Fears of the Chinese authorities’ regulatory crackdown on big businesses is an overreaction, and more damaging than the new regulations, according to Jimmy Chen, portfolio manager of the Comgest Growth China fund, based in Hong Kong.
The Chinese regulatory environment has not undergone significant change and many of the new or rumoured regulations will have limited impact, including those on property, food delivery or the internet, said Chen. Only private after school tutoring (AST) companies are likely to be severely impacted.
Those who pursue environmental, social and governance (ESG) focused investment strategies should not be so concerned.
“It is important to remember that these regulations are a response to common global problems ESG-minded investors hope to see tackled, like the monopolistic dominance of tech giants and limited protections for workers in the gig economy,” said Chen. “In Europe and the US, governments are trying to take action on these issues, and the reforms in China are, in our view, aligned with this worldwide debate.”
Yet, this time, the new regulations have affected large cap growth companies and sectors that are owned by foreign investors. Due to the lack of transparency, Chinese regulation tends to be delivered in waves, reflecting changes in the government’s priorities. This is alarming, but any risk is best mitigated through the use of an ESG integrated investment approach.
“This involves analysing socio-economic and associated policy risks for all companies from an early stage of research,” said Chen. “Being conscious of such risks doesn’t mean that they can all be avoided, but it does mean many of them can be factored into valuation and investment decisions, based on knowledge and insight across our 20+ investment team members based in Asia.
“For example, given the regulatory risks that have built up in recent years, this has led us to look beyond China’s internet sector to other industries, such as custom furniture or healthcare companies, rather than focusing too much on new economy stocks.”