Chinese regulators' latest clampdown rattles investors

Are Chinese stocks “uninvestable”? asks Farah Elbahrawy on Bloomberg. Goldman Sachs says its clients are wondering whether they should pull their money out after Beijing broadened a clampdown on businesses it blames “for increasing inequality and financial risk”. The resulting market volatility has pushed “key stock indexes to the brink of a bear market”.

Investors wake up

Investment trusts focused on China have suffered “average losses of a third” since a recent peak in February, notes David Brenchley in The Times. The benchmark CSI 300 index is down by more than 6% in 2021. “Chinese regulatory interference… is turning out to be one of the big stories of 2021,” says Russ Mould of AJ Bell. What’s next? Keep an eye on “highly indebted” property developer China Evergrande. The shares have tumbled by 63% so far this year as regulators address property speculation.

Investors in China have endured “an excruciating week”, says Seeking Alpha. The “deluge of news” and “speculation” about which stocks would be next in the cross hairs has created a “potent mix of anxiety, fear, anger and regret”. The government’s desire to tackle “social ills and deepening inequality… has parallels”, not least in Washington.

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But what has unnerved investors is the speed at which China is announcing new measures. When an authoritarian state makes a decision, things can change very quickly. Beijing has been cracking down on big internet firms for some time, says Thomas Gatley in Gavekal Research. Shares in the likes of Alibaba and Tencent were already having a bad year. What’s changed is that investors have “flipped from thinking” that only a few firms were in trouble to “fretting that no sector is safe”. They may have overreacted. Chinese policymakers were not too worried when the biggest losers were foreign investors (Alibaba’s primary listing is in New York). Yet the latest sell-off has hit domestic investors too, so officials are likely to start treading more carefully. Chinese regulators “hate domestic market volatility”.

Buy the dip?

Some spy a buying opportunity. “We’ve been through these regulatory tightening periods before and generally” they have “been a pretty good time to buy,” Dale Nicholls of Fidelity International tells CityWire. A significant “valuation gap” has appeared between Chinese businesses and global peers. “Chinese tech stocks [listed in the US] have suffered their worst month since the financial crisis of 2008,” says Katie Martin in the Financial Times. For some investors the temptation to “buy the dip” is almost a “reflex”. China bulls say you just need to steer clear of sectors such as education, property and tech.

Most analysts think that the current turmoil will pass. Yet it is still unclear whether the sell-off is over; no fund manager “wants to be the person hauled up in front of the boss at the end of the quarter to explain why they took on more risk just as a well-known bad situation turned worse”. As Morgan Stanley has warned clients: “no bottom-fishing yet”.