The North American wealth management firm, one of the biggest in the continent, argues that worries over Chinese regulatory actions are well-founded but that in the medium term, the case for holding assets from the world's second-largest economy remains.

CIBC Private Wealth Management says there is a case for holding Chinese assets in the medium term, given the country’s big growth potential as an emerging market, even though Beijing’s regulatory crackdowns and authoritarian methods have jolted investors. 

The wealth management firm, with $91.9 billion of assets under management and administration as at the end of 2020, is one of the latest to have weighed in on what to make of China’s regulatory actions against sectors such as for-profit, post-school education, as well as specific technology sectors. At the same time, Beijing continues to open - to a degree - its onshore capital markets to overseas investors. 

“China remains behind other nations in terms of gross domestic product per capita, a gap that should narrow. The continued growth of the middle class in China and the leading position of many of its technology companies, should offer active investment managers access to strong revenue and earnings growth,” the wealth management house said in a note. 

“That said, China remains an emerging market, particularly in relation to the authoritarian regime that governs it. We expect to continue to see periods like the current regulatory cycle, which may appear arbitrary and undemocratic to Western investors. To a degree, these periods of volatility are in some ways the price paid for accessing Chinese growth,” it continued. 

Over the course of the last six months, the Chinese government has escalated regulatory oversight of certain sectors and foreign listings, CIBC Private Wealth Management noted. 

Relations between Beijing and Washington DC remain sensitive. A few weeks ago, China stunned international investors when it suddenly announced a clampdown on education firms, and also announced moves against other sectors. Beijing has also restricted the use of the variable interest entities structure - holding companies based in tax haven jurisdictions, designed to allow foreign investors to invest in key sectors such as tech without giving them any operational control. 

The moves by China, which wrongfooted investors, hammered equities in late July, raising questions about whether the Chinese authorities are aware, or care, about how such policy moves might hit investors. Ironically, the country has continued to push various schemes such as its Hong Kong mainland stock market links, various foreign investor quota regimes and capital programs to bring capital into the country. A few days ago, for example, BNP Paribas said it had won a license in China to provide custody services for China's Qualified Foreign Investor scheme, which allows it to work directly with foreign institutional investors. JP Morgan earlier in August won regulatory approval in China to take full control of a securities business in China. This is a first for an international firm and a sign that Beijing is keen to open its financial markets to foreign capital. CEO Jamie Dimon defended the move from critics saying that US firms should be wary of dealing with China. 
 

Cycles
The regulatory moves by Beijing against certain business areas is a “a cyclical phenomenon,” CIBC PWM said. “Over the years, we have experienced periods in which the government increases regulation or reprimands business leaders. The current period is, however, the most intense we have seen in thoroughness and breadth.”

Chinese regulatory actions take four broad forms, the firm said: Antitrust actions; pulling of initial public offerings; regulatory concerns about data security outside China, and moves by China to raise the birth rate by reducing education costs. 

“We are monitoring the situation closely and are using this period of geopolitical volatility as an opportunity to buy the highest quality companies at attractive levels. We believe our approach of investing in quality companies with defensible business models and predictable earnings, underpinned by strong balance sheets is the most effective way of achieving attractive long-term track records,” the firm added.