Over the past year, the Chinese government has introduced a series of regulations that have unnerved investors and caused share prices to plummet. These include anti-trust actions against tech giants, new data security laws, and tighter scrutiny on foreign listings.
Although Amundi gives the Chinese government the benefit of the doubt about its motives – ostensibly, to address domestic inequalities, promote common prosperity and to reach its national development goals – foreign investors are right to be anxious.
“The bad news for investors is that, in the short term, the current wave of regulation is likely to continue and could intensify,” said Amundi in a recent report by the firm’s Asia specialists.
“Recent regulatory changes have emphasised a layer of risk that could impact the investment framework beyond traditional policy drivers such as credit and liquidity or rates.”
The French asset manager believes uncertainty will remain high in the technology and internet sectors and will increase volatility in Chinese equities in general. Stricter regulatory control is also likely in the housing and education sectors.
“The anti-trust and social welfare regulations are likely to temporarily disrupt both revenues and cost structures, while uncertainty over the magnitude of future regulations and business models will keep risk premiums elevated.”
Due to the regulatory clampdown and concerns about valuations, Amundi has become more cautious on Chinese equities compared with earlier in the year.
The internet sector, particularly digital advertising and data sharing, should remain on the radar of regulators in the short term as they continue to focus on cyber security and data protection issues, according to Amundi.
On the other hand, it favours the clean energy and biotech sectors, where government policy is clearly supportive of. China has committed to carbon neutral by 2060, while biotech has become a cornerstone industry for the Chinese administration.
Moreover, Amundi suggests that this period of instability and sudden regulatory intrusions might ultimately be beneficial.
“While these episodes have weighed on market sentiment in the short term, they should help market returns over the longer term by plugging loopholes in the regulatory system, boosting competition and reducing systemic risk,” it said.
“This phase of market correction could create some interesting entry points in structurally growing companies which could generate appealing returns over the longer term.”
