China is in the midst of a tightening regulatory cycle which has led to some investor uncertainty and heightened market volatility. Our Chief Market Strategist, Stephen Dover, discusses China’s aspirations to increase economic growth while also providing social fairness and stability.
Since first visiting China in 1982, I’ve witnessed the country’s phenomenal transformations and the many challenges it faces as it develops economically. China has a long history of managing, in certain sectors, foreign direct investment. The country is now in the midst of a tightening regulatory cycle, implementing anti-monopoly, data security, and industry-specific regulations which have led to some investor uncertainty and heightened market volatility. When investing, it is critical to evaluate the alignment of companies with China’s long-term strategic goals.
- China’s recent regulatory activities cross many industries and are part of the Chinese government’s determination to develop China into a “modernized socialist economy,” including objectives of common prosperity, green development, and independence in key technologies and industries.
- China’s policy approaches are more cultural- and principles-based, focusing on desired outcomes, rather than legal rules-based, creating higher regulatory risks.
- Chinese companies have used variable interest entities (VIEs) to mimic direct equity ownership, thus allowing them listings on foreign exchanges. Chinese authorities have not formally approved these structures. China recently banned VIEs in the education sector. Investors must consider what would happen to valuations if this regulatory stance was extended to a broader universe of sectors.
- Chinese companies’ American Depositary Receipt (ADR) listings will be required to allow US regulators to audit their financials. This is raising concerns for the Chinese over possible sensitive data-sharing with the US government.
- While we remain positive on foreign investment options in China–including both equity and fixed income–we do expect these regulatory cycles to continue as the country aims to increase economic growth while also providing social fairness and stability.
- We believe China’s government will continue to use public equity and fixed income markets to foster innovation, despite new regulations. We also see opportunities where China is becoming more open, such as in the Chinese bond market.
For deeper analyses across Franklin Templeton, read “Heightened Regulatory Scrutiny In China: What Investors Need to Know,” by Franklin Templeton’s Emerging Markets Equity team; “The Certainty of Change: Evolution of Investor Access to China,” by Dina Ting, Head of Global Index Portfolio Management Team, Franklin Templeton ETFs; and “China Calling: The Rise of the Chinese Bond Markets,” by Franklin Templeton Investment Institute.
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