During the past few months, a whirlwind of regulatory changes has swept across the business and investment landscape in China, putting pressure on Chinese equities. China’s get-tough approach appears to be the new normal given the regulators’ overarching socio-economic aims, said RBC Wealth Management, in a recent report.
Markets in China and the rest of Asia have already responded negatively, with valuations below historical averages. The MSCI China Index is currently trading at 13.9x the 2021 consensus earnings estimate versus its five-year average of 15.7x, while the MSCI AC Asia ex Japan Index is at 14.5x current year earnings compared with its five-year average of 16.2x.
The regulatory assault on the powerful tech sector, tough action on excessive borrowing by property companies (which have been a major driver of economic growth), and the sudden restrictions imposed on China’s $120bn private education sector justify a downgrade to market weight from a long-standing overweight to Asia ex-Japan equities, according to RBC WM.
“[Nevertheless], these moves are consistent with both the strategic objectives of China’s 14th Five-Year Plan, which was unveiled in March 2021 and outlined the goal of increasing gross national income per capita, and the country’s much-heralded aim of ‘stable and sustainable growth’,” Mark Dowding, chief investment officer at BlueBay Asset Management, an RBC group company, said.
Other areas likely to attract regulators’ attention include health care, online gaming, online insurance, and sectors related to the digital economy, according to RBC WM.
Meanwhile, the Covid-19 resurgence is crimping China’s economic growth. July retail sales were hit by the introduction of tough new restrictions to contain the outbreak, and consensus GDP growth forecasts, currently at 8.5% and 5.6% for 2021 and 2022, respectively, may well come under pressure from these measures and recent flooding, RBC WM warned.
The consensus earnings growth forecast for the MSCI China Index for 2021 is now 15%, down from 20% earlier this year.
The key signals the wealth manager is watching for before considering a more positive stance include leading fintech companies fully complying with regulatory requirements and opening up their systems or services to each other, Chinese companies resuming their onshore and offshore IPO plans, and major digital platforms announcing measures to improve social benefits for their workers.
