China's crackdown intensifies. What does it mean for emerging markets investors?

by Alex Cousley, Russell Investments

On the latest edition of Market Week in Review, Investment Strategist Alexander Cousley and Senior Client Investment Analyst Chris Kyle chatted about bond yields dropping around the world, the impact of China's regulatory crackdown on Chinese equities, and the Chinese monetary policy for the second half of 2021.

Bond yields fall globally

To kick off the conversation, Kyle mentioned that Treasury yields have continued to fall this week, adding that German Bunds went negative across the curve and that the Bank of England met to discuss their approach to rates and bond buying. Cousley noted that we have seen this continued trend of lower yields, sharing that, in Germany, 30 Bunds went negative. Cousley also noted that in the U.S., real yields kept moving lower as well. "Our view still is that we think that this 150-to-200-basis-point range on the U.S. 10-Year [Treasury] seems to be about right to us," said Cousley.

The China crackdown intensifies

Kyle mentioned that the China crackdown narrative further intensified this week and expanded beyond tech companies to property and education. In regard to the impact these mandates are having on the outlook for Chinese investments, Cousley narrowed it down to three things: China's relation to foreign investors, China's opinion on strategic priorities, and 2022's political agenda. Regarding foreign investors, Cousley explained that, "Most Chinese companies have this structure called a variable interest entity, that is generally listed in the Cayman Islands and that gives U.S. investors access to China's equity. And that isn't strictly legal in China, but they've kind of accepted it and let it go on. And it seems like they've become increasingly uncomfortable. And they would like, over the longer term, to see those capital raisings occur in Hong Kong and China rather than other countries. So I think that element is going to stay around with us for some time." Regarding the impact on investors, Cousley explained that it's likely to expect more of a risk premium for foreign investors when it comes to impacted Chinese equities.

Regarding China's strategic priorities, Cousley stated, "The base of the Chinese government's thinking right now is that those companies that do consumer tech aren't viewed particularly favorably. It's not viewed as strategically important or even necessarily a productive use of assets." Cousley explained that China would prefer to see assets and resources move towards artificial intelligence, electric vehicles, carbon reduction—those areas that are considered strategically important.

Finally, regarding China's broader political agenda, Cousley noted that both the National People's Congress and Chinese President Xi Jinping have a focus on inequality as it relates to education, property and healthcare. That strategy is likely to impact economic decisions.

The Politburo and economic policy impacts

Finishing up this week's conversation, Kyle and Cousley dug into what many eyes were watching this last week: A meeting of the Politburo of the Communist Party of China and how it might impact fiscal and monetary policies for the remainder of the year. Cousley noted that even before this meeting, the flow of credit in China was tightening faster than the government was comfortable with. The main emphasis of this recent meeting was that continued economic fiscal support from the government is likely to pick back up. "I think at the margin, both fiscal and monetary [policies] are going to become more supportive," said Cousley.

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