and all three would use a variation of the investing idea that if the free cash flow yield of a quality stock is higher than government bond yield, then its a buy. Macro investors would have looked at the experience of Japan from 1990 onwards, and generally assumed that the deflation tendencies that made bonds do so well, were generally bad for earnings, at least until last 10 years.

So what has changed? Or was Japan just an aberration, and we should all be quality investors all the time? Where I think macro investors (or at least me) have gone wrong is the government attitudes towards bond markets.

For me, corporate bonds and government bonds (sovereigns) were two distinct assets classes, with corporate bonds trading much more like equities. In practical terms, sovereigns did well in bad times, and corporates bonds did bad in bad times. Using KDP High Yield daily, you can see during recessions, typically sovereign and high yield bonds yields would go the opposite direction. This was the case in dot com bubble, the GFC and Covid recessions.

In essence, since the financial crisis there was an implicit guarantee for the corporate bond market (the Fed put), which has now morphed into an explicit guarantee for the corporate debt market. When we look at the spread between US 5 year treasuries and high yield debt, even with the sell off in high yield debt this year, there has been no spread widening.

In essence, the quality trade has been a very good political trade, as governments have guaranteed corporate bond markets (Europe is a little different, as the ECB’s main focus has been to guarantee peripheral sovereign debt). Emerging market investors are aware of both the advantages and disadvantages of having a corporate and sovereign debt tied together.

If the US was an emerging market (ie borrowing in another currency) it would likely be seeing downgrades as its structural budget deficit has ballooned in recent years. Given the unemployment rate and record stock market and property market, the US should be close to budget balance, but instead is close to levels seen in the debts of the financial crisis.

From an economic perspective, there is little chance of the US being forced to borrow in another currency. However other changes in the macro environment make me think inflation is becoming more secular than cyclical, and this is shifting the “political winds” that have supported a windfall that quality investing has had for the last 10 years. The shift in inflation from cyclical to secular is the subject of another post.

Tyler Durden
Thu, 04/14/2022 – 17:00

Tagged With: Clark, idiots, Investors, Macro, published, Russell

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