MacroscopeWhy emerging markets will weather China’s regulatory crackdown just fine

Most emerging-market investors have little choice but to stick with China as its size and importance force investors to maintain their exposure

With previous China-led sell-offs having given way to rallies, emerging-market stocks could recover sooner than many think

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People stand in front of an electronic display showing the Hang Seng Index in Central on July 26 after stocks plunged as tuition firms were hammered by China’s decision to reform the private education sector by preventing them from making profits. Photo: AFP

Published: 1:00am, 6 Aug 2021Updated: 1:46am, 6 Aug 2021

Are Chinese stocks uninvestable? That the question is being asked is an indication of the extent to which global investors have been taken aback by the ferocity of Beijing’s regulatory crackdown on sectors ranging from education to technology.

In a report published last week, investment strategists at Goldman Sachs said the word “uninvestable” featured in many of their conversations with clients regarding the outlook for Chinese equities.

The education sector has borne the brunt of Beijing’s regulatory assault, with academic tuition groups forbidden from making profits, raising capital or going public. The scale of the wealth destruction during the past fortnight would make anyone question whether it is safe to put money into Chinese shares.

Since details of the clampdown on the industry were leaked on July 23, the share prices of TAL Education and New Oriental Education – two of the largest US-listed Chinese education companies – have plunged 72 per cent and 67 per cent respectively.

In a report published on July 30, US investment adviser Evergreen Gavekal said the share prices of Chinese education firms make for “some of the most traumatic viewing” since the 2008 global financial crisis and “reflects a landscape upended by government action”.

People stand outside a Xueersi outlet, a private educational services provider owned by TAL Education Group, in Beijing, on July 26. The share prices of TAL Education and New Oriental Education – two of the largest US-listed Chinese education companies – have plunged 72 per cent and 67 per cent respectively since July 23. Photo: Reuters

While the escalation in political and regulatory risk in China has weighed on sentiment across asset classes, emerging markets are the most vulnerable to financial contagion. In 2005, China’s weighting in the MSCI Emerging Markets Index – a leading gauge of stocks in developing economies – was only 7.6 per cent. Today, China accounts for 37.5 per cent of the index.