China’s capital markets have experienced considerable change. Equities in certain sectors have come under regulatory pressure, while China bonds are gaining greater index acceptance. All this coincides with China setting ambitious carbon-neutral targets for itself. Our panel explores the opportunities.

Liang Yin (Chair of China Taskforce and director at Willis Towers Watson investments research)
Bing Li (Deputy chief executive, ICBC Asset Management)
Steve Zhang (Deputy CIO, Ping An of China Asset Management (Hong Kong))

Funds Europe – The big story in the second half of this year is China’s regulatory tightening, notably on education and tech companies. From where you’re standing, what impact has this had on investors and how are you navigating the headwinds?

Steve Zhang, Ping An – The regulatory tightening to some extent was a surprise, but in our opinion, it is an ESG approach by the Chinese government. It’s something that they have been trying to do, but not necessarily of that magnitude.

If you look at technology, they are targeting monopolies, data privacy, video games and so on. All these are related to the ‘S’ part of ESG – social responsibility – and to some extent governance as well. We think it’s a proper approach, not necessarily in having all these policies within a short period of time, but over the longer term we think that it’s healthy, helpful and promotes social responsibility among internet companies.

Directly or indirectly, we do hold some of these positions, but we are looking for longer-term investment, so we don’t necessarily worry too much about that. We think global investors, especially long-term investors, would take the same view.

The question of online education is to some extent related to common prosperity and the idea that Chinese people all have the right to be wealthy and to have certain rights, meaning that you can have more than one child. The stress levels that online educational companies have been creating for regular people is just too high, especially in the last two years. During Covid, I think a lot of online educational companies took advantage of the need to stay at home to broadcast more often and put more pressure on parents, which the government sees as not necessarily sustainable.

Everything is related to sustainability. We are selective and have some exposure to technology, but very little, if any, exposure to online educational companies. We think diversification is good, as well as trying to avoid problematic companies or sectors and focusing on the fundamentals.

We also take into account the macroeconomic picture and where the government wants the country to be in the next three to five years. We have a lot of skin in the game, with billions of dollars invested, especially in Hong Kong stocks. We are comfortable with our position.

Liang Yin, Willis Towers Watson – For investors who are caught up in the eye of the regulatory storm, the impact on returns has indeed been quite significant. There is now a greater awareness of the need to watch what is happening in the regulatory environment, in the political environment and the policy expectations of the state.

While these events do highlight regulatory risks of investing in China for global investors, it’s important to take a long-term, strategic view. The key question is: do these recent events signal or constitute a fundamental shift of China’s opening up and economic reform policy for the last four decades since 1978? The answer is no.

China has been through multiple rounds of regulatory reset in the past decades which all follow this similar cycle going from relaxed to tight, to address wider societal issues caused by early periods of exponential growth in certain sectors. Examples include the attempt in 2008 to 2010 to enhance food security after the Sanlu Group milk scandal. There were anti-corruption campaigns that strongly affected high-end dining and the liquor industry in 2012 to 2016, and more in 2018 to 2019 the centralised bulk procurement of drugs to cut prices.

Today, multiple objectives are being pursued: antitrust, cyber security, data privacy and regulations on internet companies. There is also certainly an attempt to close a regulatory loophole for fintech companies to protect banks and also the integrity of the credit system.

Then there is further education sector reform, and an attempt to protect basic rights for gig economy workers such as in the case of [the shopping platform] Meituan.

Fundamentally, China is pivoting its economic philosophy from ‘growth at all costs’ to a more inclusive, long-term and sustainable model. China wants to become a more equitable country with more equitable income distribution over time.

I stayed in the UK for almost 20 years before I moved to Hong Kong. To me, in principle, this is not any different than the developments in the ESG and inclusive capitalism space in the West. What is different is probably the Chinese government’s ability to act and to enforce those forceful regulations.

Most investors would agree that sustainability of the economic system is crucial to the delivery of robust investment returns over the long term. In that regard, there is a positive angle to interpret these events.

Bing Li, ICBC Asset Management – The recent regulations have signalled the Chinese authorities are prioritising social fairness and stability over the capital markets in areas that are deemed important to strategic and policy goals, therefore those sectors are more likely to attract more regulatory attention.

The regulatory uncertainty will of course translate into market volatility until a new equilibrium is reached. The process is facilitating market competition and improving social equality, which in turn will improve the country’s economic structure, capital markets and governance in the long run.

Investors are likely to place their attention in those sectors with lower regulatory risk to navigate the headwinds by taking several factors into consideration, such as revenue concentration and data penetration. I think software, semiconductors, green energy, electric vehicles – these are areas which are less exposed to potential regulatory shocks.