Talking Point  

Why China worries shouldn’t cause clients to change course

Why China worries shouldn’t cause clients to change course
 Pexels/Wolfram

Recent policy actions by the Chinese government could make Chinese shares more risky in future, but should not be enough to cause investors to reduce their allocation to emerging markets, according to Luca Paolini, chief strategist at Pictet Asset Management. 

China's government has banned for-profit after-school tutoring in a surprise move, which essentially shuts down the "edu-tech" sector according to Paolini, which is worth around US$100 billion, a move which has raised concerns about an intensification of Beijing's regulatory crackdowns.

Paolini says: “The latest intervention comes on the heels of cybersecurity investigations of the ride hailing app DiDi and other e-commerce companies, increased scrutiny of overseas IPOs and the imposition of fines and restrictions on some of China’s largest e-commerce firms.

"Authorities have also moved to restrict the use of the variable interest entities (VIE) structure – holding companies based in tax haven jurisdictions and designed to allow foreign investors to invest in key sectors such as tech without giving them any operational control.”

But he adds that while the government’s actions mean a permanently higher “risk premium” should be added to the shares of Chinese companies, clients do not need to take “evasive action”.

Paolini says: “Recent events should not fundamentally change China’s growth model or the broader investment case for the country’s financial assets. Balancing the economic resilience with the rising uncertainty, we retain an overall neutral allocation across equities, bonds and cash. We remain neutral on equities in China and other emerging markets.”

Paolini says he has recently moved portfolios to an increased allocation to European equities as that region’s economy begins to open-up. 

david.thorpe@ft.com