China’s crackdown on private education signals that Beijing is willing to take strong action when it perceives socioeconomic problems — regardless of what investors may want, according to an equity strategist at a major Asian bank.
“The government is ready to do whatever it takes to rectify perceived social, economic issues,” DBS’ Dennis Lam said during a webinar Thursday, pointing to the speed, efficiency and strength of China’s new policy.
“Stock market volatility is not a consideration at all,” according to Lam.
For sectors that face high risk of regulation, including education, e-commerce, internet and health care, it’s “prudent for the investor to basically expect the worst,” he said.
But he acknowledged that Chinese securities regulators tried to ease market fears in a meeting with major investment banks Wednesday. The regulator did not make a public statement but said Beijing will continue to allow Chinese firms to list in the U.S., a source familiar with the matter told CNBC.
Hong Kong’s Hang Seng index subsequently gained 3% Thursday in a volatile trading week for Chinese tech and education stocks, including two listed in the U.S. The index fell again on Friday, posting a 5% weekly loss.
Beijing’s mentality
There has been a “fundamental shift” in the mentality of Chinese authorities, according to DBS Chief China Economist Chris Leung.
He said the crackdown on private education shows that the country’s policy design now takes social factors into account, beyond financial and economic considerations. He explained the government is trying to tackle high education costs, which discourage Chinese couples from having more children.
Leung added that Beijing is “willing to bite the bullet to serve long-term … socioeconomic goals,” even if it’s at the expense of stock market prices.
UBS: You need to stay invested, but also diversified in Chinese stocks
Thomas Fang, head of China global markets at UBS, said the underlying intention of the Chinese government is practical and development focused.
But investors will need to be careful when it comes to areas such as national security, monopolistic behavior or businesses that don’t benefit “social values,” “Street Signs Asia” on Friday.
Lam from DBS said issues including data security and social equity will continue to be treated seriously.
Investing advice
Looking ahead, it’s important to stay invested in Chinese markets, Fang added.
“That’s really a reflection of a hotter market and how easy the overall global liquidity is,” he said. But investors also need to hedge their bets while policy remains uncertain, he said.
Lam said clarification from China’s securities regulators helped rule out the worst-case scenarios, but did not completely dispel market fears. For now, old economy stocks not related to regulatory risks are a safer bet, especially after the declines in share prices, he said. Lam argued, however, that new economy stocks still offer good risk-reward.
“Valuations are more compelling, fundamentals (are) not impacted,” he said.
