Tales of China’s new regulatory environment are flaring up in the news on a near-daily cadence, and sentiment has arguably never been lower. Fears are inflamed across the investor landscape, as VIE delistings, antitrust measures, and data security lead to dramatically decreased valuations across China ADRs. Some excellent Chinese businesses are reaching trough multiples, and bargain hunters may be tempted by dirt-cheap valuations.
Now, to be clear, China’s new regulatory environment poses serious risks, which should not be hastily overlooked based on “cheap” valuations. The regulatory landscape could evolve from here in several ways. As it stands, the continued cadence of regulatory updates underscores what we view as substantial uncertainty around outcomes and price action across most Chinese equities.
However, amid the noise, we believe there are four common political themes arising from the new regulatory announcements. We are tracking these themes and their implications closely:
1) A new, long-term regulatory framework: China is transitioning towards their new five-year plan, and building a sweeping regulatory framework to implement across sectors.
2) Improving self-reliance: In order to decrease reliance on foreign trade, the Chinese government is focused on improving the competitive environment within industries, via antitrust provisions.
3) Common prosperity: It has been proven that China has built world-class companies and, as a result, the divergence between social classes has increased. The country’s revitalized “Common Prosperity” slogan refers to the increased focus on redistribution of wealth towards the middle and lower classes.
4) Population growth: In order to ensure China’s GDP growth for the decades to come, the government is focused on reversing its declining population growth by empowering individuals to have families, whether it be by reducing work hours, decreasing education costs, or providing child-rearing support.
These political themes have given rise to new regulatory measures, including recent rules concerning data security, antitrust, financial leverage, and corporate “investments'' into society. We are carefully and systematically considering each of our China holdings through the lens of these political themes and regulatory changes, and any potential impact they may have.
For instance, we expect antitrust measures against BABA to be less risky than those taken against its peers, as we believe:
The opening of “walled gardens” may actually be beneficial to BABA on a net-basis. ~1.3B WeChat users would be able to access BABA’s platforms through WeChat mini-programs.
BABA’s scale and dominant share should allow strong network effects to continue (akin to Amazon in the US).
Regulators have concluded their antitrust investigations into BABA, fining the company RMB 18B in Apr-21.
In short, we are assessing new regulatory developments across our China holdings. In the face of any material changes, we will potentially revise our China allocation.
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