AbacusHong Kong equity investors may as well give up and kiss the HSI goodbye
- A hellish week for investors in Chinese equities as risk profiles shift from valuation methodologies we hold dear to policy changes by Chinese and American governments
- With the best of intentions, HSBC’s Hang Seng Indexes Company spices up its Hong Kong indexes to increasingly cover China tech, potentially making them uninvestible
Under its new regulations, companies that teach the national school curriculum will not be able to raise capital, list on stock exchanges, accept foreign investment or pay shareholders, as they will no longer be allowed to make profits. To my mind that is not a bad thing at all. As a parent I wanted the best I could find for my children and it cost an arm and a leg, and I was well aware that unlike in my day, funds raised by the schools, even at the summer fete, were not for the benefits of the teachers, pupils or their parents.
One of the main drivers behind the policy change was to address the problem of China’s lack of babies, as it specifically targets child education, not extracurricular or adult education. By taking away the excruciating cost of putting kids though the supplemental tuition needed to get into good universities, theoretically, young couples would be more likely to start families and have several kids.
However, switching hats here from Dad to equities sniffer, the result has been an absolute disaster for Chinese stocks. And the sudden change in the perception of risk over the past week delivered the investment community a painful lesson: we are at the total mercy of government policies, and therefore equity valuations at the moment play no real part in the portfolio selection process.
The move demonstrated just how quickly, and without warning, Chinese regulators can control the level of foreign investment
Not only did the change in regulation directly impact the share prices of education companies, but the change in policy is having knock-on effects in advertising and online learning businesses as well as the employment of hundreds of thousands of workers. China also threw a punch at foreign investors by prohibiting variable interest entities (VIEs) from housing education companies. Foreign investors often operate in a legal grey area by using VIEs, residing in the Cayman Islands, to skirt rules against foreign shareholding in certain sectors. The tightening of regulations of such vehicles may not stop with education companies.