Wealth Strategies

RBC Wealth Management Cuts Asia Ex-Japan Exposure On China Worries

Tom Burroughes, Group Editor, 23 August 2021

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Another wealth management house cuts its exposures to the Asia (excluding Japan) equity area as a result of concerns about China's regulatory crackdown on specific sectors, such as fintech and for-profit education.

RBC Wealth Management has cut its weightings on Asia ex-Japan equities to “market weight” from “overweight,” citing China’s regulatory crackdown on sectors such as for-profit education and fintech as a reason for acting. The firm's move chimes with similar actions taken by wealth managers such as Pictet.

The suddenness of Beijing’s moves have rattled global investors, hitting stocks in a variety of sectors. (This publication has also written about the issues here and here.)

“The combination of Chinese regulatory zeal and the increased threat from the delta variant has led us to reduce our longstanding recommended allocation to Asia ex-Japan equities to market weight from overweight,” RBC Wealth Management said in a note. “We believe this is an appropriate stance given valuations have come down and are below historical averages. The MSCI China Index is currently trading at 13.9x the 2021 consensus earnings estimate versus its five-year average of 15.7x, while the MSCI AC Asia ex Japan Index is at 14.5x current year earnings versus its five-year average of 16.2x.”

The Canada-based firm said it is waiting for a number of positive signals before turning more upbeat on China: major fintech companies fully complying with regulatory requirements; Chinese companies resuming their onshore and offshore IPO plans; major digital platforms announcing measures to improve social benefits for workers; and tech companies opening up their systems or services to each other.

“Over the past few months, a whirlwind of regulatory changes has swept across the business and investment landscape in China, putting pressure on Chinese equities. China’s get-tough approach appears to be the new normal given the regulators’ overarching socio-economic aims,” the firm said. 

China has been tightening the screws on specific sectors for months. In April, China’s Ministry of Industry and Information Technology announced that it would take measures to stabilise commodities prices, crack down on speculation, and encourage smelters and fabricators to hedge on futures markets. Regulators also issued provisions to bring fintech companies firmly into the fold. This led Ant Group, Alibaba’s fintech group, to announce that it will restructure as a financial holding company to ensure that its financial-related businesses are fully regulated.

China is trying to cut family living costs, in particular heavy education costs - a big concern at a time when Beijing is trying to encourage couples to have more children – reversing the long-standing and controversial “one-child” policy.

Chinese authorities recently barred after-school tutoring companies from making a profit. The education industry in China is “massive”, RBC WM said, with revenues reaching $120 billion, as children compete fiercely to get into good schools and are heavily tutored at an exorbitant cost to parents.

“This has created a headache for China, which is facing the demographic challenge of a rapidly ageing population following its decades-long one-child policy. The steep education costs are making the Chinese hesitant to embrace the newly-relaxed rules that encourage three children per family,” the firm said. 

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