‘We’re Not Allowed to Comment Negatively on Anything About China’

An ex-Fed official says asset managers are self-censoring their true views of the country.

(Roy Liu/Bloomberg)

(Roy Liu/Bloomberg)

Maybe it’s business. Maybe they really believe China’s official growth story.

Whatever the motivation, many bankers and asset managers remain strikingly mum or optimistic on China in the face of grave signals about the country’s financial stability, according to former Federal Reserve official Niall Coffey.

“From my perspective, China’s GDP data are fabricated. They have to be,” said Coffey, now CEO of macro research firm Avoca Global Advisors. “It is concerning that this occurs — and is widely discussed behind closed doors in the finance industry — but few professionals are willing to discuss it in public.”

Avoca recently published a detailed paper undermining the veracity of China’s official economic data, the stability of its financial systems, and U.S. investment advisors’ legal footing for not ringing the alarm, should they suspect chicanery.

The paper attracted substantial feedback — and much of it through private channels — Coffey told Institutional Investor in an interview. “I’ve had outreach and positive feedback from numerous people at banks and asset managers who’ve all nonetheless said, ‘We’re not allowed to comment negatively on anything about China.’ They can’t comment on LinkedIn; some are afraid to even ‘like’ the paper.”

“It appears management at banks feel pressure to avoid criticism or punishment from the Chinese government,” which has proven its willing to dole punishment out. “There is a lack of willingness to speak about China at many banks,” Coffey continued. In asset management, too, firms may have relationships with CIC and SAFE” — the country’s vast sovereign wealth funds — “or with private Chinese citizens whose money is offshore. That adds up to an environment where many people seem unwilling to address a situation that’s quite obvious.”

[II Deep Dive: ‘They’d Find Fraud, Fraud, Fraud.’]

Coffey spent six years (2005 to 2011) at the New York Fed running foreign exchange operations, and said he was heavily involved with emergency lending and global stability issues during the financial crisis. He went on to portfolio management positions at Graham Capital and Millennium Management before founding Avoca — a pure advisory shop — in 2017.

“We reject prevailing investor narratives that China has ‘unique advantages’ to respond to Covid-19 because its economy is now reliant on consumption and it is highly integrated into global supply chains,” Avoca argued in the paper.

For all the industry reluctance to call out China, Avoca and Coffey are far from the only vocal critics. But the decision not to speak out, or at least privately raise concerns to one’s clients, is an under-appreciated legal risk for anyone considered an investment advisor under U.S. regulations, the paper and Coffey argued.

“If you know, or have a credible concern, that any issuer of a debt or equity security is lying about their financial or income reporting, including a sovereign government, you have a fiduciary responsibility under U.S. law to respond to that, to investigate it, and to document it, to report it to the regulatory authority, and potentially to act to protect your clients’ interest,” the CEO said.

His advice: Asset managers who haven’t yet done so should contact their lawyers and start thinking about it very seriously. All U.S. investment and financial advisors — and the firms such as MSCI overseeing global benchmark investment indexes — must be honest with their clients about China’s well-known financial stability risks.

“It’s not a joke,” Coffey said. “We are talking about the third-largest economy in the world and the risks are potentially very serious.”