Posted on Jul 28, 2021 at 7:15 amUpdated on Jul 28, 2021, 7:48 AM
For investors who have flocked to Chinese markets in recent months, bringing $ 35 billion to the mainland, the wake-up call is painful. The rout of the clues in recent days reminds them that their fate remains largely in Beijing’s hands. The Hang Seng index of the Hong Kong Stock Exchange has chained two sessions of declines of more than 4%, its most severe losses since the financial crisis of 2008. In Shanghai and Shenzhen, the CSI 300 index shows more than 7% down since Friday.
Chinese stocks listed on Wall Street suffered the same fate. The Nasdaq’s “Golden Dragon” index has fallen 20% since Friday, bringing its losses to more than 30% since the start of the year. In total, the capitalization of Chinese listed companies has fallen by about $ 2.5 trillion from its peak in mid-February.
The regulatory measures of the Chinese authorities follow one another and cause trouble among investors. At the end of last year, already, the big Internet platforms like Alibaba and Tencent had been targeted. In early July, it was the companies listed on Wall Street that were heckled following the suspension of Didi in the wake of his US IPO.
But the scale of the authorities’ latest offensive against the private education sector, announced this weekend, surprised market professionals. Values little known to the general public in Europe, but which still weighed more than $ 100 billion at the start of the year, have been decimated: Gaotu Techedu, TAL Education and New Oriental Education have all plunged by at least 70% since Friday.
A blow for foreign investors
The reforms announced are radical. Foreign capital is now prohibited in a sector “Perverted by capital”, according to the authorities. Corporations even have to give up profit-seeking when teaching the public school curriculum and transform into non-profit organizations.
A blow for foreign investors who had invested in this promising market segment. And not just on listed securities. Singapore’s Temasek and GIC sovereign funds, SoftBank’s VisionFund, and Warburg Pincus funds have taken major stakes in the sector.
Tencent falls 18%
Even the market references are suffering. Tencent, the top stock in the MSCI China index, has lost more than 18% over the past three sessions. Meituan, the Chinese home delivery champion, has fallen more than 30% in the past three days. The authorities have announced new measures to improve the working conditions of the 7 million delivery people who crisscross Chinese cities.
“If a $ 100 billion sector can disappear overnight, it is legitimate for investors to question their exposure to China,” underlines Haiyan Li-Labbé, portfolio manager at Carmignac, whose fund has lost more than 10% in recent days.
Distrust of foreign investors
Sign of the greater distrust of foreign investors, the price of Chinese shares has fallen sharply against the rest of the world. The MSCI China Index, which includes stocks listed in mainland China, Hong Kong and Wall Street, has fallen more than 25% since its peak on February 17. It is trading at less than 14 times expected earnings next year, compared to an average of 18.5 times for all developed markets.
“China is not a market like any other, it is impossible to fight the government. It is important to understand the priorities of the Communist Party before investing, which is not to the taste of all investors ”, notes the manager.
Larry Chen, ephemeral billionaire
This former schoolmaster, founder and CEO of Gaotu Techedu, was once one of the world’s greatest fortunes. Its assets exceeded 15 billion dollars at the beginning of the year carried by the surge in the course of its group, listed in New York and specializing in private education: tutoring, evening classes, but also vocational training. His fortune has since melted like snow in the sun, the measures taken by Beijing to supervise the sector having plunged the valuation of his group by more than 98% on the stock market. His wealth is now valued at less than $ 350 million, according to Bloomberg.