Aug 16, 2021 - Technology

China's regulatory crackdown sends investors scurrying

Illustration of stock chart

Illustration: Brendan Lynch/Axios

Investors are reevaluating their appetite for China-related bets following a pickup in Beijing's regulatory actions.

Catch up quick: Chinese regulators have made their way into a broad spectrum of domestic industries. That includes moves that limit business growth, like banning DiDi’s app or prohibiting tutoring companies from teaching specific curriculum, as well as increasing scrutiny of online insurance companies and fintechs. 

Why it matters: China-related investments were viewed as high growth opportunities as recently as last fall. Beijing’s investigations and edicts are a reminder that "the invisible hand wears a red glove" in China, as Jason Hsu of Rayliant puts it.

In response, institutional funds are reassessing investment risks and will likely liquidate some positions, UBS Global Wealth Management’s Kelvin Tay tells CNBC.

  • Veteran investor Mark Mobius says there have already been fund inflows redirected into India and other emerging markets, per Reuters.

Some venture capital investors, including SoftBank Group, have started advising portfolio companies to stay away from investing in Chinese companies. 

On the other hand, some investors are taking advantage of price dips.

  • Over the course of a week in late July, $3.6 billion in new money flowed into funds focused on Chinese stocks, Cameron Brandt, director of research at EPFR, told CNBC.
  • And KraneShares’ CIO Brendan Ahern tells Axios that he’s seeing inflows to the KraneShares CSI China Internet ETF (KWEB) even as the fund's shares have declined by 30% since the start of July.
  • Ahern believes “investors are taking advantage of the disconnect between the KWEB companies’ strong fundamentals versus the weak price action."

What to watch: “A combination of slowing growth, deepening policy concerns and recurrent flare-ups in the virus is likely to make for difficult terrain for investors,” Capital Economics' chief economist Neil Shearing writes.

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