China has been flexing its regulatory muscles recently. There was a clampdown on tech titans such as Tencent and Alibaba last year, over concerns they weren’t doing enough to protect customers’ personal information.
Since then, things have ramped up and the Chinese government has been flexing its muscles in other sectors.
The most newsworthy events this year started with a sudden and sweeping overhaul of the after-school tutoring industry.
Companies in this sector were basically banned from making profits, raising capital overseas or going public.
Now the property sector has come under scrutiny. For some years, the Chinese government has been trying to wean property developers away from excessive borrowing. And now a myriad of new rules has hit companies harder than expected.
As if that wasn’t enough for investors to digest, the regulators have also intensified their crackdown on cryptocurrencies, with a blanket ban on all crypto transactions and mining.
When it comes to risk, the real estate sector is probably the greatest because no one really knows the extent of the problem.
Chinese developers borrowed heavily from investors all around the world, using the cheap debt to finance apartment blocks and houses all over China.
However, many companies overstretched themselves, repaying maturing debt with ever more debt as they chased sales growth.
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This finally came to a head last month when Evergrande, China’s largest real estate developer, missed a payment to foreign investors after new government rules stipulated developers must repay old debt before issuing any more.
So, what does this mean for Chinese equities?
China was the place to be for investors worldwide last year, when the stock market returned 25.5 per cent. To put this into context, the S&P 500 in the US returned 14.1 per cent.
This year, however, while the US index has continued to make gains, the uncertainty in China has led to falls of 17 per cent year to date.
But investors shouldn’t necessarily be put off investing in China – just aware of the risks.
Paras Anand, Asia Pacific chief investment officer at Fidelity, says: “For long-term investors, the indiscriminate sell-off has created good opportunities to look for bargains, especially among companies whose growth trajectories remain intact.
We believe the overarching aim of recent regulation is to foster sustainable growth and boost social equality.
“Despite policy headwinds in some sectors, China is still on track for decent GDP growth over the next decade, while its middle class should continue to grow and see its purchasing power increase as income gaps are narrowed.”
Darius McDermott is managing director at research agency Calibre
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