Markets were rocked by a series of regulatory crackdowns in China last year. But it’s not the only country grappling with how to regulate companies.
All governments must judge the appropriate balance between market forces and regulation, influenced by international pressures as well as domestic politics. It’s within this context that regulatory intervention in China should be assessed.
All governments must judge the appropriate balance between market forces and regulation, influenced by international pressures as well as domestic politics
Putting China’s regulatory changes into an international context is the latest in a series of research papers that seeks to explore the investment implications of changes sweeping President Xi Jinping’s China.
Overseas — tensions with the West
China’s extraordinary growth within a few short decades has created friction. Perceptions of a hollowing out of US manufacturing helped Donald Trump to the White House back in 2016. And while US-China relations soured notably under the Trump administration, the deterioration continues to this day under President Joe Biden.
More recently, Russia’s invasion of Ukraine adds further tensions across key geopolitical fault lines — in defense, trade, energy and humanitarian issues — suggesting future shocks could emerge quickly.
Tech barriers on the rise
As a result, we’ve seen rising regulatory barriers and limits on the use of Chinese technology in areas of strategic defense in Western countries. This reflects how cybersecurity is playing an increasingly important role in foreign relations and conflict, from an offensive and defensive perspective.
For its part, China’s "dual circulation strategy" — to be self-sufficient and open to trade — also implies a reduction in its dependence on foreign technology and a reassessment of what business deals mean for national security. However, the country remains an important source of technology, particularly for renewable infrastructure in Europe, and is a major player in the electric vehicle (EV) supply chain, for example, as the home to key inputs such as cobalt.
Climate — cooperation or conflict?
Climate, the environment and energy will be increasingly important sources of cooperation, as well as confrontation.
Even though the US and China left the COP26 climate talks last year with a joint declaration to pursue further collaboration, it’s worth noting that the actual content was less ambitious than the collaboration which existed under Barack Obama, who left the White House in early 2017. In fact, the combination of national security and national climate policies could impact bilateral trade. For example, we expect the US climate agenda to focus on creating domestic capacity for renewable technology — reducing reliance on Chinese components and raw materials.
Russia’s invasion of Ukraine has also put energy supply front and center, highlighting the power and vulnerabilities linked to the global trade in a key economic input.
Geopolitics shapes domestic decisions
It’s clear that the regulatory landscape is affected by these broader trends in international politics. The US-China strategic rivalry has already resulted in US limitations on pension investments in China, barriers to technology use and curbs on investment flows between the US and China.
Our research leads us to conclude that an increased focus by the West on values, such as democracy and human rights, could drive further regulatory changes and broader asset re-pricing. Of course, how geopolitics translates into the decision-making processes — and ultimately regulatory change — within China, also matters.
Meanwhile, China’s political system delivers continuity that can avoid the partisan swings seen in democratic countries. But its lack of checks and balances on regulatory decision making means it is harder for investors to anticipate rule changes.
Final word
Investors should expect the Chinese system to be less encumbered by due process — it’s hard to rule out more sudden regulatory changes, even after a period of regulatory "catch up," in part, as international norms continue to evolve. This naturally raises the question of whether it’s better for investors, in the long run, to have the ‘band aid’ of regulatory change ripped off suddenly, or to drag the process out slowly and painfully.
The next installment in this series will analyze the economic impact of recent regulatory moves in property, technology and education against the broader regulatory and macroeconomic backdrop.
IMPORTANT INFORMATION
Foreign securities are more volatile, harder to price and less liquid than U.S. securities. They are subject to different accounting and regulatory standards, and political and economic risks. These risks are enhanced in emerging markets countries.
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