Investors rethink China strategy after regulatory shock


After four consecutive days of massive sell-offs in the Chinese stock market, Beijing’s regulators decided it was time to provide some comfort to Wall Street. But some investors are still not sure whether to double their investment or flee.

In a hurriedly scheduled conference call on Wednesday night, Chinese regulators told more than a dozen executives from global investors, banks in hard-hit areas, and China Financial Group not to worry about China’s $100 billion shock reforms. Private education industryThey stated that investors should not worry that intervention will limit the profits of other companies. On the contrary, China remains committed to allowing companies to enter the capital market.

The news did not persist.The country’s technology stocks are over Worst month Since the 2008 financial crisis. [regulatory intervention] Come,” said a person who listened to the briefing on the phone. “It’s obvious to everyone. ”

Now, foreign investors in China have suffered huge losses and are worried about where regulators might focus next. They must decide whether the fall in the stock market is an opportunity to double their bets on a fast-growing economy, or a sign that unpredictable political risks outweigh the potential for lucrative returns.

“In the past 18 months, the political risk factors for investing in China have increased exponentially,” said Dominic Armstrong, chief executive officer of Horatius Capital, which runs a geopolitical investment fund. “People have learned the hard way in Russia, and they have also learned the hard way in China.”

Bitter lesson

After a memo leaked a week ago suggesting that Beijing plans to crack down on education companies, the market sold off sharply.

According to a Gavekal analyst, the decline in education stocks led to “some of the most painful observations since the Lehman Brothers bond chart.” Good Future Education, Gaotu Technology and New Oriental Education, which are listed in New York, all fell nearly 60% in the first hour of trading on July 23.

On Tuesday, Tencent, one of China’s largest technology groups, announced that its flagship WeChat social network has suspended user registration because it upgraded its security technology to “be in line with all relevant laws and regulations,” which made more people feel uneasy.

The nervousness hit a Chinese technology group listed in New York, and the Nasdaq Golden Dragon China Index fell by more than 20% in July-the worst month since the global financial crisis.

In Hong Kong, as Chinese Internet giants Tencent and Alibaba fell 18% and 14% respectively, the Hang Seng Technology Index fell nearly 15%, dragging the broader Hang Seng benchmark index down nearly 9%.

JPMorgan Chase’s strategists said that large institutional investors promoted the sell-off. At the same time, Cathy Wood, the star manager of Ark Investment, has been reducing her shareholding in China. According to the company’s website, the $22.4 billion Ark Innovation Exchange Traded Fund held 8% of Chinese stocks in February and has now almost completely withdrawn from Chinese stocks.

But some people have stepped in to seek potential bargaining. “We have always been a net buyer,” said a fund manager at a US$15 billion asset management company based in Asia. “It’s unheard of to see these types of actions… You have to buy them unless you think the whole world will collapse and burn.”

The new rules will prohibit companies that teach school subjects from accepting foreign investment © Costfoto/Barcroft Media via Getty

National goal

The suppression of education is part of the Chinese Communist Party’s efforts to solve the problem of declining birth rates by removing some of the economic barriers that people consider to have children. The rule will prohibit companies that teach school courses from making profits, raising funds or listing on stock exchanges worldwide, and accepting foreign investment.

This field is dominated by three major groups listed in the United States—Good Future Education, New Oriental Education, and Gaotu Education. These groups have soared valuations in recent years and have gained support from some billions of dollars in the world. Top investment company Such as BlackRock and Bailey Gifford.

Private competitors such as Yuanfudao and Zuoyebang have raised billions of dollars in financing in recent years, and have received support from groups such as Tencent, Sequoia, Softbank’s Vision Fund, and Jack Ma’s Yunfeng Capital.

The government intervened shortly after taking antitrust and data security measures against some of China’s largest technology companies.The US$37 billion blockbuster in November last year Initial public offering The Chinese payment group Ant Financial was hit by a torpedo by the Beijing regulator, and its controlling shareholder-Alibaba founder Jack Ma- Disappeared A few months from the public’s point of view.

In the past few months, Beijing has also expanded its influence to the domestic network field. In April, it imposed a fine of US$2.8 billion on e-commerce group Alibaba for abusing its dominant market position and opened a Antitrust investigation Enter the Meituan, takeaway and lifestyle service platforms.

In early July, the Chinese regulator announced investigation Less than a month after Didi Chuxing’s listing in New York raised more than $4 billion in funds, Didi Chuxing may have a data security breach. Since then, its stock price has fallen by two-fifths.

A line chart showing the performance of American depositary receipts shows that the once high-flying Chinese education stocks have fallen

Baillie Gifford, the Edinburgh-based fund manager, manages 352 billion pounds of assets, is the second largest shareholder of the good future listed in the United States, and has made big bets in the Chinese technology industry.

