The asset manager advocates a rigorous, hands-on approach when investing in Chinese equities, as the government tightens its regulatory grip on the country’s tech giants.
“Since allowing the re-establishment of privately owned firms in the 1980s, the government has made clear that while entrepreneurs are free to become rich and famous, they cannot use their wealth and fame to challenge the government on political and governance issues,” said Andy Rothman, investment strategist of Matthews Asia, in an article.
“Unsurprisingly, the government recently intervened after two well-known companies questioned or ignored the advice of regulators. This is one of the many reasons we advocate for an active, rather than a passive, approach to investing in Chinese equities.”
The Chinese administration clamped down on Alibaba earlier this year and levied a $2.8bn fine for anti-monopoly violations. It also summoned 34 leading internet companies in April, telling them to rectify anticompetition practices.
Nonetheless, Rothman believes the Chinese government is still supportive of privately owned companies, as they contribute to almost 90% of urban employment and to most of China’s exports.
Another notable regulatory change is the government’s tougher data security and privacy policies, and a shift of focus to promote competition, protect consumer and small business interests, and tackle economic inequality issues.
Although the regulations are likely to be beneficial for the long-term, the Rothman is concerned that the changes may create short-term volatility in market sentiment because the Chinese government can stipulate new regulations quickly and often does not make its objectives clear.
He is also nervous about rising Sino-US tensions, especially the direction of the US’s attitude towards Chinese companies access to US capital markets.
Chinese companies may delist from US markets in the next few years, while companies already listed in New York may be encouraged to seek secondary listing in Hong Kong or the mainland China, said Rothman.
Even so, although foreign investor sentiment may suffer under the weight of rising political tensions between Washington and Beijing, “this is unlikely to disrupt spending by Chinese consumers, or their investments in their home equities markets,” said Rothman.
