Xi’s Mixed Messages Leave Whiplashed Investors Wary Of China
President Xi Jinping spent last year trying to woo foreign capital while continuing to reshape China’s business environment to ensure his power can’t be challenged at home or abroad. Those sometimes-conflicting goals have left investors confused and put bureaucrats on edge.
![BEIJING, CHINA - OCTOBER 23: General Secretary and Chinese President Xi Jinping waves as he leaves after speaking at a press event with Members of the new Standing Committee of the Political Bureau of the Communist Party of China and Chinese and Foreign journalists at The Great Hall of People on October 23, 2022 in Beijing, China. (Photo by Kevin Frayer/Getty Images)](https://media.assettype.com/bloombergquint%2F2022-10%2Ff8ebde6a-7a29-405e-9079-75a6133d5cfe%2F_1x_1.jpg?auto=format%2Ccompress&w=200)
(Bloomberg) -- President Xi Jinping spent last year trying to woo foreign capital while continuing to reshape China’s business environment to ensure his power can’t be challenged at home or abroad. Those sometimes-conflicting goals have left investors confused and put bureaucrats on edge.
His government’s apparent backpedal this week is the latest example. Regulators shocked gaming companies on Dec. 22 with rules to cap in-game spending and prohibit mechanisms to incentivize more play time, in a bid to control a sector with growing sway over the nation’s youth. That wiped $80 billion in market value off firms such as tech giant Tencent Holdings Ltd.
Then came a report that authorities had fired the top official at the country’s gaming regulator and Beijing said it may review the controversial rules, suggesting a heightened sensitivity to offending markets. Tencent — the operator of WeChat — recovered some of its gains, but remains down about 4% since the proposed curbs emerged. China’s government hasn’t commented publicly on the reported personnel changes.
![Henry McVey, KKR Head of Global Macro and Asset Allocation explains why the growth story in China is misunderstood. He sees opportunities in Japan and says the macroeconomic conditions of China and Japan have reversed.Source: Bloomberg](https://media.assettype.com/bloombergquint%2F2024-01%2F9f548951-fda3-481a-97eb-9c3a29b3cc19%2F_1x_1.jpg?auto=format%2Ccompress)
The episode underscores the challenge facing Xi as he looks to both revive an economy struggling to arrest a slide in the property sector, while also strengthening national security as military and trade tensions rise with the US. Companies have been caught in the middle, with executives hearing warm words from top officials only to then see authorities probe consultancy firms, expand a vague anti-spy law and restrict access to data.
Conversations with business leaders who have operations in China reveal that whiplash from Beijing’s mixed messages on security and the economy are turning investors more cautious.
Local officials are putting growth in the backseat, as they try to avoid political missteps, according to six bureaucrats who spoke on the condition of anonymity. In that environment, two official measures of foreign direct investment into China fell to record lows last year, with one marking its first contraction.
“At the top of a growing list of questions about the Chinese market is, what kind of relationship does China want to have with foreign enterprises?” said Jens Eskelund, president of the European Union Chamber of Commerce in China. “Businesses do not know where they stand due to mixed messaging from the Chinese government.”
The country’s benchmark CSI 300 index lost 11% last year marking an unprecedented three years of losses since its debut in 2002. In another major exodus, one cohort of active global fund managers tracked by Morgan Stanley slashed their holdings of Chinese and Hong Kong stocks in December, their third-biggest reduction ever.
Authorities are aware of the balancing act. At a key annual economic conference last month, top leaders said new non-economic policies — a category gaming rules fall into — must be reviewed for “consistency” with the overall macro agenda.
China’s Ministry of Commerce and its securities regulator didn’t respond to a request for comment.
For local officials charged with implementing Xi’s vision, it’s clear which goal takes priority. Navigating the political landscape is the primary concern, according to conversations with the six officials, who are directly involved in local economic development policies in provinces including Zhejiang and Sichuan.
Growth isn’t a key measure for performance reviews and Beijing’s warm words about foreign investment are directed to those overseas, said two separate officials. Their comments reflect the challenges business leaders face when dealing with bureaucrats interpreting messages from Beijing.
Many executives stepped foot in China for the first time since the pandemic in 2023, after Covid controls closed borders for years. During their absence, geopolitical tensions flared with the US and general suspicion of foreigners increased.
The country’s shift toward “a more totalitarian environment” has resulted in growing anxiety about being in China among investors, according to Zak Dychtwald, founder of Shanghai-based trend research company Young China Group.
After extending his own rule beyond the two-term norm, Xi last year promoted a new economic team run by a pair of his long-time associates. Premier Li Qiang and Vice Premier He Lifeng are lesser-known than their predecessors to foreign investors, who say it’s harder to access senior officials since the pandemic.
![Li QiangPhotographer: Liesa Johannssen-Koppitz/Bloomberg](https://media.assettype.com/bloombergquint%2F2024-01%2F403ec2b6-a7d0-43be-96c5-a70034178445%2F_1x_1.jpg?auto=format%2Ccompress)
There’s now no clear figure in the party’s upper echelons advocating a pro-growth message, according to one business person who has been engaged in high-level dialogue with senior officials for over two decades. Instead, those promoting national security have become more active, particularly in the past three years, they told Bloomberg on the condition of anonymity.
China’s spy agency has become more visible, creating a WeChat account where it’s waded into the debate over what should drive growth. “The economic field has increasingly become an important battlefield for competition between major powers,” the Ministry of State Security wrote last month. “Development and security are two wings of one body.”
“You put security first because it’s survival,” said Alicia Garcia Herrero, chief Asia Pacific economist at Natixis SA. “It’s quite clear they will never put the economy first and foremost, no matter what.”
Concerns over personal safety are also running high. China probed more than 100 financial professionals last year, as Xi’s anti-corruption campaign widened. The unspecified investigation into star banker Bao Fan has had a chilling effect in financial circles, according to three professionals at firms in greater China.
![Bao FanPhotographer: David Paul Morris/Bloomberg](https://media.assettype.com/bloombergquint%2F2024-01%2F780d011d-1674-40ab-ba66-d761f7234519%2F_1x_1.jpg?auto=format%2Ccompress)
Businesspeople mulling trips to China are increasingly inquiring about the risks of detention, according to one US diplomat. That anxiety has clashed with Xi’s call for “heartwarming” measures to attract investors, such as looser visa rules for some nations and extending preferential tax benefits to foreign nationals.
Despite the challenges, leaving China isn’t an option for many multinationals because of the country’s economic heft, said Andrew Seaton, chief executive of the China-Britain Business Council. He also cited the Asian giant’s cutting-edge technology as a reason to remain engaged, after a recent trip to meet policymakers and businesses in cities across China.
“Companies will always want to stay on the right side of the law and the regulations, but they need to know where the right side is,” said Seaton. If that isn’t clarified, he added, companies will be “nervous” and stop “wanting to do things.”
--With assistance from Chunying Zhang, Jing Li, Zheping Huang, Charlotte Yang, Yujing Liu and April Ma.
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