Investors in Chinese companies were caught off guard this summer by Beijing’s actions against homegrown tech giants, including comments about overseas-listed shares. One of the surprises was a mandate in late July that Chinese education businesses should restructure and remove investment from foreigners. A separate order earlier last month called for app stores to remove Chinese ride-hailing app Didi — just days after its massive IPO in New York.
The tech giant came under fire last year for allegedly underpaying its 9.5 million delivery riders, who reportedly face high risk of injury or death from rushing for deliveries to make algorithmically calculated delivery times. Didi shares have dropped more than 30% since the listing.
The policy changes come as Chinese news media organizations — which are themselves strongly influenced by the government — have become more critical of Chinese tech companies and their culture of overwork.
Earlier this year, two employees at e-commerce giant Pinduoduo allegedly died due to excessive work. This summer, short-video companies Kuaishou and subsequently TikTok parent ByteDance, reportedly halted a policy of asking employees to regularly work on weekends.
A new policy forced after-school tutoring companies to become non-profits, and banned investment from foreign capital. Foreign capital such as Singapore’s Temasek and GIC Pte as well as Warburg Pincus and SoftBank’s Vision Fund, have all invested in many of the industry’s big players. U.S.-listed Chinese education stocks plunged double-digits on a single day in July after the announcement.
The nationwide crackdown stems from a deeper backlash against the industry, as excessive tutoring torments youths, burdens parents with expensive fees and foment social inequalities. Once regarded as a sure-fire way for aspiring children and parents to get ahead, it’s now also viewed as an impediment to one of president Xi's top priorities: boosting a declining birth rate. It’s a stunning reversal of fortune for an industry that once boasted some of the fastest growth rates in the country.
US equities march higher with strong earnings
US companies' solid Q2 corporate performance report cards helped to propel the stock market higher with 85% of the S&P's reporting companies so far have beaten earnings expectations. Last year, companies dramatically cut costs by reducing travel, cutting down on real estate expenditures, and cutting jobs. As revenues have started to improve, more of those additional revenues go to the bottom line. US personal consumer spending also surged +11.8%, one of the biggest surges in decades.
Portfolio Strategy
Our portfolio's exposure to China mainly comes from Schroder Asian Growth Fund with around 3-4% of the portfolio exposed to the badly battered Chinese tech and educational sector. As a result of our small allocation to these affected sector, our portfolio hasn't been aversely affected with cash portfolio losing -0.2% and CPF portfolio gaining 0.2%.
China equities, which was the top performing equity market in the world last year, has now fallen behind it's US and European counterparts in 2021. However, the value of the Chinese companies battered by the recent regulations is now cheapest compared to their global counterparts and is seen as a value buy, for those brave of heart. Whether we should cut loss or buy more, lies in the question if the Chinese government will continue to their scrutiny into other industries.
After the onslaught, the Chinese government attempted to calm frayed investor nerves by telling foreign investors not to "overinterpret" its latest regulatory actions as it is isolated to the educational sector. However, in a policy blueprint jointly issued by the State Council and the Communist Party’s Central Committee recently, authorities vowed to strengthen legislation and law enforcement in a sweeping range of sectors including anti-monopoly, national security and technology innovation.
With this in mind, it is very probable that the regulatory crack down will continue in the near future once some calm has returned to the Chinese capital markets, creating an uncertain regulatory environment where cheap stocks will remain cheap in the foreseeable future. Along with a hard to control Delta variant shutting down various parts of the Asian economies due to a zero COVID tolerance strategy, I foresee that Asian equities will have a rocky ride for the rest of 2021.
In order to minimize possible future disruption by regulatory changes, I will reduce the weightage of the Asian equities to look at other growth sectors at this moment in time and look for opportunities to get back into Asian equities once the "heat" has subsided, as China is still too big a market to be ignored for any long term investor with its now cheap technology sector promising decent investment return in the future.
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