Banking Crisis

China Eases Western Banks' Regulatory Crackdown Fears - Report

Tom Burroughes, Group Editor, 30 July 2021

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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.

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