China’s heightened regulatory oversight shakes investor confidence

Sid Queler

September 08, 2021

China has the largest economy in the world, but it’s still an emerging market.

Since China opened its borders to the world four decades ago and initiated economic reforms, it has been one of the world’s fastest-growing economies. Hundreds of millions of Chinese people have been lifted out of poverty. As the middle class expanded, demand for goods and services increased. Investors around the globe understood the opportunities and sought ways to participate in China’s growth.   

Despite having the world’s largest economy, China remains an emerging market. Its “open” economy is periodically subjected to intense, and sometimes disruptive, regulatory oversight by an authoritarian government. These periods create significant share price volatility, as we’re experiencing today.

China’s regulatory actions dampened share values

In recent years, Beijing intensified regulatory scrutiny of Chinese tech and tech-related companies. For example, China’s giant ride-hailing company Didi was listed on the New York Stock Exchange in June. Almost immediately, China’s regulatory agency accused the company of violating data collection and use laws, and ordered the firm to stop adding new users and to remove its apps from domestic app stores. In response to those actions, share prices declined.[1]

Elsewhere, China’s education technology industry was upended when a leaked memo disclosed that Beijing intended to require academic tutoring companies to operate as nonprofits, because tutoring was too costly for parents and could potentially create inequality and social unrest. Consequently, the share prices of three Chinese education companies listed on US exchanges dropped sharply.[2]

In total, the Chinese government pursued more than 50 regulatory actions against Chinese technology companies. The result has been dramatically lower share prices and a loss of investor confidence. According to The Economist, “…the Communist Party’s deeper ambition is to redesign the industry according to its blueprint. China’s autocrats hope this will sharpen their country’s technological edge while boosting competition and benefiting consumers.”[3]

The US demands greater accountability

The performance of US-listed Chinese companies was also affected by heightened US regulatory scrutiny. Last year, Congress passed the Holding Foreign Companies Accountable Act, which compels companies that trade on American stock exchanges to submit audited financials within a specific period of time or be delisted. Chinese companies may have difficulty complying with the new rule. Beijing has a history of refusing to provide American regulators with access to Chinese companies’ financial records, and has made sharing some materials a crime.[4] Shareholders are understandably concerned, as about $1.5 trillion worth of Chinese companies are traded on US stock exchanges.

During times like these, it’s important to remember that periods of volatility and uncertainty can lead to investment opportunities. The value of Chinese companies trading on US exchanges has fallen sharply from previous peaks, putting many of these companies solidly in bear territory. For investors with a high tolerance for risk who are seeking emerging market exposure, China’s US-listed companies may present attractive opportunities.

Sidney F. Queler is the chief growth officer of CIBC Private Wealth, US. In this role, he leads the firm’s business development team, setting strategies and practices that broaden relationships with individuals, families, foundations and endowments. Sid also serves as a member of the CIBC Private Wealth US Operating Committee and as a member of the advisory team for the firm's Boston office. In addition to leading national business development, he remains actively involved with client relationships. 

[1] Yuan Yuang, “China Cracks Down on Didi Days After New York IPO,” Financial Times, July 4, 2021.
[2] Hudson Lockett, “Crackdown on education companies sparks sharp sell-off for Chinese stocks,” Financial Times, July 26, 2021.
[3] “Xi Jinping’s assault on tech will change China’s trajectory,” The Economist, August 14, 2021.
[4] “How the delisting of Chinese firms on American exchanges might play out,” The Economist, August 14, 2021.