What’s Going on With China and the Regulators?
I was on CNBC Exchange the other day and they were interested on my take on China knowing that I have done extensive research on investment strategies in that area of the world. I shared with the panel that China is undergoing a change in terms of how they look at business. This change will likely have a dramatic impact on portfolio strategies for investors.
China has now decided that businesses must serve the needs of the government rather than being capitalist, free market enterprises. The regulators have real authority to make dramatic changes to current laws as well as mandate dramatic adjustments to current laws.
Recently companies were forced to divest assets, told to remove their apps from local app stores in the Chinese market, and CEOs were called out for not being more focused on the Communist party’s long-term policy goals. The Chinese government is being very proactive and punishing companies that do not follow the new rules.
Though it has been tempting, we’ve continued to hesitate to invest directly in Chinese companies. Until the regulatory fervor calms down and there’s more clarity on what rules Chinese companies must play by, we believe this is a quite uncertain place to invest. It can have great reward but certainly does have significant risk. At present, this is a direct risk we are not willing to take.
There will be a time when there is clarity regarding the investment landscape in China. We are watching closely and I continue my frequent conversations with Chinese policymakers and company leaders. When we believe the opportunity is worth the risk, we will take action when appropriate.
A recent article highlighted some of the changes happening in China and why it will likely be a while before the current environment changes. A few excerpts are listed below.
“Everybody’s in the cross-hairs,” said Fraser Howie, an independent analyst and co-author of books on Chinese finance who has been following the country’s corporate sector for decades. “This is a very difficult environment to navigate, when over the weekend your business can basically be written down to zero by state edict, how on Earth are you to plan for that?”
Regulatory risk is nothing new in China, but rarely have global investors had to cope with such an onslaught of rules that threaten to curb growth and in some cases decimate entire business models. Beijing’s surprise scuttling of Jack Ma’s initial public offering of fintech giant Ant Group Co. in November looks increasingly like the high-water mark for an era of relatively loose regulation for the country’s private sector.
Chen said it’s too early to judge whether the Chinese government’s attitude toward the private sector has permanently shifted, noting that authorities have in some ways made it easier for companies and investors to access capital markets in recent years.”
China has wiped out more than $1 trillion in value in its clampdown on companies. There are many signs it isn’t over yet.
Disclosures: DWM does not currently hold Uber Technologies, Inc., Lyft Inc., or FedEx Corporation as part of DWM managed portfolio strategies.