An installation saying “Follow our party, start your business” in front of Tencent Holdings headquarters in Shenzhen on March 20. Tech companies’ quick responses to new regulations show a willingness to adhere to a more disciplined financial model. Photo: Bloomberg
Eye on Asia
by Sheldon Chan
Eye on Asia
by Sheldon Chan

China’s regulatory crackdown: what Asian credit investors should expect

  • Short-term volatility will give way to a healthier credit market eventually, with China’s tech and property sectors likely to emerge with better governance, more sustainable growth and stable cash flows

China’s regulatory actions, driven by Beijing’s financial, security and social objectives, have injected volatility into the credit market over the past year.

Despite the short-term impact on companies’ profitability, there might be a window for the affected sectors to formulate a more sustainable growth strategy and emerge stronger in the long run.

For Asian credit investors, being mindful of the dynamic regulatory backdrop while adopting a prudent credit selection can help to navigate the uncertainties and identify opportunities for better risk-adjusted returns.
The prices of some segments of the Chinese corporate dollar bond market have come under strong pressure after Beijing embarked on its regulatory overhaul. Investors could not help but wonder at the direction of regulation and its ripple effect on the wider Asian credit market.
The Chinese government has been supportive of the internet and property sectors for the past two decades, both in terms of favourable regulations and the build-up of infrastructure, as developing these key sectors promoted economic prosperity. The focus has now shifted to achieving more equitable objectives such as social stability.


‘Socialism with Chinese characteristics’ explained

‘Socialism with Chinese characteristics’ explained
Additional policy steps towards furthering social objectives – such as repositioning housing as living spaces rather than speculative investments, reducing the education cost burden for families, or deriving better value from the big tech firms and promoting greater profit sharing with small and medium-sized enterprise vendors and employees – have the potential to move markets.

Asian credit investors should be mindful of how companies in their portfolio are positioned in such a dynamic backdrop.

Ahead of next year’s Party Congress, Beijing’s regulatory crackdown is also aimed at addressing income inequality. By removing anti-competition practices and lowering barriers to entry, that gap could be bridged.
The new five-year legal development blueprint jointly published by the Communist Party’s Central Committee and the State Council makes clear that regulatory oversight will remain a persistent theme into 2025, and so should remain uppermost in the minds of investors over the medium term.

The aftershocks of the recent moves are still being felt. However, it is worth noting that the measures in themselves are from a familiar playbook. Such regulatory pressures have always existed.

The move to regulate internet platform companies that have grown into quasi-monopolies or that have access to large amounts of user data follows a historical pattern.

In the past, we have seen companies deploying new technologies and being allowed to grow for many years. As the technology becomes more mature and other users come to depend on it, regulation steps in, mirroring wider trends globally. However, after the volatility in July, the government will be mindful of financial market stability.

But while the regulatory actions have hit investors’ confidence in the short term, there are silver linings.


Tencent narrows kids’ playing time on video games labelled ‘spiritual opium’ by Chinese state media

Tencent narrows kids’ playing time on video games labelled ‘spiritual opium’ by Chinese state media
The quick responses by some tech companies show their willingness to rein in aggressive growth plans and adhere to a more disciplined financial model. While this may reduce profitability in the face of the probable increase in competition, it also suggests a more sustainable growth trajectory and potentially greater cash flow stability. These conditions are positive for investing in credit markets.
The regulatory changes have also motivated tech companies to rethink their strategies to create value to all stakeholders, not just shareholders, which should improve their environmental, social and corporate governance standing.
For the property sector, Beijing’s “three red lines” policy targeted at developers’ leverage should ultimately lead to a healthier sector and more sustainable balance sheets in the medium term.

What to expect as China’s economy transitions towards common prosperity

Along the way, some problems may occur and some developers may run into default, which could create contagion and volatility. At the same time, fundamentally sound Chinese issuers are not expected to face sustained credit stress, and are likely to end up with healthier balance sheets in the medium term.

Diversifying credit exposure across Asia and optimising allocations within specific markets can help manage volatility during periods of market uncertainty.

Sheldon Chan is portfolio manager of the Asia credit bond strategy in the fixed income division at T. Rowe Price