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Here is what money managers have to say about navigating China’s regulatory minefield.

RBC Wealth Management: A downgrade for Asian equities excluding Japan

While markets were surprised by the extent of the education sector reforms, RBC Wealth Management said China’s “get tough” approach appeared to be the new normal. Not out of the blue, it remained consistent with its much-heralded aim of “stable and sustainable growth”, said the Canadian financial services firm.

“The combination of Chinese regulatory zeal and the increased threat from the delta variant has led us to reduce our long-standing recommended allocation to Asia ex-Japan equities” and downgrade the recommended equity positioning, said RBC’s Frederique Carrier and Jasmine Duan.

“The key signals we are watching for before considering a more positive stance include: major fintech companies fully complying with regulatory requirements; Chinese companies resuming their onshore and offshore IPO plans; major digital platforms announcing measures to improve social benefits for workers; and leading technology companies opening up their systems or services to each other.

“In the short term, we believe that lower equity inflows will weigh on the renminbi. But on a six to 12-month horizon, the imminent inclusion of Chinese bonds in the FTSE World Government Bond Index should continue to attract foreign capital, in our opinion, and underpin the currency.

“We believe other areas likely to attract regulators’ attention include health care, online gaming, online insurance and sectors related to the digital economy,” the report added.

Vontobel: Government policies take precedence

Chinese regulators have become more assertive when it comes to clampdowns, said Brian Bandsma, a portfolio manager based in New York. The key to navigating, or profiting, from the volatility is to look at China’s shifting priorities.

“The key to helping investors navigate, and hopefully profit from, these changes is to understand the bigger picture and what the government is ultimately trying to achieve. So far, policy changes have been directed towards immediate impact, but over time another area that could help would be to focus more on conspicuous consumption by the rich.

“This would mean that businesses like baijiu, premium automobiles or European luxury goods should be considered incrementally riskier investments. Gaming should be less likely targeted, given the lingering effects of previous corruption crackdowns and Covid-19 related restrictions on travel.”

In the face of these changes, current and ongoing, the best approach is to assess what the government is trying to achieve and try to make investments in-line with the direction – “or at least avoid investing in those businesses that stand in the way of those objectives”, he added.

Zurich-based Vontobel manages about CHF134.6 billion (US$147 billion) in assets.

Amundi: Not all is lost

“In the short term, China’s regulatory tightening could be challenging and may include restrictions on companies listing overseas using the Variable Interest Entity structure,” fund managers including Vincent Mortier said in a report on August 10.

“Against this uncertain backdrop, we have become more cautious on Chinese equities compared to early 2021, due to tightening regulation and valuation concerns. Earnings and multiples could still be at risk, due to some potential new regulatory changes. High scrutiny and sector selection remain crucial in China to avoid possible new regulations or bubbles.

Renewable energy stocks a possible haven from China’s regulatory crackdown on big tech

“In this respect, we are focusing on strategic sectors where government policy is a clear tailwind rather than a headwind. Clean energy and biotech are two examples.

“This short-term correction coupled with possible further weakness should prove healthy for the market in the medium term, and could be seen as an opportunity for investors looking for sustainable returns. We remain constructive on the Chinese equity market over the long term,” they added.

Paris-based Amundi oversees more than €1 trillion (US$1.2 trillion) in assets.

Capital Group: Still a “classic stock picker’s market”

In some areas such as cybersecurity and digital commerce, current rule making and stricter enforcement parallel, to a degree, the efforts made by the US and Europe to regulate the digital economy, portfolio managers Victor Kohn and Noriko Honda Chen said in a report recently.

“Beijing is saying it wants greater control, but that does not necessarily mean the government wants to punish any company that makes too much money, or to sharply curtail the profitability of some of the country’s most successful companies.

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Crackdown on private tutoring leaves industry, students and parents drawing a blank

Crackdown on private tutoring leaves industry, students and parents drawing a blank

“No doubt, what happened in online education may extend to other industries, such as video gaming and streaming services, where there reportedly is pressure to enact more rules. Restrictions already exist to reduce the time students and young adults spend on online gaming and streaming.

“We anticipate more regulatory action, and there could be further guidelines in areas such as consumer finance, online gaming and mobile apps. We think the government is sensitive to market concerns even though the motives of party officials can be opaque.

“We are weighing potential opportunities to invest in unique companies with dominant market share positions, whose absolute valuations are much more palatable at current levels. It remains a classic stock picker’s market, with a growing number of high-quality companies and ongoing innovation, so we believe it’s important to invest on a company-by-company basis to gain an appropriate comfort level,” they added.

Los Angeles-based Capital Group manages more than US$2.6 trillion in assets.

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