China Small Companies: Positioning for China's Policy Tailwinds

As China seeks to achieve “Common Prosperity,” companies which are aligned with the latest policy guidance stand to gain. Innovation, ”technological self-reliance”, and “green energy” continue to be important goals for China, and many smaller companies operating in this space offer strong growth potential.
- Winnie Chwang, Portfolio Manager

Chinese equities experienced a large sell-off following recent regulatory announcements created on technology and for-profit education and were the weakest performing in the region in the third quarter.

While year-to-date through end of September 2021, the MSCI China Index was down -16.59% in U.S. dollar terms, one area within China remained resilient: the MSCI China Small Cap Index was up 2.41% during this period. So what has been behind this resilience and where do Chinese equities go from here?

First of all, it’s important to note that regulation in China is nothing new. China’s regulatory philosophy is different to western markets: They tend to not create the regulations at the very beginning, but intervene when they deem it necessary.

Almost every sector of the market, from education to financials, has received government guidance over the past few years to curb excesses in industries. Lately the government has focused on the concept of “Common Prosperity”, a drive to narrow the wealth gap and strengthen and enlarge China’s middle class.