US investors woke up to an ugly result from the Far East this morning. No, I’m not referring to Simone Biles withdrawing from the Olympic gymnastics competition, but instead the sharp selloffs in Hong Kong and China. The Hang Seng fell 4.22% and the CSI 300 fell 3.53%, spurred by continuing fears about increased corporate regulation coming from Beijing. The mood has not been investor friendly and forces us to wonder whether there is a risk that the selloff in China and Hong Kong could spill into global equity markets.
The regulatory rumbles began early this month when the Chinese government forced Didi Chuxing’s (DIDI) app to be removed from app stores, then increased this week when Beijing cracked down on for-profit education companies. At the time, we acknowledged that the DIDI decision was likely related to prior moves that the government made against Ali Baba (BABA) and Ant Group. Those moves seemed more about keeping billionaires at heel and controlling the myriad data that is generated by companies in finance and social media. But even then, we became cautious about the situation in China, writing:
The full ramifications for investors of China’s recent moves have yet to be digested. Until that is possible, it argues for investors to be far more risk averse regarding Chinese shares. If one invests in a Chinese company, one is exposing himself to an extra layer of uncertainty from a government that has just shown that it may not have investors’ interests in mind when making its decisions. The Chinese growth story is compelling, as are many of China’s companies, but the investment climate in that country and its companies became much more uncertain today.
It appears that view is taking greater hold in the marketplace. Investors certainly want to invest in companies and countries that are growing — as China and many of its companies are – but they also want a stable, investor-friendly regulatory climate. The Chinese government is indeed stable, but some of the recent regulatory decisions seem capricious to foreign investors, and certainly are being made without regard to the prices of stocks held by investors. That type of behavior raises the perceived risk of a country, and riskier markets usually receive some sort of discount. We appear to be seeing that discount placed upon China and Hong Kong markets presently.
As of this morning, some of those concerns appear to be reflected in global equities, particularly US tech shares. We can’t overlook the importance of China to the global economy and supply chains. Remember that Chinese growth played a key role in helping global markets recover from the global financial crisis earlier this century. If investors feel that the regulatory climate in China could weigh upon the wide range of global companies that operate in or source key inputs from that country, it is not improper for investors to express some sort of nervousness in those companies’ stock prices. Considering the recent advances that we have seen in most of the world’s major equity indices, a little caution is hardly unwarranted. As some of the US-based global behemoths report earnings this week, investors will be alert to any signs that regulatory concerns may be weighing upon those companies’ businesses.
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