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.
“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.