Chart Of The Week   December 01 2021

Chinese Growth Stocks Face Structural Regulatory Headwind

bearish Chinese stocks

Chinese authorities are taking steps to limit foreign listings of Chinese companies. According to media reports, Beijing is planning to ban companies from using the variable interest entities structure – a loophole used by Chinese tech companies – to go public on foreign bourses. This follows reports last week that Chinese regulators have asked Didi to delist from US stock markets.

These measures highlight the regulatory risks facing Chinese tech companies – which our Emerging Markets strategists have been arguing are structural in nature. Socio-political, geopolitical, and economic considerations have prompted heightened scrutiny from Beijing around foreign listings. Specifically, the US and China are engaged in a “big data war” amid the strategic confrontation between the two countries. As such, authorities in both nations are opposed to US listings of Chinese companies.

From Beijing’s perspective, Chinese tech companies’ big data contains sensitive information that could pose a national security risk. Thus, Chinese authorities do not want foreign shareholders to gain access to Chinese companies’ big data. Meanwhile, US regulators want to limit American investors’ exposure to opaque Chinese companies.

Thus, the end game is likely to be that the trading of Chinese stocks moves from US bourses to Hong Kong. Our Emerging Markets strategists argue that a selloff in these stocks is unlikely to impact Chinese authorities’ decision as it would hurt foreign shareholders and therefore has limited significance for domestic investors or the Chinese economy. The implication for investors is that heightened uncertainty justifies lower equity multiples for Chinese tech companies. Thus, Chinese growth stocks are likely to experience further de-rating.