Investors grappling with China’s regulatory risk as Beijing cracks down on internet sectors

Beijing, China

Western investors are wrestling with the risks of investing in US-listed stocks of Chinese companies after Beijing embarked on a regulatory crackdown on large swathes of its economy, from the internet sector to private tutoring.

The S&P/BNY Mellon China Select ADR Index, which tracks the American depositary receipts (ADRs) of major U.S.-listed Chinese companies, dropped 5.9% on Friday after Beijing moved to bar tutoring for profit in core school subjects, triggering a collapse in the shares in the sector.

It was the latest in a series of actions by Beijing that have caused the index to lose 18.8% since the beginning of the year. A string of cybersecurity investigations by Chinese regulators into major technology companies such as Alibaba Group Holding Ltd and Baidu Inc has prompted many investors to dump their shares.

China’s latest crackdown on technology firms was announced just two days after ride-hailing giant Didi Global Inc went public in New York at the end of last month. Its shares are down 42% since the initial public offering.

The Chinese Communist Party’s uneasy relationship with private business has always weighed on the minds of Western investors who seek legal and regulatory certainty to place their bets.

Yet Beijing’s recent moves are unsettling even seasoned investors who are otherwise used to navigating corporate China’s murky auditing and poor governance in order to chase growth in the world’s second-largest economy.

Max Gokhman, head of asset allocation at Pacific Life Fund Advisors, where he oversees more than $30 billion in assets, said he believed Beijing’s end game was to bring capital back to China. He said he was bullish on many Chinese consumer-facing companies over the long term because of the country’s emerging middle class, but that it was difficult to price stocks in the short term.

“The near-term picture is murky as Chinese ADR issuers are caught in the crossfire between U.S. regulators that are asking for more disclosures and Chinese regulators that demand privacy for data on Chinese citizens,” Gokhman said.

Some investors deem these investments too risky. Paul Nolte, portfolio manager at Kingsview Investment Management in Chicago, said he has not held any China-related stocks in his portfolio for the last two years because of the political risk.

“What we have done is moved away from the fundamentals of the companies. It has now become a political football and there is no way to analyze that and put it into a financial spreadsheet,” Nolte said.

The vexing question for many investors is whether they can call the bottom in these stocks. With the S&P 500 at record levels after rallying more than 95% from its March 2020 lows, they are trying to establish whether the next rally could come in Chinese ADRs.

The discrepancy in the trajectory of the shares of U.S. and Chinese companies has been especially profound in the technology sector. The regulatory clamp-down has suppressed the value of Chinese tech firms just as U.S. technology giants are riding high after work-from-home and big data trends accelerated during the COVID-19 pandemic.

“At this point, it is anyone’s guess where (Chinese ADRs) will bottom, and where you are seeing this money go is to the U.S. big tech stocks,” said Joel Kulina, a senior trader at Wedbush Securities who specializes in technology stocks.

Reuters

Singapore Reporter/s

In Singapore, we are looking to double our reporting team by this year-end to comprehensively cover the fast-moving world of funded startups and VC, PE & M&A deals. We want reporters who can tell our readers what is really happening in these sectors and why it matters to markets, companies and consumers. The ability to write precisely and urgently is crucial for these roles. Ideal candidates must have to ability to work in a collaborative, dynamic, and fast-changing environment. We want our new hires to be digitally savvy and ready to experiment with new forms of storytelling. Most importantly, we are looking for hard-hitting reporters who work well in a team. Collaboration and collegiality are a must.

Following vacancies can be applied for (only in Singapore).

Following vacancies can be applied for (only in Singapore).   

  • A reporter to track companies/startups that have raised private capital, and have the potential to become unicorns. SEA currently has over 40 companies with a valuation of over $100 million and under $1 billion.
  • A reporter who can get behind the scenes and reveal how funding rounds are put together, or why they’ve failed to materialise. She/he in this role will largely focus on long-format stories. 
  • A journalist to track special situations funds, distressed debt and private credit (from the PE angle) across Asia.

Singapore Reporter/s

In Singapore, we are looking to double our reporting team by this year-end to comprehensively cover the fast-moving world of funded startups and VC, PE & M&A deals. We want reporters who can tell our readers what is really happening in these sectors and why it matters to markets, companies and consumers. The ability to write precisely and urgently is crucial for these roles. Ideal candidates must have to ability to work in a collaborative, dynamic, and fast-changing environment. We want our new hires to be digitally savvy and ready to experiment with new forms of storytelling. Most importantly, we are looking for hard-hitting reporters who work well in a team. Collaboration and collegiality are a must.

Following vacancies can be applied for (only in Singapore).

Following vacancies can be applied for (only in Singapore).   

  • A reporter to track companies/startups that have raised private capital, and have the potential to become unicorns. SEA currently has over 40 companies with a valuation of over $100 million and under $1 billion.
  • A reporter who can get behind the scenes and reveal how funding rounds are put together, or why they’ve failed to materialise. She/he in this role will largely focus on long-format stories. 
  • A journalist to track special situations funds, distressed debt and private credit (from the PE angle) across Asia.