CFDs are complex instruments and come with a high risk of losing money rapidly due to leverage. 87.41% of retail investor accounts lose money when trading CFDs with this provider. You should consider whether you understand how CFDs work and whether you can afford to take the high risk of losing your money.

Scan to Download iOS&Android APP

Is China still attractive following the government’s regulatory crackdown?

By James Hester

10:00, 5 August 2021

Share this article

Subscribe to Weekly Highlights

The major market events for the week ahead right in your inbox. Subscribe
Shanghai skyline
Shanghai skyline - Photo: Shutterstock

China was the worst-performing global equity market last month, with the MSCI China Index falling by over 14% during July in sterling terms. Investors took fright from the Chinese government’s decision to crackdown on its education industry.

New rules mean companies are to be banned from tutoring Chinese school curriculum subjects for-profit and such firms will be no longer allowed to raise capital on public markets or receive funds from foreign investors. The moves brought big share price falls for US-listed groups that tutor the school curriculum in China, including New Oriental Education, TAL Education and Gaotu Techedu, but the crackdown also precipitated a wider sell-off across Chinese stocks in general as investors fretted over the rising tide of regulation in the country.

Chaoping Zhu, global market strategist at J.P. Morgan Asset Management, says the key goals of China’s new rules are to strengthen the nation’s K-9 stage (kindergarten to junior high school) education system and to relieve the economic and mental burdens on students and their families.

“Authorities view educational challenges as one factor contributing to China’s declining birth rate in the recent years,” explains Zhu.

Wider concerns

But the problem for the market is not just China’s changing stance on its education sector. Investors are worried about broader regulatory tightening that’s been evident this year, including moves to clampdown on big technology groups and tame house price inflation.

In the tech sector, the shares of big Chinese players like ecommerce giant Alibaba and internet group Tencent have come under pressure from new rules designed to curb market dominance, controls on data security and incoming restrictions on internet firms’ structures. In April, Alibaba was hit by a landmark $2.8bn fine for abusing its market position.

Meanwhile, in late July, the People’s Bank of China Shanghai headquarters coordinated a mortgage rate hike as part of efforts to calm house price inflation.

Nick Payne, head of strategy, global emerging markets focus, at Jupiter Asset Management, says a shift is underway by the Chinese government in this 100th anniversary year of the Chinese Communist Party.

“The party announced it achieved its goal of eliminating poverty, and there is now a change in emphasis from growth at all costs to growth with sustainable outcomes and that is socially inclusive. China also is more focused on improving its national economic security, particularly given the US trade war,” says Payne.

Focused interventions

Zhu argues that the circumstances surrounding the education sector are somewhat unique.

“We do not see these actions setting a widespread precedent for other sectors, nor are they indicative of Chinese policymakers’ broader intentions towards the operations of private sector companies or the use of foreign capital,” says Zhu.

Zhu believes recent interventions by regulators aimed at China’s internet companies have been clearly focused on improving overall market competitiveness to enable more private companies to thrive over the long term.

GBP/USD

1.23 Price
+0.170% 1D Chg, %
Long position overnight fee -0.0039%
Short position overnight fee 0.0005%
Overnight fee time 22:00 (UTC)
Spread 0.00090

USD/JPY

136.60 Price
-0.100% 1D Chg, %
Long position overnight fee 0.0047%
Short position overnight fee -0.0124%
Overnight fee time 22:00 (UTC)
Spread 0.050

EUR/USD

1.05 Price
-0.220% 1D Chg, %
Long position overnight fee -0.0083%
Short position overnight fee 0.0025%
Overnight fee time 22:00 (UTC)
Spread 0.00030

GBP/JPY

167.50 Price
+0.090% 1D Chg, %
Long position overnight fee 0.0000%
Short position overnight fee -0.0001%
Overnight fee time 22:00 (UTC)
Spread 0.110

Payne is also relatively relaxed about the changing regulations in China’s tech sector.

“The regulatory tightening aimed at big tech companies has been about protecting individual data privacy along the lines of GDPR rules here and also about improving the labour code and strengthening anti-trust rules. Many of these policy announcements are following the right lines and reflect the fact that companies have innovated, disrupted, and moved much faster than the regulations have,” says Payne.

Healthy development

The Chinese government has claimed it wants to promote the healthy development of its industries, with a commitment to capital market reforms and further opening up.

“All of this suggests to us, on balance, that Chinese authorities continue to regard domestic and foreign capital as positive elements for the functioning of Chinese markets,” opines Zhu.

Rather than representing a coordinated attack on the private sector, J.P Morgan argues that the regulations are aligned with China’s long-term goals.

Zhu does not view the strained US-China relationship as playing a direct role in the latest policy shift, though acknowledges that the outlook for US-listed Chinese companies remains uncertain given emerging regulation. This may prompt more US-listed firms to seek secondary listings in Hong Kong or mainland China.

Best opportunities

So should investors still be plumping for Chinese stocks, and where are some of the best opportunities?

J.P Morgan says its retaining a long-term positive stance on Chinese equities, with a focus on structural growth areas such as technology, healthcare and domestic consumption.

“While some sectors face regulatory headwinds, others could enjoy policy support. For example, semiconductors and software are benefiting from the effects of the import substitution, set out by the 14th Five-Year Plan. Carbon neutrality is another policy focus,” says Zhu.

“China will continue to be a key source of investment opportunities for our strategy, but it’s undoubtedly the case that the discount in China has to increase given some of this policy unpredictability,” comments Payne.

Read more: World Bank raises China's GDP growth forecast

Rate this article

Share this article

The difference between trading assets and CFDs
The main difference between CFD trading and trading assets, such as commodities and stocks, is that you don’t own the underlying asset when you trade on a CFD.
You can still benefit if the market moves in your favour, or make a loss if it moves against you. However, with traditional trading you enter a contract to exchange the legal ownership of the individual shares or the commodities for money, and you own this until you sell it again.
CFDs are leveraged products, which means that you only need to deposit a percentage of the full value of the CFD trade in order to open a position. But with traditional trading, you buy the assets for the full amount. In the UK, there is no stamp duty on CFD trading, but there is when you buy stocks, for example.
CFDs attract overnight costs to hold the trades (unless you use 1-1 leverage), which makes them more suited to short-term trading opportunities. Stocks and commodities are more normally bought and held for longer. You might also pay a broker commission or fees when buying and selling assets direct and you’d need somewhere to store them safely.
Capital Com is an execution-only service provider. The material provided on this website is for information purposes only and should not be understood as an investment advice. Any opinion that may be provided on this page does not constitute a recommendation by Capital Com or its agents. We do not make any representations or warranty on the accuracy or completeness of the information that is provided on this page. If you rely on the information on this page then you do so entirely on your own risk.

Latest Economics headlines

Still looking for a broker you can trust?

Join the 480.000+ traders worldwide that chose to trade with Capital.com

1. Create & verify your account 2. Make your first deposit 3. You’re all set. Start trading