Why is the Future Fund bailing out of China shares?

What's gone wrong with investing in China?

| More on:
a man looks at a stock exchange graph board backgrounded by a Chinese flag

Image source: Getty Images

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More

sdf

One of the ancillary trends we have seen on global share markets over 2021 so far has been a surprising exodus from China shares. China was once touted as a high growth market. A market diversified away from both ASX and US shares no less. But recent developments have not done investors any favours.

China's all-powerful Communist Party government has spent 2021 cracking down on several industries that it feels threaten the long-term welfare of the country. Just last month, we saw billions wiped from the valuations of several Chinese companies operating in the education space.

As we reported at the time, this was due to regulatory changes that are forcing these companies to reorganise as not-for-profit entities.

China shares face government crackdowns

We also saw a recent crackdown on the Chinese ride-sharing company DiDi Global Inc (NYSE: DIDI). This may have been the primary catalyst behind the company losing around 42% of its value since its June IPO.

This follows the clamps being put on one of China's largest companies – Alibaba Group Holding Ltd (NYSE: BABA) – last year. Alibaba was planning on spinning off its Ant Financial division at the time. But it was forced to pull the plug at the last minute after intervention from Chinese authorities.

All of these heavy-handed moves by the Chinese Communist Party have seen a plethora of investors lose faith in China shares. Not just the ones directly affected by the actions of the Chinese government either.

The BetaShares Asian Technology Tigers ETF (ASX: ASIA) is an exchange-traded fund (ETF) that holds a basket of mostly Chinese tech shares. These not only include Alibaba and DiDi. It also includes other famous China shares like Tencent Holdings Ltd (HKG: 0700), Baidu Inc (NASDAQ: BIDU) and JD.com Inc (NASDAQ: JD).

The ASIA ETF was one of the best performing ASX ETFs of 2020. But, in 2021 so far, it's down a nasty 12.8%. It's also down close to 30% from its February all-time high.

Future Fund pulls the plug on China

Well, now we have some confirmation that it's not just retail investors with paper hands. According to a report in the Australian Financial Review (AFR) last week, a larger investor has taken note.

That investor is none other than Australia's sovereign wealth fund – the Future Fund. The result? The Future Fund is bailing out of China shares.

Future Fund chair Peter Costello told the AFR that the Future Fund needs to be careful with "sovereign money" in light of "recent circumstances" with China. Here's some of what the former Treasurer said:

China is a big part of the emerging world and ordinarily we would be taking a big position in relation to that… But given the difficulty in the relationship between Australia and China we have pulled back on allocation in China… We think it's wise to be cautious as Australia's sovereign [fund], when we're making the allocations in this difficult political climate.

The AFR reports that the Future Fund had China shares Alibaba and Tencent as its sixth and seventh largest positions as of 30 June. Both positions were reportedly worth more than $1 billion together. But in light of Mr Costello's comments, we can probably assume these positions have been at least pruned.

Mr Costello's comments seem to put the blame for this shift in preference for China shares to the recent well-publicised diplomatic spats between Australia and China. Even so, it's possible that the recent tectonic shifts in China's regulatory environment may have helped to grease the wheels.

Whatever the reason, Australia's sovereign wealth fund is a lot less invested in China shares than it was just a few months ago. Food for thought!

Motley Fool contributor Sebastian Bowen has no position in any of the stocks mentioned. The Motley Fool Australia's parent company Motley Fool Holdings Inc. owns shares of and has recommended Alibaba Group Holding Ltd., Baidu, and JD.com. The Motley Fool Australia owns shares of and has recommended BetaShares Asia Technology Tigers ETF. The Motley Fool Australia has recommended JD.com. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Bruce Jackson.

More on Share Market News

Person handing out $100 notes, symbolising ex-dividend date.
Share Market News

$20,000 invested in CBA and these ASX 200 shares 5 years ago is worth

Did these shares deliver the goods for investors? Let's find out.

Read more »

a business person checks his mobile phone outside a Wall Street office with an American flag and other business people in the background.
Share Market News

Is the 'sell America' trade back?

Institutional investors appear to be at odds with retail investors.

Read more »

Unsure man analysing data on laptop.
Share Gainers

Here are the top 10 ASX 200 shares today

It was a disappointing end to a disappointing week for investors this Friday.

Read more »

Six smiling office colleagues stand in a row and look at the camera.
Broker Notes

Brokers name 3 ASX shares to buy today

Here's why brokers are feeling bullish about these three shares this week.

Read more »

A male investor wearing a blue shirt looks off to the side with a miffed look on his face as the share price declines.
Share Fallers

Why ANZ, Clarity, IGO, and Pilbara Minerals shares are dropping today

These shares are ending the week in the red. But why?

Read more »

Man drawing an upward line on a bar graph symbolising a rising share price.
Share Gainers

Why Betr, Centuria Capital, GR Engineering, and Mach7 shares are pushing higher

These shares are having a good finish to the week. But why?

Read more »

woman holding 'hiring' sign in shop
Broker Notes

How much upside does Macquarie tip for Seek shares?

The broker recently reviewed Australian job ad volumes for May.

Read more »

Ecstatic woman looking at her phone outside with her fist pumped.
Broker Notes

Macquarie tips 50% return for this cheap ASX All Ords stock

Let's see which stock the broker is feeling bullish about this week.

Read more »