Page 34 - Bloomberg Businessweek - November 19, 2018

Bloomberg Businessweek The Year Ahead 2019 Finance

Donald Trump’s tariffs and the Federal have been propped up for too long by reckless
Reserve’s interest-rate hikes have played a role, shadow lenders. Strong companies are still grow-
but the biggest triggers have been local. By far ing. Private-sector investment in fixed assets
the most important: the Chinese government’s rose at an 8.7 percent annual rate in September,
almost two-year campaign to rein in the country’s up from 2.5 percent two years ago, according to
$9 trillion shadow banking industry—financial government statistics. Bytedance Ltd., a Beijing-
companies that aren’t regulated like traditional based online media startup, raised $3 billion in
lenders. While the clampdown was designed to October in a deal that valued the six-year-old com-
make China’s financial system safer and more pany at $75 billion.
transparent, it’s crimped a key funding channel Skeptics say China’s market turmoil is a sign
for private-sector companies that lack access to that the country has backtracked on Deng’s
state-run banks. Faced with a drying up of credit reforms and failed to develop sustainable financ- “Do you think you will
and the country’s weakest economic expansion ing options. They also see rising odds of a policy
since 2009, more small businesses are defaulting misfire as tumbling share prices add to a long list make it through the year?”
on debt or liquidating. of challenges, including the trade war with the
Larger companies, including Tencent and U.S. and a weakening yuan.
conglomerates such as Dalian Wanda Group Co., The government has announced steps to
have been hurt by tighter regulations, contribut- ease funding strains, such as a requirement that
ing to a growing perception among investors that a third of new bank loans go to private- sector
President Xi Jinping, who may rule China indef- companies. But the measures unveiled so far
initely after he scrapped term limits this year, haven’t been strong enough, says Liu Xingqiang,
wants to prevent nonstate companies from grow- president of a trade group for small and mid-
ing too powerful. Under Xi, leaders have called size enterprises in Hebei province. He says
for stronger party guidance of entrepreneurs. A about 80 percent of the companies he sees are
phrase increasingly whispered in business circles: “dragging out their feeble existence” and that
“Guo jin min tui,” or “The state advances, the pri- state banks remain reluctant to lend. “For us,” 67
vate sector retreats.” Liu says, “the banks will only add icing to the
Optimists see the jump in private-sector cake and never offer fuel in snowy weather.” <BW>
defaults as a healthy purge of companies that �Bloomberg News

ETFs
PHOTOGRAPH BY PIPPA DRUMMOND FOR BLOOMBERG BUSINESSWEEK. PROP STYLIST: AJA COON. DATA: COMPILED BY BLOOMBERG

▷ Investors love exchange-traded funds because they’re simple and cheap� With
some index funds now charging zero fees, it’s getting harder for asset managers to
make money selling investors the basics� Watch ETFs get more complicated

● CHASING THEMES ● BANKING ON BITCOIN ● COMPLEX HEDGES ● THE SMART SET U.S. assets in smart- Share of U.S. ETF
Some ETFs have a Several companies New “defined outcome” So-called smart-beta beta funds assets in smart-beta
storytelling hook, such have been lobbying for ETFs use options con- funds track indexes funds
as the rise of self- driving the U.S. Securities and tracts to offer investors that favor stocks with a
cars, vegan foods, or Exchange Commission a cushion against stock common characteristic, $ 800b 22.5%
digital banking. State to allow an ETF that can market drops. But they such as low volatility or
Street Corp. has started buy the digital currency may come with lower cheap valuation, that’s
an ETF that buys com- or related futures con- returns than a plain been associated with
panies involved in sea tracts. The watchdog stock fund, because outperformance. But a
or space exploration. worries that the crypto they also cap investors’ paper from Research
Goldman Sachs Group market is too opaque gains when the market Affiliates—an early 40 0 21.5
Inc. has a “human evo- and vulnerable to manip- rises. Their fees are advocate of such strat-
lution” fund in the works ulation, and it rejected almost double that of egies—warns that inves-
to invest in genom- plans for nine funds in the average ETF. tors have to be prepared
ics, life extension, and August. But the agency for long stretches when
robotic surgery. Assets is reviewing those deci- these funds lag the
in theme funds have sions, and at least one market. �Rachel 0 20.5
almost doubled over the commissioner wants to Evans
past 18 months, to more see a Bitcoin ETF get 2014 2018 2014 2018
than $20 billion. the green light.