While these policy changes may seem draconian to those of us living in the western world, these regulation policies are in fact designed to foster a sustainable and healthy environment for technology and internet industries in China.
The hope is that this will help to increase their global competitiveness. Ultimately, the Chinese government wants to show that their regulatory framework ensures they are fully compliant, which should cause increased inflows of investment.
Supporting this theory, the president of the Chinese web giant Tencent, Martin Lau, reacted positively to the news, saying, “the regulation has been quite loose in the past and new regulations are necessary to help identify and rectify industry misbehaviours. New regulations will emphasise compliance [and] social responsibility, as well as fair and proper behaviour.”
Even so, these moves spooked the market and prompted questions around China’s attitude towards their capital markets and foreign investment.
Regulatory changes shake China’s stock markets, but sharp rebounds often follow
Although these new regulations could slow down the growth of some Chinese companies, there are signs of strong resilience.
Given that the long-term aim for the regulatory changes is to create a more level playing field for Chinese businesses, the long game should help attract significantly more foreign investment.
It’s not the first time target regulatory changes have shaken China’s stock market, and it’s unlikely to be the last, but, on the upside, these are often followed by sharp rebounds.
Investors who can stomach the risk of heightened volatility tend to be rewarded with strong returns. In fact, the MSCI China index has returned 12.3% over 20 years compared to 9.3% for the S&P 500.
China’s bear market is linked to near-term policy uncertainty
Understanding that the bear market in China is linked to near-term policy uncertainty, rather than wider economic problems that could linger, should give investors some comfort.
Since you should invest with a long-term view, while regulations might cause blips in share prices, in the longer term they should aid greater levels of foreign investment in Chinese companies. This should help your investment in the country to grow.
While attempting to time any market is a tough challenge, China can be even more difficult to predict.
In the short to medium term, regulatory rollout could continue. Property prices could also fall, damaging consumer confidence. In addition, the potential for Covid concerns could destabilise the situation, with the US-China relationship possibly affecting the short-term outlook for growth.
News stories, such as the Evergrande crisis, that grab the world’s headlines add to the potential for volatility.
Why China should be considered as part of a diversified investment portfolio
Despite the potentially troubling property sector, there are still plenty of reasons why China is a good home for your investments. Here are three of them.
- Entrepreneurship drives growth
China’s economy is driven almost entirely by privately-owned businesses. This high level of entrepreneurship is helping to drive growth beyond the areas being targeted for reform.
According to research carried out by McKinsey, almost 87% of employment is in private companies. These firms are also responsible for 88% of China’s total exports.
- China’s unique characteristics reduce the threat of a crisis
Because the Chinese government controls both sides of the banking system, the threat of an economic crisis is reduced.
State-owned enterprises are the largest borrowers. The region’s reliance on internal funding makes it more resilient and the vast domestic capital available means it is not especially vulnerable to any sudden withdrawal of capital from foreign investors.
In terms of lending, the government holds significant stakes in the large banks and would find it relatively easy to recapitalise them in the event of a crisis.
- China is the second-largest economy in the world
Although China is the second-largest economy in the world, it has a small equity market and represents only 5.4% of the global equity market.
To put this in perspective, the largest economy in the world – the USA – has a 57% share of the global equity market.
Whatever you may think about the authoritarian Chinese government, the gap between Chinese and US firms is rapidly closing. Chinese companies on the Fortune 500 generated $8.3 trillion in revenue in the past year, compared to $9.8 trillion for US firms.
Additionally, according to McKinsey, China’s middle-class population is estimated to reach 550 million by 2022, more than one and a half times the entire US population.
McKinsey also found that $1 of every $3 of global investment made by companies over the past decade has been in China.
To overtake America, the Chinese government knows that they must increase investment into their stock markets. This means that although the regulation changes imposed may seem harmful to the economy, take a long-term view and their moves may not seem as crazy as you first thought.
Get in touch
If you are interested in learning more about investment opportunities in China and how you can profit from expert insight and long-term growth, get in touch.
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The value of your investments can go down as well as up, so you could get back less than you invested.
Past performance is not a guide to future performance.
Bowmore Asset Management Ltd is authorised and regulated by the FCA.