- The double whammy of the trade war and the pandemic has caused Beijing to double down on efforts to preserve stability and maintain control
- Still, concerns over such interventions have not put off foreign investors, and falls in Chinese tech stocks are creating attractive buying opportunities
Are international investors losing confidence in China’s economy and markets? Beijing’s regulatory clampdown on China’s technology and education sectors has taken its toll on sentiment towards the world’s second-largest economy, which is already having to contend with a slowdown and a further deterioration in US relations since Joe Biden become president.
The latest crackdown – the government’s decision last weekend to ban academic tuition groups from making profits, raising capital or going public – has ricocheted through global markets amid concern that the intensifying regulatory pressure will have a detrimental impact on broader sentiment.
The “Didi effect” – the fallout from Beijing’s launch of a data security probe against ride-hailing group Didi Chuxing just days after its initial public offering in New York, which heightened concerns over political and regulatory risks in China – has already wreaked havoc with China-sensitive assets.
The MSCI Emerging Markets Index – a gauge of stocks in developing economies where China has a 37.5 per cent weighting – is down more than 8 per cent since June 28, dragging the index into negative territory for the year.
The decline pales in comparison to the dramatic fall in the Hang Seng Tech Index. Launched last year to track the 30 largest Hong-Kong-listed tech firms, including Tencent Holdings and Alibaba Group Holding (the owner of the Post), the index is down 22 per cent since June 27, taking its losses from its mid-February peak to a staggering 41 per cent.
The shares of US-listed Chinese firms have also been dealt a heavy blow following Beijing’s announcement on July 10 that nearly all companies seeking an overseas listing must undergo a cybersecurity review.
The Nasdaq Golden Dragon China Index – a gauge of US-listed Chinese firms – is down 22 per cent since June 29, in stark contrast to the tech-heavy Nasdaq-100 index, which is trading just below its all-time high.
The timing of Beijing’s regulatory assault is inopportune, coming as markets are increasingly concerned about threats to the post-pandemic recovery, and when there is mounting political pressure on Big Tech.
Some investment strategists believe Beijing has crossed the Rubicon in its hostility to the private sector and global capital markets, undermining the investment case for owning Chinese assets. At the very least, equity investors should receive a higher risk premium to compensate for escalating political and regulatory risks.
Yet, worries over Beijing’s heavy-handed interventions, and the acute governance challenges facing international investors in Chinese companies, are nothing new. While these concerns have intensified, they have not deterred foreign investors from buying record amounts of Chinese stocks and bonds.
In a report published on Wednesday, JPMorgan noted that foreign purchases of Chinese equities in the first half of this year were surprisingly strong, despite the underperformance of mainland shares, adding that overseas investors “structurally under-own both China bonds and stocks”.
China’s government debt market – which is less affected by the regulatory crackdown – is attractive to foreign investors partly because of its low correlation with US Treasuries. Beijing’s determination to keep a tight grip on the market by limiting foreign ownership of bonds is a source of resilience, given the dangers of excessive and volatile capital inflows in developing economies.
More importantly, while the severity of China’s regulatory actions has unnerved markets, it has shown how foreign investors underestimated Beijing’s determination to preserve financial and social stability, and maintain control over personal data.
The clampdown reflects the changing economic and geopolitical landscape over the past several years. The double whammy of the trade war and the Covid-19 pandemic has caused Beijing to double down on efforts to entrench the power of the ruling Communist Party.
Not only did investors misjudge Beijing’s response, they were too sanguine about the scope for an easing of US-China tensions following Biden’s victory.
The new administration’s resolutely hawkish stance on China has not just deepened the political and ideological divisions between both superpowers, it has intensified the battle for tech supremacy that is at the heart of the conflict.
Beijing’s efforts to rein in the clout of its tech giants should be viewed through the prism of broader regulatory threats facing the industry. Although China’s actions are by far the most aggressive, the US and European governments are also taking a tougher approach to curbing the power of Big Tech.
The dramatic falls in Chinese tech stocks are starting to create attractive buying opportunities that could be quite compelling, provided concerns about regulatory risks abate. In the US, by contrast, tech stocks are still priced for perfection despite threats posed by tighter monetary policy and tougher regulations.
Beijing’s clampdown is a harsh lesson for global markets. Yet, there is little sign that investors have fundamentally changed their view of China. If the recent sell-off forces investors to price political risks more accurately – both in China and elsewhere – markets will be better prepared for the next bout of volatility.
Author: Nicholas Spiro, South China Morning Post