China casts shadow over London stocks

London Stock Exchange (LSE) companies with high exposure to China face a potential beating if President Xi Jinping’s tightening hold on the country hits the domestic economy and threatens global growth.

Earlier this week, shares in Chinese companies plunged following a coup by Xi at the Communist Party Congress in fear of stricter regulations and crackdowns on the business elite.

This was accompanied by a decline in the value of China’s currency, the yuan, which fell to its lowest level against the dollar in nearly 15 years as traders fled fears Xi’s policies will continue to dent growth. .

Developments also threaten to flood the London market, as the FTSE 100 index includes a number of companies with significant exposure to the Chinese economy, which is cracking under the weight of Beijing’s zero-covid strategy and a real estate crisis.

While rising interest rates have been a boon to banks worldwide, a deepening crisis in China’s real estate market is causing alarm. The vulnerability of UK equities to this became apparent this week when HSBC had to set aside £947 million in the third quarter to cover bad debts created as a result of instability in Chinese real estate.

HSBC has also become entangled in the growing divide between East and West, as China’s growing authoritarianism makes it more difficult for the bank to operate in the country without being criticized by politicians and activists.

Earlier this year, the bank sparked anger after becoming the first foreign lender to install a Chinese Communist Party (CCP) committee at its investment bank in the country.

This usually involves three or more employees who are CCP members and a way for party representatives to be installed at the top of a company. And HSBC is under pressure from Ping An, a major Chinese insurer and its largest shareholder, to divest the bank’s Asian operations.

Ping An claims the HSBC’s global reach is becoming untenable as political tensions escalate. Such a move, as well as the CCP’s growing influence over the bank’s operations, could have profound implications for the London market, as HSBC is one of the LSE’s largest companies with a market capitalization of £88 billion.

The value of China’s currency, the yuan, fell to its lowest level against the dollar in nearly 15 years as traders fled amid worries Xi’s policies will continue to dent growth

Keith Bowman, investment analyst at Interactive Investor, emphasized that amid rising tensions, prudence on investment in China has “increased” and that Xi’s iron grip on power is “doing nothing to allay concerns.”

Meanwhile, Interactive’s senior personal finance analyst Myron Jobson said that while there were “no easy answers” regarding investment in China, the region “was hard to avoid despite political risks.”

Other blue-chip companies that could bear the brunt of a Chinese slowdown and increasing government interference in the economy are the large miners, who export large amounts of raw materials to the country.

Antofagasta, Anglo-American, Glencore and Rio Tinto may find their price performance in the spurt of Chinese demand, with signs that the growth rate could slow and send a shiver through the industry.

The recent weakness in the Chinese currency could also have repercussions, as analysts at City broker SP Angel predict that the depreciation of the yuan will “weigh on copper prices” as a result of a blow to the purchasing power of Chinese buyers.

Meanwhile, Scottish Mortgage Investment Trust, a fund popular with private investors and savers, is exposed to China through large holdings in food delivery group Meituan and tech giant Tencent, which together make up 6.2 percent of its portfolio.

Shares of both companies fell this week in response to growing unease about China’s economic prospects. Also in the firing line is the luxury fashion brand Burberry, which counts for a large part of its turnover on the enormous Chinese consumer market.

The company’s stock took a hard hit in the spring and summer after lockdowns were reintroduced in several major Chinese cities, including Shanghai, which left many shoppers confined to their homes.

Elsewhere, the FTSE 100 health and safety and quality testing group Intertek — which has major operations in Shanghai and makes about 20 percent of its revenues in China — has been hit by lockdown measures. The stock has fallen 33 percent so far this year.

Other LSE-listed companies with potential exposure include beverage company Diageo, which sells high-end spirits to China’s burgeoning middle class, as well as student housing group Unite, which reported “significant growth” in demand from Chinese students earlier this year. study abroad, signaled , and bank salesman DFS who takes some of his items out of the country.