10 Jan 2022
When it comes to the forthcoming Chinese New Year, it’s out with the Ox and in with the Tiger. The festival marking the start of a new year according to the Chinese lunar calendar is celebrated across the country with dancing, decorations, fireworks, gifts, and family reunion dinners. An astronomical new moon represents the start of a new lunar cycle, and the second new moon of 2022 will bring in the year of the Tiger, the third of the 12-year cycle of animals in the Chinese zodiac. The celebrations are traditional, opulent, and last for fifteen days.
The Tiger is known as the king of all beasts in China. The zodiac sign is a symbol of strength, exorcising evils and braveness and those born in the year of the Tiger are said to be ambitious, daring, courageous and self-confident. These traits could well come in handy when contemplating investment in China.
What’s happening in Chinese equity markets? 2021 got off to a solid start as the economy emerged from the Covid-19 pandemic. Having taken the decision to lockdown early in 2020, China was a frontrunner when it came to subsequent economic and social recovery. As locked-down nations saw manufacturing capabilities reduced, demand poured in from around the world, causing orders to surge to the point where capacity became constrained. Manufacturing indices were firmly in expansionary mode as a direct result of this persistent and strong demand for exports.
Where does regulation come in? Regulation has been a consistent topic throughout the second half of 2021 with policy makers seeking to implement stricter controls on property developers to curtail speculative activity in the sector. The government’s actions have led to some defaults in the property sector but rather than implement a de facto bailout of developers, the government has chosen to deal with potential issues at an individual project level.
What about healthcare and education? Government policy introduced in these sectors has increased the pressure on medical device and equipment manufacturers to cut prices, replicating action taken by the US government under the Trump administration. The business models of education companies in China have been broken by regulation; tutoring had become the norm and educational companies were profiting from high levels of demand, placing pressure on students and society in general, causing the government to introduce change. Prior to this shift in China, the Obama administration had curtailed for-profit educational establishments in the US as students were over-burdened by debt and complained of poor outcomes.
The greatest regulatory encroachment has been within the technology sector where companies wield the biggest influence. The interjection of the government on the eve of Ant Financial’s initial public offering was a clear indication of the level of influence the Government continues to exert on private entities. The Chinese government wants to tackle monopolistic practices, meaning that Tencent and Alibaba have had to bring down the walls of their respective eco-systems. Tencent is re-evaluating its investment portfolio; the company owns some well-known businesses and is aiming to reduce those cross holdings to assuage concerns of policy makers. Didi’s listing in the US resulted in the government becoming more vocal about data privacy laws and the control of data provided by technology companies. Some Chinese companies have recently opted for a secondary local listing in Hong Kong and Didi is following suit by de-listing from the US and re-listing in Hong Kong.
What does this mean for investors? Regulatory encroachments have caused a great deal of volatility in Chinese equity markets and have led some investors to completely exit the space. Others have argued that this volatility represents opportunity and have expressed this through adding to holdings or opening new positions in stocks that have been sold down by investors disproportionately to the news.
There’s a small consensus that the regulatory action is targeted in line with the five-year plan and is nothing more than meeting the global standard. What has been surprising is the speed at which the Chinese government has brought in reform. China has serious ambition and is aiming to double GDP by 2035 and this can only be achieved with a thriving private sector. Smaller companies may take advantage of the regulatory challenges facing larger companies, allowing them to thrive and eventually compete with their larger brethren.
As we embark on the year of the Tiger, investors may want to summon the strength, ambition, and confidence of the king of all beasts to pounce on what some may class as an appealing long-term growth opportunity at low valuations.
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