What does the Chinese crackdown mean for us, the indices and other emerging markets?
China is the world’s second-largest economy with a size of $ 14.5 trillion and the largest foreign exchange reserve worth $ 3.2 billion. It is the world’s largest exporter and the second largest importer of goods. In addition, it is one of the favorite destinations for FDI. They have managed to achieve an average GDP growth of almost 10% per year until 2014 since 1978.
Why Chinese authorities are weighing heavily on their own businesses:
The real story began last year in November when Chinese regulators shut down the listing of one of Ant Group’s largest IPOs led by Jack Ma. Then, in March-2021, the SEC shut down warned Chinese companies to comply with US auditing standards. And it was quite difficult for China to share accounting data of all US listed companies with US regulatory agencies, especially for some listed companies that involve national security or national data and might also be at risk of violating Chinese law.
Rather than listing on the US stock exchange and complying with their standards, Chinese authorities are tightening oversight of foreign companies linked to IPOs and outlawing those that collect large amounts of user data. In addition, all internet companies planning to go overseas would be asked to voluntarily apply for exams from China’s powerful Cyber Security Administration (CAC). On the US side, the SEC has started sending out detailed instructions on disclosing their use of offshore vehicles known as Variable Interest Entities (VIEs) for IPOs. VIEs in modern times have been misused because this structure allows certain assets to be kept off the balance sheet of the company and without endangering the whole company. Many Chinese VIEs are incorporated in tax havens such as the “Cayman Islands”.
Which sectors and companies are most affected:
During this crackdown, sectors that have remained under scrutiny include entertainment, gaming companies, the sharing economy (ridesharing, bike sharing, house sharing), technology / algorithm based companies, cloud computing platforms, education, online finance, cryptocurrencies, real estate, etc. The most affected companies include the Alibaba group, whose US listed stock prices have lost more than $ 400 billion since the end of October, Tencent Holding which has lost more than $ 347 billion in market value, DIDI Global a also lost about $ 37 billion, or more than 40 percent of their value. There were few education-based online tutoring companies like Rise Education and New Oriental that lost more than 85% of their market value.
How does this affect US tech indices and sentiment?
There are at least 250 Chinese companies listed on the three major US stock exchanges with a total market capitalization of $ 2.1 trillion and there are eight nationally listed Chinese state-owned enterprises in the United States. The NASDAQ Golden Dragon China Index (HXC) – a gauge of Chinese companies listed in the US market, with the majority of business in the People’s Republic of China, fell more than 53% in just 6 months. The recent turmoil will not only threaten ongoing IPOs, but could upend the popular Chinese ADR market as well. This suggests that the “Chinese tech bubble” is bursting slowly and steadily. This could trigger a new wave of risk across the globe and could lead to increased demand for the safe haven currency – the dollar.
Will this have an impact on the yuan in Chinese currency? And what could be its impact on other EM FX?
The constant tightening of regulations by Chinese authorities is putting pressure on the Chinese market and the Hang Seng index. However, the PBoC is closely monitoring its impact on the yuan. Unlike other major currencies like USD or JPY, Yuan is not a floating currency. The rate is maintained by Mainland China and the PBoC sets the daily midpoint.
What could be the impact on the Indian market and the rupee?
Because China remains an immediate competitor of India with a similar economic dynamic, although very late in many aspects, but would have a positive impact on the Indian market. Unless major risk aversion occurs due to the same, India will remain a prime market for FDI. This does not mean that the rupee will start to appreciate, as the RBI closely monitors flows, trade balance and reserves. They immediately intervene in the market and launch bailouts for exporters whenever the rupee appreciates beyond a certain level. In addition, a higher rupee against the yuan will erode the competitiveness of Indian exports; above all, at a time when there were many obstacles on the shipping front. Therefore, we might see a move related to the rupee range, with some hiccups on any sudden news from Chinese authorities.
We need to understand this: the bigger the economic size, the bigger the problem and the greater the impact on the global financial market. Chinese crackdown is now a new normal for the market, as is the trade war. The implication of the same will remain unfavorable for China in the medium term. Therefore, Yuan might come under pressure in the coming times. Even if the PBoC tries to ease its monetary policy and save the currency, it could depreciate to the levels of 6.65-6.80. FDI flows could be diverted to other opportunistic markets where the differential will give investors an alpha return. But the movement of the currency of this country will depend only on the target level of the central bank and its tolerance.
—Amit Pabari is the Managing Director of CR Forex Advisors. The opinions expressed are personal.
(Edited by : Anshul)
First publication: STI