Why investors are being spooked by Chinese regulatory risk

Hong Kong’s Hang Seng Index recently reached its lowest point since November 2020 as investors sold down Chinese tech following increased regulatory scrutiny.

But is the rout justified or could it be a major buying opportunity?

Timeline of major Chinese regulatory risk developments

As early as September 2020, concern about increased Government scrutiny on Chinese big tech first emerged as the Peoples Bank of China announced new rules to regulate financial holding companies (Ant Financial was named by the Peoples Bank of China as a company in the new regulatory cross hairs). 

The following month, Alibaba founder Jack Ma (also the founder of Ant Financial) publicly criticised Chinese regulators for stifling innovation ahead of the Ant Financial IPO.  

In November, Ant Financial’s IPO was suspended with the Shanghai and Hong Kong stock exchanges citing changes in the financial technology regulatory environment. This prompted a sharp sell-off in Chinese tech – shares in Alibaba (which has around a 30% stake in Ant Group fell almost 10%).  

This February, the market jitters re-surfaced when new anti-monopoly rules targeting internet companies were issued by China’s State Administration for Market Regulation to prevent monopolistic behaviour. 

Alibaba was subsequently hit with a record US$2.8 billion fine for anti-competitive behaviour. 

Early in July, concerns intensified after regulators announced a cybersecurity review into Didi (the Uber of China), resulting in its apps being removed from app stores in China just days after the company’s US IPO.  

In recent weeks, Chinese education companies were hit with regulations, while Tencent announced its WeChat social network had suspended new user registrations so its technology could be updated to comply with relevant laws and regulations. 

So, it’s easy to see why there is so much uncertainty.

Enough to even concern the Chinese Government, which moved to allay fears. 

The following from the state-owned Securities Times, as reported by Reuters

“The macroeconomy is still in a steady rebound stage, and short-term fluctuations do not  change the long-term positive outlook for A-shares. 

“The recent market decline to some extent reflects misinterpretation of policies and a  venting of emotion. Economic fundamentals have not changed and the market will stabilise  at any moment” 

Securities Times, July 27, 2021

Will the regulatory fear abate?

Chinese equites have rebounded slightly since the Hang Seng dropped almost 10% between July 22 and July 27.

From a global perspective it’s not unusual for regulators to protect consumers from monopolies, cyber security risk or substandard corporate behaviour, however, western investors will always view these actions in China in a harsher light given the country’s system of governance.

Large-cap tech companies are a critical part of a China’s private sector and many are improving the lives of consumers, particularly those from regional areas who are now benefiting from increased connectivity and ecommerce.

It’s no secret, China wants its leading companies to list in China or Hong Kong. This shouldn’t impact long-term fundamentals.

If the events of the past twelve months do end up being a storm in a teacup, then this may prove to be a great buying opportunity for Chinese tech.