Chinese corporates are experiencing growing pains as fines and restrictions rain down on sectors like tech, real estate and education—but select opportunities are emerging as well.
Over the past year, the Chinese government has embarked on a campaign to break up monopolies and curb price pressures through new regulations and fines on a number of sectors. Following these announcements, stock prices plummeted and credit spreads widened significantly. However, while the current crackdown is certainly causing growing pains for Chinese corporates, we can see a path forward, toward the much overdue reforms in various parts of the Chinese economy.
For investors trying to contextualize the longer-term market impact of these developments, history does offer some guidance. Looking back at similar crackdown episodes in the past, we note that the Chinese government did eventually ease restrictions to avoid stifling wider economic growth momentum, and for the majority of those past episodes, the market’s initial negative reaction created buying opportunities for long-term investors.
A Recap of the Idiosyncratic (Or Not So Idiosyncratic) Crackdowns
One could be forgiven for thinking the various recent government crackdowns are idiosyncratic in nature—taking the real estate sector in isolation, then the tech sector, and finally the consumer and education sectors. However, to us, trends are apparent in the wake of the chaos when viewed through a reform-minded lens.