Last week, the MSCI China Index declined 4.77% to finish July lower by 13.55%. All things considered, the weekly performance could have easily been worse when factoring in persistent concerns regarding Beijing's intensifying scrutiny on consumer-facing technology and internet companies.
You know, the stocks that were once hot in China. The ones that were the very reason to embrace any number of supposedly diversified funds focusing on the developing economies and/or the world's second-largest economy.
Indeed, these are turbulent times for stocks that were once viewed as the most attractive of the China lot and there's no hard and fast timeline for which Beijing will relent. Still, a look at the chart of the aforementioned MSCI China Index indicates there was dip buying last week.
In a broader sense, what may emerge over the near-term is a battle of wills between market participants focusing on China's regulatory risk and those believing that the government is not in fact anti-tech or anti-growth. Said another way, given the fact many clients have some form of China exposure, whether they know it or not, the current regulatory headwinds present advisors with a credible avenue to engage clients on the merits of international exposure and exactly what's happening in China.
Keeping Things in Perspective
Clearly, the goings on in China regarding internet and tech stocks require some perspective and that's often easier said than done.
“Many of the regulations introduced recently are fair and reasonable, reflecting social consensus that is in-line with Chinese values and fostering greater competition and innovation,” says Phil Lee, head of equity research at Mirae Asset Global. “For instance, echoing the actions against rideshare platforms like Uber and Lyft in the US, regulatory overhang has weighed on food delivery platform Meituan for some time, with speculation that the company may be ‘forced’ to provide higher salaries or insurance coverage to its delivery riders.”
Forgive the personalization here, but I'll say the following as someone that drove nearly 2,700 trips for Uber: Any company comparable to Uber, Lyft, DoorDash, etc., regardless of what market they operate in, needs to learn the lesson from what those companies faced in California. That being that the argument of drivers being temp workers falls on deaf ears at the government level.
Didi and Meituan need to learn this in China and not repeat the mistakes of their U.S. counterparts in California. There are ways to appease regulators while still fostering growth and attracting investors.
Adding to the perspective conversation, it's worth noting that some of what Beijing is looking to accomplish with regulations aimed at consumer-facing internet companies could actually benefit investors over the long-term by facilitating more competition.
“Antitrust concerns across e-commerce platforms remain top of mind as well, as companies such as Alibaba actively discouraged merchants from selling items on rival platforms,” notes Lee. “This practice is now banned, which we think is sensible and necessary to ensure fairer competition in the burgeoning theme.”
Lee's outlook on these matters is relevant because he manages the Global X China Innovation ETF (KEJI), which debuted earlier this year. That fund focuses on companies “tied to disruptive innovation in China.”
What Comes Next
Predicting exactly what happens next to Chinese internet companies is difficult, but it wouldn't be surprising to see some that are listed in the U.S. drop those listings in favor of Hong Kong listings. Amid a strained US/China relationship and Beijing's concerns about data sharing with the U.S. via New York-listed companies, an efficient avenue for some firms in terms of getting regulators off their backs is simply to list in Hong Kong and that market is vibrant and open enough to still engage global investors.
A couple of other points for advisors to discuss with clients. First, China's previous sector-focused regulatory efforts often gave way to significant upside in those groups. Second, China isn't the worst offender when it comes to regulatory regimes in emerging markets. In fact, a case can be made it's one of the better ones when it comes to execution and long-term investor benefit.
“We often encounter more malicious cases where vested interest groups, family businesses and conglomerates leverage their size and power to hamper innovations and growth in a country to protect their position. China is different,” notes Mirae's Lee. “We welcome positive changes that help to ensure a competitive and sustainable economic environment and believe most of the recent regulatory changes are of this nature.”
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