For American investors, US and China regulations are a primary risk for Chinese shares
- China’s financial watchdog has ramped up scrutiny of the country’s biggest tech firms even as US has sought to de-list Chinese companies from US capital markets
- ‘We need to be very careful in not discounting the regulatory hurdles … we have jumped out of the frying pan into a fire,’ one investor says
Back in 2005, any US investors buying into the initial share offering on Nasdaq by Baidu, China’s equivalent of Google, could reasonably expect a decent return: as of early 2018, they would make nearly 10 times their investment, a compounded annual return of more than 20 per cent.
Until recently, many Chinese companies like Baidu generated stellar annual returns for US investment funds, propelled by China’s phenomenal economic growth.
But this type of success story will be hard to replicate as increasing pressures on Chinese companies – from both Washington and Beijing – put regulatory risks front and centre when investing in China.
That obvious trade to put all the money into mega-Chinese companies when we first got access to them years ago – that trade is gone
Since last fall, China’s financial watchdog agency has ramped up its scrutiny of the country’s biggest tech firms. The industry that used to run largely free from regulation has produced some of the world’s biggest corporate giants, which in turn have helped drive China’s economic growth.
But Beijing now fears that, if not regulated, the power these tech firms have harnessed cannot only challenge the state’s control of data but of finance as well. On Tuesday, the Chinese tech regulator ordered its internet giants to fix anticompetitive practices and data security threats within six months.
This comes as Washington has looked to de-list Chinese companies from US capital markets, fearing that American investments are going to help the Chinese government and its military. The Securities and Exchange Commission said again on Tuesday that Chinese stocks in the US pose significant risks to investors and therefore must disclose their government ties.
Hit from both sides, the iShares MSCI China ETF, a fund that tracks large Chinese companies, has lost 30 per cent since mid-February. The Nasdaq Golden Dragon China Index, which tracks large Chinese technology stocks, dropped 48 per cent during the same period.