United States

Government crackdown triggers selloff in Chinese assets


Source: FactSet, as of 7/28/2021

China’s benchmark Shanghai Composite Index recently slid more than five percent over a four-day stretch, marking a new year-to-date low and dragging down broader emerging markets indexes. The declines stemmed from announcements that government officials are again heightening regulations; this time targeting technology, educational, and property development firms.

The changes are just the latest in a series of regulatory crackdowns since late last year, though prior governmental interventions were in aggregate viewed more as a positive for investors (and consumers), and included: promoting fair competition, reducing potential systemic risk in the financial industry, and cracking down on anti-competitive behaviors.

Still, the continued expansion of China’s regulatory oversight, coupled with the government’s willingness to upend industries, prompted a “who’s next” mindset that has led to more widespread repricing of risk in investments tied to the world’s largest emerging economy. Consequently, foreign-listed shares of Chinese firms, China government bonds, and the renminbi (yuan) are among the related assets also facing downward pressure.

While the increased regulatory concerns are not misplaced, we believe recent investor behavior reflects, at least in part, a “sell first and ask questions later” approach. However, recent events serve as a reminder that investors should be cognizant of the heightened market volatility that comes with the unpredictable nature of government policy in China and other emerging market countries.

In addition to policy risks, the proliferation of the Covid-19 Delta variant poses additional risks that bear close monitoring given countries such as Korea and Thailand recently posted record-high infections; and supply-chain issues remain as evidenced by Honda’s halt of motorbike production in Vietnam, and Toyota’s suspension of production in a Japanese factory due to supply chain disruptions stemming from Southeast Asia. Still, we believe that despite increased regulatory scrutiny in China and pandemic-related supply chain setbacks in the region, the risk-reward profile of emerging markets equities remains an attractive proposition for long-term investors.

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