Tue. Oct 19th, 2021


After four days of big sales in Chinese stocks, regulators in Beijing have decided it’s time to reassure Wall Street. But some investors have still decided to double or flee.

In a hasty call Wednesday night, Chinese regulators told a dozen executives of global investors, banks hit hard, and Chinese financial groups that they should not worry about the shock recovery of the country’s $ 100 billion private tutor industry. Investors should not worry about intervening to make a profit in other companies, they said. China was rather committed to giving businesses access to capital markets.

The message did not stay. Technical shares in the country have completed their shares worst month since the financial crisis of 2008. “There will clearly be more [regulatory intervention] to come, ”said one person about the call. “It was clear to everyone.”

Foreign investors in China have suffered huge losses, and they are anxious about what regulators after education could focus their attention on. They need to decide whether the drop in equities is an opportunity to double a fast-growing economy or a sign that unpredictable political risk outweighs potentially profitable returns.

“The political risk factors for investing in China have grown exponentially over the past 18 months,” said Dominic Armstrong, CEO of Horatius Capital, which manages a geopolitical investment fund. “People have learned the hard way in Russia, and they are learning the hard way in China.”

Line chart of the performance of the stock index to date (%) showing that China's technological collapse exacerbates foreign listings

Difficult lesson

After a leaked memorandum more than a week ago indicating that Beijing intended to mobilize education enterprises, market sales were sharp.

This was led by a decline in education stocks which, according to an analyst at Gavekal, was one of the most traumatic views since the graphs of Lehman’s bonds. Listed in New York, TAL Education, Gaotu Techedu and New Oriental Education, all down nearly 60 percent in the first hour of trading on July 23.

Further unrest came on Tuesday when Tencent, one of the largest technology groups in China, announced that its flagship WeChat social network had suspended user registrations because it was upgrading security technology “to comply with all relevant laws and regulations”.

Nerves listed Chinese technology groups in New York, which dropped the Nasdaq Golden Dragon China index by more than 20 percent in July – the worst month since the global financial crisis.

In Hong Kong, the Hang Seng Tech Index fell nearly 15 percent, dragging the Hang Seng broader benchmark nearly 9 percent lower as Chinese internet giants Tencent and Alibaba fell 18 and 14 percent, respectively.

According to the strategists at JPMorgan Chase, large institutional investors have driven the sale. Meanwhile, Ark Invest star manager Cathie Wood has also reduced her holdings in China. According to the company’s website, the $ 22.4 billion Ark Innovation Stock Exchange Fund, which had an 8 percent allotment to China shares in February, came out of Chinese shares almost entirely.

But some have opted in for a possible bargain. “We were net buyers,” said a fund manager of a $ 15 billion asset manager in Asia. ‘It’s unusual to see these types of movements. . . You have to buy it unless you think the whole world is going to crash and burn. ”

The new rules prohibit companies that teach school curriculum subjects from accepting foreign investment © Costfoto / Barcroft Media via Getty

National goals

The suppression of education is part of the Chinese Communist Party’s efforts to address declining birth rates by removing some of the alleged financial barriers for children. The rules prohibit companies that teach school curricula from making a profit, raising capital or listing on stock exchanges worldwide, and accepting foreign investment.

This sector is dominated by three major U.S. listed groups — TAL Education, New Oriental Education, and Gaotu Techedu — which have enjoyed high valuations over the past few years and billions of dollars in support from some of the world’s top investment companies like BlackRock and Baillie Gifford.

Private competitors such as Yuanfudao and Zuoyebang, which have held billions of rounds of funding in recent years, are backed by groups including Tencent, Sequoia, SoftBank’s Vision Fund and Jack Ma’s Yunfeng Capital.

The government’s intervention comes shortly after anti-monopoly and data protection measures against some of the largest technology companies in China. Last November, the $ 37 billion blockbuster took place initial public offering of the Chinese payment group Ant was torpedoed by the regulators of Beijing and its controlling shareholder, the founder of Alibaba. disappear for a few months from the public eye.

In recent months, Beijing has also expanded its influence into the domestic online sector. In April, he fined e-commerce group Alibaba $ 2.8 billion for abusing its market dominance, and opened a antitrust investigation to Meituan, the pick-up platform for deliveries and lifestyle services.

And earlier in July, Chinese regulators announced an investigation possible data breach by Didi Chuxing, less than a month after the app raised more than $ 4 billion in a listing in New York. Its shares have since fallen by two-fifths.

Line chart of the performance of American conservation evidence showing as soon as high-flying Chinese education supplies fall back to earth

Baillie Gifford, the fund manager in Edinburgh with £ 352 billion in assets under management, is the second largest shareholder in the US-listed TAL and has placed big bets on the technology sector of China.

