Banks and wealth managers appeared to put a broadly brave face on the moves by Chinese regulators to go after certain business sectors in recent days. Beijing regulators have reportedly sought to calm Western firms' fears about its actions.

(An earlier version of this item appeared yesterday on Family Wealth Report, sister news service to this one.)

Chinese financial authorities have made a move to ease investor worries about crackdowns on listed companies that have sent shares plummeting in tech businesses and those linked to education, the Wall Street Journal reported yesterday (29 July). 

A top regulator has told firms in private that Beijing will consider the market impact before introducing future policies, the newspaper reported, citing unnamed sources. 

Fang Xinghai, vice chairman of the China Securities Regulatory Commission, spoke to representatives of banks including Goldman Sachs and UBS as well as some investment firms on Wednesday evening, the report said. Yi Huiman, the securities regulator’s chairman, was also present at the closed-door meeting in Beijing, they added.

After the meeting, and following a series of upbeat articles in state media, Chinese technology stocks listed in New York and Hong Kong recovered, aiding the wider market. Earlier this week, companies such as Tencent dropped sharply. Education stocks dived, with New Oriental Education & Technology Group slumping by 47 per cent in Hong Kong trading, building on a steep fall in the previous session.

An investment note from Bank of Singapore, sent to this news service, said that Beijing’s regulatory moves against technology and education firms will weigh on sentiment for some time. 

“We believe that regulatory overhang will likely continue well into 2H21. This is reinforced by the Ministry of Industry and Information Technology’s latest announcement that it will establish a special task force to regulate the internet sector. It may be too early to assume that the impacts of regulatory tightening on the internet sector are fully priced in, and the risk of further downward earnings adjustment, especially for next year, cannot be ignored,” the Asian bank said. 

“The latest worries on new policy risks now extend well beyond the for-profit education sector, with increasing market concerns over potential restrictions on the variable interest entity (VIE) structures commonly used by Chinese companies in other sectors to list overseas and raise foreign capital. This includes many Hong Kong and US-listed internet, electric vehicle and pharma companies,” it said.  

Tackling problems
Fang reportedly said that China’s recent regulatory crackdowns on companies engaged in private tutoring, online financial services and other sectors are designed to tackle problems in those businesses and to help them “grow in a proper manner,” the WSJ reported its sources as saying. Fang said that China has no intention of decoupling from global markets, and especially from the US.

The report said that the CSRC didn’t immediately respond to a request for comment. Goldman and UBS also declined to comment, it said.

The big selloff to Chinese companies listed in Hong Kong and New York over recent days has rattled investors. Chinese mainland companies now account for a significant chunk of emerging market indices, so losses will hit the retirement funds and other portfolios of investors around the world. 

This news service has contacted a number of banks and wealth managers for their views about the situation, and whether developments will discourage HNW individuals from putting money into Chinese assets. 

As the WSJ reported, international investors have expressed dismay over how China’s new restrictions for after-school tutoring companies - which were published by state media over the past weekend - would force out any for-profit businesses in this sector. Shares of New Oriental Education & Technology Group and its other US-listed peers lost most of their market value.

Ronald Chan, the founder of Hong Kong asset management firm Chartwell Capital and a listing committee member on the Hong Kong Stock Exchange panel, gave this news service a sanguine take on the Chinese restrictions and market fallout.

“We do not think investing in China is any riskier. Political risk has always been an overhang, and there are no surprises that central government wanted to rein in cannibalizing, monopolistic market tendencies. Applying a Western mindset to interpreting Chinese policymaking is too binary and accepting the cultural and ideological differences is part of the investment thesis,” Chan said. 

“Remember that markets are fickle and have a short-term memory; investors have had a phenomenal run over recent years, so investors late to the party have only themselves to blame. Investing in China is two steps forward, one step back. If investors are going to dance with China to capture the development and growth of the country, they need to expect to get their toes stood on occasionally,” Chan continued. 

“So, where do investors go from here? Avoid the eye of the storm which are the big names that have heavy trading volume and are big index and ETF components. We think that the Asian post-pandemic recovery story is a much safer and more rewarding position to take. Domestic consumption such as food and restaurant and retail spending are themes that regional governments and business owners are all aligned with,” Chan said. 

“We like the quality small to mid-cap companies where we can grasp what exactly is going on in their business and see the catalysts for recovery and growth. Localised themes are also important, such as the broad spectrum of businesses that will benefit from borders re-opening,” Chan added. 

Bank of Singapore, referenced above, said it was unlikely that the regulatory crackdown would hurt the wider Chinese economy. 

“The key engines of China’s recovery this year from the pandemic have been manufacturing, exports and to a lesser extent consumption. This month’s sharp increase in equity market volatility may make consumers concerned about falling stock holdings. But the ‘wealth effect’ is still likely to be less important for consumption than China’s increasing pace of vaccinations. The latter will encourage consumers to go out more, worried employees to return to the labor market and the authorities to reduce the frequency of lockdowns in response to new outbreaks of the virus,” it said.

Other reactions
“China’s recent wave of regulation has been more aggressive than many expected. While it is a continuation of policies already flagged, it has gone further than markets had factored in. To our mind the disregard paid to minority shareholders marks a shift in tone, which raises risks and emphasises the need for investors to be increasingly selective. While we expect this to be a talking point for many months and even years to come, we do anticipate that the volatility will create buying opportunities,” Mark Williams, co-manager of the Somerset Asia Income and Somerset Emerging Markets Dividend Growth Funds, said. 

“The three sectors most impacted by the regulation are education, technology and property. Education stocks have been hit particularly hard after the Chinese government announced after-school tutoring businesses were set to morph into `non-profit’ entities. We have no direct exposure to the education companies that have been targeted by the regulation in either the Asia Income or EM Dividend Growth Funds and we have no immediate plans to invest in the sector. At this stage we believe that investors should be prudent when buying into regulatory risk in China.

Most importantly it is the goals behind the framework that show the breadth of the potential regulatory sphere. The government aims, amongst other things, to promote common prosperity – effectively reducing the burden of the cost of living for the low-to-middle-income segment of the population. Though a logical step, for many companies (as we have seen with education) this may shift that burden onto previously profitable businesses, and their shareholders,” he added.