China: where now?

China has become one of the most unloved markets due to this year’s regulatory crackdown and self-inflicted property weakness. And yet, despite the headlines, some of the world’s largest and most influential asset owners remain considerably invested in China.

Last month saw the release of our China Position 2021 report, which revealed that only 12% of the 200 organisations (including pension and sovereign funds, endowments and insurance firms) surveyed for the report are expecting to reduce their exposure. Most asset owners know that regulatory change isn’t unique to China. Policymakers from Washington to Brussels are pushing for stronger regulation of ‘Big Tech’ firms, with various polls indicating that there’s broad public support for this kind of action. They also appear to play the long game, and believe that despite the current volatility, China’s potential for economic growth, as well as investment returns, continues to be better than other markets.

We believe opting out of the world’s second largest economy would mean ignoring the sheer breadth of its market and the unique opportunities that lie within it. It also means fixating on sectors hit by Beijing’s regulatory drive and neglecting others that receive government support. 

Not all of tech was targeted by the crackdown

While the so-called ‘tech crackdown’ has hit a wide range of companies from ecommerce to edtech, it didn’t target the tech industry at large. It focused on China’s homegrown internet-based services and platform economies, but left hardware companies, for example, unscathed.

There’s no evidence behind the view that China’s government wants to destroy its technology sector. We believe that regulators are simply aiming to promote healthy, long-term growth. China’s 14^th Five-Year Plan puts technology at the heart of its future, with the intention to transform the country into an innovation powerhouse.

Beijing has also identified key areas, such as semiconductors, biotech and renewable energy, to be of strategic importance and are fully prepared to support them. China’s semiconductor sector, for example, has been helped by a multibillion-dollar government plan.

“The indiscriminate sell-off seen in July was a result of overreaction by market participants not differentiating between companies,” says Mike Shiao, Chief Investment Officer of Invesco Asia ex Japan. “However, market participants soon began to distinguish the winners from losers, and quality names rebounded strongly from the panic selling.”

Furthermore, Mike thinks that the market has absorbed much of the negative impact of recent regulatory adjustments, but that market participants continue to remain sensitive to market noise.

William Lam, Co-Head of the Asian & Emerging Markets Equity team at Invesco's Henley Investment Centre agrees. “The market is all too keen to exaggerate the risks of investing in China. And in my opinion, it has led to undervalued opportunities and a better outlook for returns.”

Both of our China experts believe that internet platform companies currently under spotlight continue to have very strong competitive advantages. “Many of the companies hit by this year’s crackdown will likely evolve and develop, prioritising innovation and creativity in the process,” Mike adds. “In the medium to long term, their fundamentals should remain solid.”