INDO-PACIFIC China exit? Russia crisis has businesses thinking the unthinkable Capital flight may have already begun as investors fear Taiwan contingency How would the financial hub of Shanghai fare in a Taiwan crisis? Big capital outflows from China have been observed since the start of the Ukraine war. © Reuters RYUSHIRO KODAIRA, Nikkei senior staff writerMarch 22, 2022 19:36 JST TOKYO -- The invasion of Ukraine has sent multinationals and investors in Russia scurrying to the exits. But something else is happening to global capital flows. "Something big," according to Institute of International Finance Chief Economist Robin Brooks. He tweeted last week that money is leaving China while the rest of the emerging markets are seeing inflows. "Never happened before on this scale and reflects asset managers looking at China in a new light after Russia's invasion of Ukraine." For many, the question of whether to continue doing business in Russia has become an easy "no," as footage of brutal and indiscriminate shelling of civilian facilities is reported in the daily news. But the elephant in the room is what to do with China, particularly in the event of a Taiwan crisis. Investors and bankers say pulling investment out of the world's No. 2 economy would be far more difficult. With its massive population and a rising middle class, China offers no shortage of business opportunities, from mergers and acquisitions to capital-raising and wealth management, just to name the financial possibilities. A Taiwan emergency could scupper all that. Most banks and securities firms do not have a clear game plan in that event. For these financial companies, business with Russia was not nearly as important. In many instances, their Russian business was operated from other hubs such as London. Yale University's Chief Executive Leadership Institute has been keeping tabs on companies that have withdrawn or frozen their Russia businesses since February. As of March 21, over 400 companies had announced their withdrawal. Project leader Jeffrey Sonnenfeld and his team of experts say that the stocks of the companies that are still in Russia were falling by 15% to 30%, by far underperforming 2% to 3% drops on key market indexes in the week of Feb. 28. Russia invaded Ukraine on Feb. 24. The exodus from Russia reflects not just the international sanctions on the country but also the pressure companies face from institutional and retail investors. Social justice matters more and more to investors now. Traders work on the floor of the New York Stock Exchange. Companies who have opted to stay in Russia have seen their share prices fall. © Reuters Philippe Zaouati, chief executive of Mirova, a $30 billion asset management company focused on environmental and social impact, arguably said it best: "It's a vital issue for energy and human rights, and questions whether we still want to live in a democracy or not." He added: "We have to decide what we will do with other autocratic regimes." On March 2, New York-based index provider MSCI announced that the MSCI Russia Indexes will be reclassified from the widely tracked "Emerging Markets" to a lower "Standalone Markets" status. This move is expected to trigger an outflow of up to $32 billion in funds, active and passive, from the index. But while firms deal with the immediate issue of Russia, they also have one eye on China. Like Russia, China is an authoritarian state that has been criticized for alleged human rights abuses and flagrant disregard for the environment. The tipping point, however, would be a military invasion of Taiwan, which Beijing considers to be a renegade province that must be united with the mainland. "If such an invasion occurs, we will have to review our investments. But will we be able to proceed with such a decision? I honestly can't say," said the head of a Japanese asset management firm. His view is likely widely shared. People shop for meat at a Costco Wholesale Corp store in Shanghai. © Reuters There were 17 joint venture securities firms in China in which U.S., European and Asian companies had stakes, according to a survey by Nomura Institute of Capital Markets Research in September 2020. There are likely more today. Companies have been opening branches, hiring staff and expanding offices, despite the U.S.-China trade war. China's presence has also been growing, in contrast to that of Russia's. China's weight in the MSCI Emerging Markets Index has grown to 32% as of February, from 16% at the end of 2007. During the same time frame, Russia has seen its weight plunge to 2% from 10%, as it struggled to recover from the global financial crisis. Considering that the Chinese Communist Party has always touted economic growth as one of its proudest achievements, it is hard to imagine that President Xi Jinping would risk exposing the country to devastating economic sanctions with a Taiwan invasion any time soon. But crucially, the tides already appear to be turning in the financial market. Jonathan Fortun, another economist at the IIF, tweeted on Tuesday that it is "too early to say if outflows from China represent a structural change." But he added that "the timing suggests recent geopolitical events may be playing a role," noting that similar dynamics played out during the trade war. The need to draw up a game plan may be more urgent than ever. https://asia.nikkei.com/Politics/In...source=NA_newsletter&utm_content=article_link
"How would the financial hub of Shanghai fare in a Taiwan crisis?...Investors and bankers say pulling investment out of the world's No. 2 economy would be far more difficult. With its massive population and a rising middle class, China offers no shortage of business opportunities, from mergers and acquisitions to capital-raising and wealth management, just to name the financial possibilities." You know what? Shanghai should just become independent. There, problem solved. LOL Shanghai is pretty much the only city in China that foreign businesses and investors put money in any way so once it's independent, everybody can do whatever they want. The foreign businesses and investors can still have their capital invested to take advantage of the business opportunities and China can do the f*** they want with Taiwan.