China’s recent bid to crack down on Big Tech sent shares of firms such as Didi, Meituan, New Oriental Education, Pinduoduo and Tencent into a tailspin. Equity market prices plunged and adverse commentary emerged in the Western media. Do these events foretell doom for foreign investors in China ? Do these changes have negative implications for Chinese equities in general? How about the corresponding bond markets ? Were they also sending out similar signals? The issue is more complex than many Western commentators have concluded. The evolving scenario requires a nuanced examination of the issues over the long term, particularly given the Chinese bond market’s less conspicuous response to the crackdown. Could China’s crackdown on Big Tech and private enterprise backfire? China is now the second-largest bond market in the world. According to investment consultancy Seafarer, it is a US$15 trillion behemoth, second only to the United States , which is at US$33.9 trillion as of December 2020. The same report estimates that China’s corporate bond market is US$5.3 trillion in size. While it is still dominated by domestic players, international investors’ appetite for Chinese bonds is growing with loosened government regulations, the set-up of Bond Connect in July 2017 and greater transparency. For example, the interbank bond platform used for trading Chinese bonds – the China Foreign Exchange Trade System (CFETS), which is an arm of the Chinese central bank – requires every bond transaction be recorded throughout the day. That level of data capture is similar to that of the Trade Reporting and Compliance Engine platform. Developed by the Financial Industry Regulatory Authority, it has been a key tool in recording all secondary market transactions in the US, although the data releases in China are not yet on a tick-by-tick basis. Will Beijing’s Big Tech crackdown kill the golden goose? To complicate matters somewhat, US authorities under the Trump administration waged a crackdown on ByteDance’s TikTok, Apple, Zoom and other tech firms over concerns that data collected in the US and China could be fed back into the ecosystem built by the Chinese government. Beijing, meanwhile, had similar questions about how Chinese firms’ data in the US and China could be captured by American government entities – particularly via the National Security Agency’s data surveillance and collection activities. The latter has received renewed attention with recent revelations that by using the Pegasus spyware , certain US-friendly governments, such as Israel, Saudi Arabia, India, and UAE, were spying on their own citizens and others. Both sides have their respective rallying points, but do they place a damper on foreign investment in China, particularly from US institutions? And what do Chinese capital markets signal about China’s Big Tech crackdown? A look at the stock market price reaction against the corresponding bond market price reaction to the crackdown proves revealing. Take the case of Alibaba, the e-commerce firm that rivals Amazon in size, whose American Depositary Receipt (ADR) trades on the NYSE (BABA). The BABA ADR has underperformed the corresponding Alibaba 3.125 per cent November 28, 2021 Corporate Bond by a significant margin: US$1 invested in the return spread between the two Alibaba-linked securities at the end of 2020 would have yielded US$1.61 in the BABA bond’s favour by 18 August 2021, as shown in the figure below. In the case of another tech firm, Pinduoduo , China’s largest online grocer, the figure below also illustrates that US$1 invested in a similar fashion would have yielded US$1.37 in the bond’s favour by August 18, 2021. The bonds outperformed the stocks handily in both cases. To make this comparison on a marketwide basis, let’s have a look at the overall performance of three China equity indexes against two Hang Seng Markit iBoxx RMB bond indexes. The CSI 300 Index (SHSZ300) is a market capitalisation-weighted index designed to replicate the performance of the top 300 stocks traded on the Shanghai and Shenzhen Stock Exchanges, while the FTSE China A50 (X1N91) comprises of 50 free-float adjusted, liquidity-screened A-share stocks from the same two exchanges that ensure that the index remains representative of the underlying China market. The Hang Seng TECH Index (HSTECH) comprises of the 30 largest technology companies listed in Hong Kong, which have high business exposure to technology themes. For bonds, the Hang Seng Markit iBoxx Offshore RMB Bond Overall Index (IBXX001T) and Hang Seng Markit iBoxx Offshore RMB Bond Non-Financials Index (IBXX240T) are designed to reflect the Overall Bond performance and Non-Financials Bond performance of Chinese sovereign and corporate bonds denominated in Chinese yuan, respectively, but issued and settled offshore. The figure below clearly demonstrates that the bond indexes outperformed their equity index counterparts handsomely over the stated sample period. US$1 invested on December 31, 2020 yielded 0.928 yuan in the SHSZ300, 0.868 yuan in the X1N91, 0.73807 yuan in the HSTECH, against 1.022 yuan in the IBXX001T, and 1.024 yuan in the IBXX240T as of August 17, 2021. The reasons behind the Chinese government’s Big Tech crackdown may be complex, and perhaps mostly justified for the firms’ unbridled anticompetitive, data privacy proliferation and perceived negative influence on society. However, the bond markets in China appear to signal that things are not as bad for investors as the corresponding stock markets or indeed, how Western media have made them out to be. Many Chinese commentators are actually cheering their government on, given the widespread disaffection with the tech giants. China’s top leaders move to reassure private sector amid Big Tech crackdown What do these developments imply for investment portfolios? Either the Chinese bond market, unlike its equity counterpart, is grossly inefficient, illiquid and irrational, or that the smart money in Asia appears to be still betting on China, perhaps a little more selectively and in a geopolitically sensitive manner, just as investors in Chinese bonds continue to do. China has never been an easy ride, with its command-and-control form of capitalism, regulatory reforms and market liberalisation policies springing surprises and setbacks on occasion. Despite that caveat, excluding China’s capital markets from one’s investment strategy remains somewhat unimaginable. Joseph Cherian is Practice Professor of Finance at Singapore’s NUS Business School. Marti Subrahmanyam is the Charles E. Merrill Professor of Finance at NYU’s Stern School of Business in New York and the Global Network Professor of Finance and Economics at NYU Shanghai.