Key Takeaways
China’s long-term growth plans are based on establishing a consumer-based economic system centered around technology and innovation. To achieve its goals, the government has implemented various regulations on its technology sector, aiming to protect national security and support social stability. We believe the market volatility induced by these regulations presents investment opportunities.
China issued a data policy framework in April 2020 that notes data as a “factor of production” and formally recognizes the importance of data in the nation’s economic model. So, the lack of clarity and communication behind recent regulatory actions have surprised financial market participants. Such activities include:
We think these actions clearly indicate China’s heightened commitment to its long-term, socioeconomic goals. Companies operating in China must operate under this framework and contribute to these objectives. These goals are not unique to China; the U.S. and Europe also aim to boost innovation through market-based mechanisms. But the U.S. and Europe have not invoked similarly swift regulatory disruption.
The current regulatory cycle has similar characteristics to previous ones, particularly 2018. Centering around mobile games and mobile payments, that cycle resulted in significant volatility and share price declines. Both sectors are highly concentrated in terms of market share of the top two, and both are going through significant structural growth.
The current regulatory environment is both broader and deeper than previous cycles, but the overall framework guiding the regulation is similar.
From an investment standpoint, Tencent is a good example since it has experienced two regulatory cycles in recent years. The similarities to the previous regulatory cycle are observable in market expectations:
As shown in Figure 1, the one-year price chart for the Hang Seng Tech Index reveals how market sentiment has quickly flipped from bullish to bearish. Following a one-year 47% rise, the index quickly reversed course and dropped 40% (through 8/31/2021). We think these price declines present potential investment opportunities.
Data from 8/30/2020 – 8/31/2021. Source: Bloomberg. Past performance is no guarantee of future results. The Hang Seng TECH Index aims to represent the 30 largest technology companies in Hong Kong that have high business exposure to innovative tech themes.
China’s evolving regulatory environment will create new risks and uncertainties for investors. But we don’t believe the government’s recent actions present a departure from its stated development path while also increasing access to foreign capital under a state capitalist system. For example, China granted BlackRock a license to start a wholly owned onshore mutual fund business, and JP Morgan obtained approval for the first fully foreign-owned brokerage.
Other large foreign financial institutions are following suit, in line with China’s stated long-term goals of steady development of capital markets, entrepreneurship and openness to investment by foreign investors. The key difference versus the U.S. or Europe is the Chinese state runs capitalism to serve the interests of most people. This may add uncertainty as Chinese policymakers devise further regulations.
While regulatory disruption in the Chinese marketplace has created uncertainty, we believe the accompanying spikes in volatility can create compelling long-term investment opportunities. In the past, we’ve made similar investments out of line with consensus that we believe added value over the longer term. For example, we found opportunities amid unforeseeable events, including:
Short-term volatility can be painful and create an uncertain environment, but we believe the current environment may present a rare opportunity to invest in temporarily undervalued, China-based technology companies.
Investment return and principal value of security investments will fluctuate. The value at the time of redemption may be more or less than the original cost. Past performance is no guarantee of future results.
The opinions expressed are those of American Century Investments (or the portfolio manager) and are no guarantee of the future performance of any American Century Investments' portfolio. This material has been prepared for educational purposes only. It is not intended to provide, and should not be relied upon for, investment, accounting, legal or tax advice.
Statements regarding specific holdings represent personal views and compensation has not been received in connection with such views.
The information is not intended as a personalized recommendation or fiduciary advice and should not be relied upon for, investment, accounting, legal or tax advice.
No offer of any security is made hereby. This material is provided for informational purposes only and does not constitute a recommendation of any investment strategy or product described herein. This material is directed to professional/institutional clients only and should not be relied upon by retail investors or the public. The content of this document has not been reviewed by any regulatory authority.
