What does market regulation mean for Chinese equities?

World in Motion – Global equities blog

What does market regulation mean for Chinese equities?

Recent regulatory action around China’s after-school education companies has raised concerns around the country’s economic system. The companies had been stock market darlings, propelled by strong demand from parents looking to get their children ahead in a competitive education system. But new regulation has effectively made the sector non-profit, shrinking the addressable market for these companies from $100 billion to $25 billion2 and wiping billions off the market caps of education companies such as New Oriental and TAL Education (Figure 1). This was a worst-case scenario few investors had been anticipating.
Figure 1: The political and financial stance of successive administrations
Market cap dollar billion
Source: Bloomberg, as at 13 August 2021
This may one day be considered a watershed moment in China’s market history. The prioritisation of quality rather than quantity of growth has become increasingly important to the Chinese government, and one metric it wants to address is the rise in social inequality, especially in the three areas of deepest concern to the middle class: education, housing and healthcare. Highly profitable private, after-school education companies, at which families spent 7%-9% of their household incomes in 20173, are unlikely to be looked upon favourably under this new regime.
At the same time, new regulation has also been the source of market volatility for China’s big tech giants. Companies such as Alibaba and Tencent have been at the forefront of China’s new economy for the past decade, spearheading the digitisation of the country’s economy with technology ecosystems to challenge those of the leading US tech peers. Successful innovation and exponential growth meant that, at the February peak, internet companies made up nearly half of the MSCI China index.5
China has a history of letting industries experiment in early stages to help supercharge growth and regulating after the fact as challenges emerge. It is now the turn of the tech stocks. Many of the challenges regulators are seeking to tackle are the same as those facing US companies – antitrust, data security and workers’ rights. In the case of big tech, it is highly likely the Chinese government realises it actually needs for-profit companies to achieve another of its policy objectives: that of greater technological self-sufficiency, an objective that has become ever more urgent since former US president Trump began his technology-focused China containment policies in 2018. Beijing still wants tech companies to thrive, but more in ways that meets its policy objectives.

How will markets be affected?

This takes us on to the market impact of these moves, with many participants asking if the new policy regime makes China uninvestable? Recent murmurings from government officials suggest a continued commitment to market-based principles, with extreme for-profit bans likely to be limited to the education sector. Nevertheless, it is reasonable to expect continued policy action in other areas as regulators attempt to interpret and implement the government’s new focus on technological self-sufficiency, decarbonisation and reducing social inequality.
Once again, the Chinese economy is evolving, and companies that are in areas under scrutiny will need to change their business models – it is uncertain what type of earnings profile these companies will have in the next three to five years. With such uncertainty affecting more than 40% of China’s equity market, the multiples investors are willing to pay for Chinese stocks will be lower. As a result, we have exited all our positions in Tencent, having held the stock for many years.

We must not forget, however, that China is the second largest economy in the world and growth opportunities remain, even as the economic regime evolves. Some of our portfolio companies, which are listed elsewhere, have significant exposure to China and we remain optimistic about their growth prospects, especially where revenues are aligned to new policy objectives. For example, China’s plans to decarbonise will be a likely boon for electric vehicle manufacturers, and in turn as a supplier our holding TE Connectivity, which derives a fifth of its revenues from the country. Similarly, the flip side of the government’s ban on after-school tutoring has been the announcement of new policies to promote greater participation in sports, which should benefit another of our holdings, Adidas, for which China accounts for a quarter of sales.

More opportunities will present themselves with time, but we prefer to wait until the policy picture becomes clearer.
For an extended viewpoint version of this blogpost, with additional data and more detailed discussion, click here: Cats, rivers & regulation: the lowdown on Chinese equities.
17 Setembro 2021
Share article
Apple web badge
Spotify web badge
Listen on Stitcher badge
Setembro 2021
Share article

3Goldman Sachs, Future of learning: Transforming China’s after-school tutoring in the digital era, 3 Feb 2020
5Morgan Stanley, China’s Regulatory Reset, p9, 1 August 2021

Important Information

Important Information: For use by Professional and/or Qualified Investors only (not to be used with or passed on to retail clients). This is an advertising document.

This document is intended for informational purposes only and should not be considered representative of any particular investment. This should not be considered an offer or solicitation to buy or sell any securities or other financial instruments, or to provide investment advice or services. Investing involves risk including the risk of loss of principal. Your capital is at risk.  Market risk may affect a single issuer, sector of the economy, industry or the market as a whole. The value of investments is not guaranteed, and therefore an investor may not get back the amount invested. International investing involves certain risks and volatility due to potential political, economic or currency fluctuations and different financial and accounting standards. The securities included herein are for illustrative purposes only, subject to change and should not be construed as a recommendation to buy or sell. Securities discussed may or may not prove profitable. The views expressed are as of the date given, may change as market or other conditions change and may differ from views expressed by other Columbia Threadneedle Investments (Columbia Threadneedle) associates or affiliates. Actual investments or investment decisions made by Columbia Threadneedle and its affiliates, whether for its own account or on behalf of clients, may not necessarily reflect the views expressed. This information is not intended to provide investment advice and does not take into consideration individual investor circumstances. Investment decisions should always be made based on an investor’s specific financial needs, objectives, goals, time horizon and risk tolerance. Asset classes described may not be suitable for all investors. Past performance does not guarantee future results, and no forecast should be considered a guarantee either. Information and opinions provided by third parties have been obtained from sources believed to be reliable, but accuracy and completeness cannot be guaranteed. This document and its contents have not been reviewed by any regulatory authority.

