China outlook – 3 policy implications

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Polina Kurdyavko
August 18, 2021

2021 has seen several stresses in the Chinese corporate market. Negative headlines around a state-owned asset manager were followed by market stress proliferating across internet, education and real estate sectors.

We see three policy implications arising as a result of these stresses:

  1. Beijing is challenging the market assumption that for some quasi-sovereigns and large companies, the sovereign will automatically act as a backstop (“No company is too big to fail”). In our view, the implication of this is likely to be repricing in some sectors.

  2. China is intent on reducing data security vulnerability arising out of listing in New York. As a result, some internet companies have come under its policy scope. We believe one implication of this will be less capital flowing through some of the major Chinese internet assets, although the long-term impacts remain unclear, e.g. capital flowing through Hong Kong listings may be tolerated by Beijing.

  3. China is tilting its policies in favour of more ‘socialistic capitalism’ as opposed to the ‘market capitalism’ championed by Western economies. Education businesses, delivery companies and associated labour market policies are within scope of this ambition. The implication of this policy is likely to be higher costs and lower profitability, but probably not meaningful credit deterioration, in our view.

Acting on all of these priorities at the same time would mean China risks creating more volatility in the market. This has already been evidenced to some extent given the stock market reaction over the last few weeks.

For now, our base case remains that Chinese policymakers will be able to take a more measured approach in implementing these policies, thus allowing corporate and investors alike to adjust to the new paradigm. However, we cannot discount the possibility of a policy mistake.

For a long time, investors’ assessment of Chinese policies has hinged upon the assumption that the authorities’ number-one priority remains social cohesion and that the sovereign will enact policies to ensure cohesion remains in place at all costs. We are starting to see this play out.

Whilst we see this as a positive social step from an ESG perspective, in the short term, it has created more volatility.

Should investors be more careful about what they wish for?

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