“It does not say that we like geopolitics or national politics,” said Baillie Gifford Fund Manager. James Anderson told the Financial Times in June, citing his decision to add exposure to China over the past few years.

But potential profits are too compelling to ignore, he added, pointing to “the excitement we see around businesses, the levels of ambition among Chinese entrepreneurs and the relationships we can build with the individual businesses”.

Baillie Gifford declined to comment this week on the latest developments in China.

The new restrictions on private education enterprises prohibit them from accepting foreign capital through structures with ‘variable interest rates’ – the model that many large Chinese technology enterprises have been listing abroad for two decades. The LIFE STRUCTURE, which enables global investors to avoid foreign ownership control in some Chinese industries, has never been legally recognized in China, despite underpinning about $ 2 tons of investment in companies such as Alibaba and Pinduoduo in US markets.

In response to Beijing’s restrictions on companies based in China on raising capital abroad, the US Securities and Exchange Commission announced on Friday that companies in China will have to disclose more about their structure and contact with the Chinese. government before listing in the US.

“I am concerned that average investors do not realize that they hold more in a shell business than in a trading company in China,” SEC Chairman Gary Gensler said in a statement.

Beijing launches antitrust inquiry into Meituan, the takeaway platform and lifestyle services platform © Yan Cong / Bloomberg

Increasing oppression?

The repression of education has raised fears that the VIE ban could be extended to other sectors.

The revocation of the rights of Chinese enterprises to use VIEs is considered as China’s core option. On Wednesday, Beijing regulators wanted to reassure investors that it would not target VIEs more widely. But one Wall Street executive informed the week’s call with regulators: “it’s more about what they did not say; there were questions about the VIE structure that they did not address”.

The consequences of limiting VIEs in non-education sectors would be so severe that some are confident that Beijing would not eradicate them completely.

“The government will allow the VIE structure to survive, but one thing is clear: if a company wants to use the VIE structure to circumvent certain regulations, it will not work,” said China’s Min Chen. market specialist Somerset Capital Management.

Instead of selling out of China altogether, some investors say they are focusing on choosing stocks that match the government’s strategic priorities.

“Companies like taxi groups or community groups that buy businesses where their model wants to use their competitive price advantage to express smaller players are likely to be more vulnerable to more regulation,” Chen said. ‘There is also the potential for winners in this area, such as local leaders in the technical space and semiconductor manufacturers. . . as well as businesses exposed to mass consumption. ”

Alice Wang, a London fund manager of Quaero Capital of € 2.7 billion, agreed that investors will have to switch to sectors that are ‘important for China’s long-term economic future. . . areas such as renewable energy and industrial automation companies that drive the story of ‘Made in China’. “

David Older, head of equities at € 41 billion in asset manager Carmignac, reiterated these sentiments, saying he loves sectors such as semiconductors, software, renewable energy, healthcare and electric vehicles. He is overweight in China and adds to his positions this week: “It’s a good buy signal when you see strategists say China is uninvestable.”

Trying to align with the government’s strategic goals “is the only way you can sleep at night,” said Armstrong, Horatius Capital.

The Chinese government’s intervention is about addressing its’demographic time bomb, “he said.” This is a Chinese problem and there will be a Chinese solution. You can come along and be a passenger if you want, but the ride is not going to be smooth.

International asset managers are rapidly taking advantage of the ‘enormous’ wealth in China

Some of the world’s largest investors are urging a joint venture to wealth management to China to create investment products for the country’s large and growing pool of savers. A report by Boston Consulting Group and China Everbright Bank showed that China’s larger wealth market was worth Rmb121.6 tons ($ 18.9 tons) by 2020, 10 percent more than a year earlier.

While China’s wealth management sector is still dominated by banks, early overseas movers includes Europe’s Amundi and Schroders, and BlackRock, JPMorgan Asset Management and Goldman Sachs Asset Management from the US, attracted by the country’s liberalization of its financial markets.

‘There is a fast-growing middle class in China that is big [asset management] needs for savings and retirement, ”says Valérie Baudson, CEO of the € 1.7 million group, which recently started a wealth management subsidiary at the Bank of China. This year, the joint venture launched more than 50 funds to sell to the Chinese bank’s network of customers, raising a € 3.4 billion asset.

Managers reduce the political risk of these initiatives and point out the importance of partnering with local Chinese institutions. ‘It’s not a risk that keeps me awake at night. For us, it is a long-term investment, ”said Peter Harrison, CEO of the £ 700 billion asset manager, Schroders, which was approved in February for a wealth management subsidiary at China’s Bank of Communications. By bringing Schroders’ long-term investment approach to China, “it’s very much in favor of long-term Chinese savers,” he added.

Additional post by Eric Platt in New York



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