In Australia: Issued by Threadneedle Investments Singapore (Pte.) Limited [“TIS”], ARBN 600 027 414. TIS is exempt from the requirement to hold an Australian financial services licence under the Corporations Act and relies on Class Order 03/1102 in marketing and providing financial services to Australian wholesale clients as defined in Section 761G of the Corporations Act 2001. TIS is regulated in Singapore (Registration number: 201101559W) by the Monetary Authority of Singapore under the Securities and Futures Act (Chapter 289), which differ from Australian laws.

In Singapore: Issued by Threadneedle Investments Singapore (Pte.) Limited, 3 Killiney Road, #07-07, Winsland House 1, Singapore 239519, which is regulated in Singapore by the Monetary Authority of Singapore under the Securities and Futures Act (Chapter 289). Registration number: 201101559W. This document has not been reviewed by the Monetary Authority of Singapore.

In Hong Kong: Issued by Threadneedle Portfolio Services Hong Kong Limited 天利投資管理香港有限公司. Unit 3004, Two Exchange Square, 8 Connaught Place, Hong Kong, which is licensed by the Securities and Futures Commission (“SFC”) to conduct Type 1 regulated activities (CE:AQA779). Registered in Hong Kong under the ce (Chapter 622), No. 1173058.

In the UK: Issued by Threadneedle Asset Management Limited, registered in England and Wales, No. 573204. Registered Office: Cannon Place, 78 Cannon Street, London EC4N 6AG. Authorised and regulated in the UK by the Financial Conduct Authority.

 

In the EEA:  Issued by Threadneedle Management Luxembourg S.A. Registered with the Registre de Commerce et des Sociétés (Luxembourg), Registered No. B 110242 44, rue de la Vallée, L-2661 Luxembourg, Grand Duchy of Luxembourg.

 

In the Middle East: This document is distributed by Columbia Threadneedle Investments (ME) Limited, which is regulated by the Dubai Financial Services Authority (DFSA).

For Distributors: This document is intended to provide distributors with information about Group products and services and is not for further distribution.

For Institutional Clients: The information in this document is not intended as financial advice and is only intended for persons with appropriate investment knowledge and who meet the regulatory criteria to be classified as a Professional Client or Market Counterparty and no other Person should act upon it.

 

In Switzerland: Threadneedle Asset Management Limited. Registered in England and Wales, Registered No. 573204, Cannon Place, 78 Cannon Street, London EC4N 6AG, United Kingdom. Authorised and regulated in the UK by the Financial Conduct Authority. Issued by Threadneedle Portfolio Services AG, Registered address: Claridenstrasse 41, 8002 Zurich, Switzerland.

 

Columbia Threadneedle Investments is the global brand name of the Columbia and Threadneedle group of companies.

Related Blog Posts

17 Outubro 2024

Neil Robson

Head of Global Equities

Power hungry AI - investment implications in the era of energy transition

Understanding the options for power provision and assessing the investment opportunities resulting from AI’s thirst for energy.
9 Outubro 2024

Neil Robson

Head of Global Equities

Five quality growth stocks with potential in all weathers

From US railroads to e-commerce platforms. We highlight five diverse businesses with one thing in common - strong competitive advantages.
23 Agosto 2024

Neil Robson

Head of Global Equities

On pause: the one-way certainty of the market is over … for now

The macroeconomic backdrop is changing, or at least uncertain. This could shift the pricing of risk assets, but it won’t change what we do, which is look for stronger competitively advantaged businesses that fit our quality growth philosophy.
Read time - 3 mins

Também poderá gostar de

Sobre nós

Milhões de pessoas em todo o mundo confiam na Columbia Threadneedle Investments para gerir o seu dinheiro. Acompanhamos investimentos para investidores individuais, consultores financeiros, gestores de património, bem como companhias de seguros, fundos de pensões e outras instituições.

Contactos

Para mais informações sobre a Columbia Threadneedle Investments ou os nossos produtos, entre em contacto connosco ou com o seu consultor.

Responsabilidade social corporativa

Milhões de pessoas em todo o mundo confiam na Columbia Threadneedle Investments para gerir o seu dinheiro. Acompanhamos investimentos para investidores individuais, consultores financeiros, gestores de património, bem como companhias de seguros, fundos de pensões e outras instituições.