“It’s not that we like geopolitics or national politics or similar things,” Baillie Gifford fund manager James Anderson It told the Financial Times in June, referring to its decision to increase its exposure to China in recent years.

But he added that the potential benefits are too compelling to be ignored, noting that “we see the excitement around companies, the ambitions of Chinese entrepreneurs, and the relationships we can build with individual companies.”

Baillie Gifford declined to comment on the latest developments in China this week.

The new restrictions on tuition companies prohibit them from accepting foreign investment through a “variable interest entity” structure-a model that many large Chinese technology companies have been using overseas for two decades.This Life structureAllowing global investors to bypass the control of foreign ownership of certain industries in China has never been legally recognized in China, even though it has supported approximately US$2 trillion in investments in the US market by companies such as Alibaba and Pinduoduo.

In response to Beijing’s restrictions on overseas financing of Chinese companies, the US Securities and Exchange Commission announced on Friday that Chinese companies must disclose more information about their structure and contacts with the Chinese government before listing in the United States.

“I worry that ordinary investors may not realize that they hold stocks in a shell company rather than a Chinese operating company,” said Gary Gensler, chairman of the US Securities and Exchange Commission, in a statement.

Beijing has launched an antitrust investigation into the foreign sales and lifestyle service platform Meituan © Yan Cong/Bloomberg

Intensify the crackdown?

The education crackdown has raised concerns that the VIE ban may extend to other industries.

The cancellation of the right of Chinese companies to use VIEs is regarded as China’s nuclear option. On Wednesday, the Beijing regulator tried to assure investors that it would not target VIEs more broadly. But a Wall Street executive listened to a briefing on this week’s conference call with regulators. He said that “it was more of what they didn’t say, and they didn’t solve the problem about the VIE structure.”

The consequences of restricting VIEs in sectors other than education will be so severe that some people believe that Beijing will not completely eradicate them.

“The government will allow the VIE structure to continue to exist, but one thing is clear: if a company wants to use the VIE structure to circumvent certain regulations, then this will not work,” said Chen Min, head of the US$8 billion emerging market China. Market expert Somerset Capital Management.

Some investors said that they did not completely sell China, but focused on trying to select stocks that fit the government’s strategic priorities.

Chen said: “Companies such as taxi-hailing groups or community group buying companies, whose model is to use their competitive pricing advantages to squeeze out smaller players, are likely to find themselves vulnerable to more regulation.” Winners are also possible in this environment, such as domestic leaders and semiconductor manufacturers in the field of technology… and companies that are exposed to mass consumption.”

Alice Wang, fund manager of London-based Quaero Capital 2.7 billion euros, agrees that investors will need to switch to industries that are “important for China’s long-term economic future”. .. Renewable energy and industrial automation companies that promote the’Made in China’ narrative. “

David Older, head of equity at 41 billion euro asset management company Carmignac, echoed these views and said that he likes industries such as semiconductors, software, renewable energy, healthcare, and electric vehicles. He has increased his holdings in China and has been increasing his positions this week: “When you see strategists saying that China is not available for investment, it is a good buy signal.”

Armstrong of Horatius Capital said that striving to align yourself with the government’s strategic goals “is the only way you can sleep at night.”

The intervention of the Chinese government is to solve its “Population time bomb,” he said. “This is a Chinese problem, and there will be a Chinese solution. If you want, you can come here as a passenger, but the journey will not be smooth sailing. “

International asset management companies are eager to tap the “huge” wealth opportunities in China

Some of the world’s largest investors are entering China through wealth management joint ventures, creating investment products for China’s large and growing depositors. According to a report by the Boston Consulting Group and China Everbright Bank, China’s broader wealth market is worth RMB 121.6 trillion (US$18.9 trillion) in 2020, a year-on-year increase of 10%.

Although China’s wealth management industry is still dominated by banks, Early overseas migrants Including Europe’s Amundi and Schroders, as well as BlackRock, JP Morgan Asset Management and Goldman Sachs Asset Management from the United States, they are tempted by the country’s financial market liberalization.

“China has a rapidly growing middle class [asset management] Savings and retirement needs,” said Valérie Baudson, CEO of the 1.7 trillion euro Amundi Group, which recently established a wealth management subsidiary with the Bank of China. This year, the joint venture launched More than 50 funds were sold to the customer network of Bank of China, and 3.4 billion euros in assets were raised.

Executives downplayed the political risks of these initiatives, pointing out the importance of cooperating with Chinese domestic institutions. “It’s not a risk to keep me awake at night. For us, it’s a long-term investment,” said Peter Harrison, CEO of Schroder, a £700 billion asset management company, which was awarded a Chinese investment in February. Approval of the Bank of Communications Wealth Management Subsidiary. He added that introducing Schroder’s long-term investment method into China is “very beneficial to China’s long-term savers.”

Additional report by Eric Platt in New York


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