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30 March 2021

Chinese Markets Falter Amid Regulatory Concerns

Performance across the main global indices was underwhelming last week, particularly in China where a mixture of regulatory concerns, political tensions and expectations for tighter monetary policy appear to have dampened the positive outlook for Chinese equities in the short term. 

Since the start of 2021, the CSI 300 Index, which replicates the performance of the top 300 companies traded on the Shenzhen and Shanghai stock exchanges, has dropped roughly -5% compared to the US S&P 500 that is up around +4% this year, and the FTSE 100 up +3%. One factor weighing on market sentiment is the potential tightening of monetary policy. With China’s economy recovering from the effects of the pandemic much faster than any other, tighter monetary policy is likely to follow. The capital of investors anticipating liquidity withdrawals from Chinese markets may, therefore, have been swayed towards the US and UK, as both are still at the early stages of a recovery and are expected to keep looser monetary policies until the economy has fully recovered. Nonetheless, China’s return to normality before the rest of the world has left the country in a position for strong economic growth over the coming years, while the performance of Chinese equities over the long-term still looks promising.

Last week was overshadowed by regulatory concerns, however, there are not many differences to what has been threatened in the past. On Wednesday, the US announced that it is taking initial steps to force foreign companies listed in New York to provide access to financial audits or risk being forcibly delisted after three years of non-compliance. Simultaneously, there was a Bloomberg report that Beijing plan to take control of companies’ user data. Major Chinese tech firms took a hit on the back of the news. Alibaba was down -3.9% towards the end of Thursday, Tencent -2.8% and Baidu -4.9%. The Hang Seng and CSI 300 indices are down -2.02%, and -1.92%, respectively, by Friday morning.

Rising tensions also impacted European markets. After the EU, UK, US, and Canada jointly imposed sanctions on officials in China over human rights abuses involved in the production of Xinjiang cotton. Chinese social media exploded with calls to boycott H&M, Adidas, and Nike for expressing concerns surrounding the issues, which Chinese State media declared as false rumours. The backlash had a knock-on effect to the share prices of the western fashion retailers involved. Adidas was down -5.88%, Nike -4.10% and H&M -1.99% on Thursday. This has the potential to unfold as a significant challenge for western retailers in the region. These companies will need to upgrade their geo-political awareness if they are to successfully navigate consumer markets in China.

A container ship stuck within the Suez Canal passage has been an anchor on some markets since last Wednesday. It is estimated that around US$9.6bn worth of daily marine traffic has been halted by the lodged vessel with two million barrels of oil flow per day held up. Experts have warned the ship may not move for weeks, which would cost already constrained global supply chains millions of dollars each day. The price of oil and shipping containers has already risen drastically, and if ships decide to reroute around South Africa’s Cape of Good Hope, it would add 6,000 miles to the journey and roughly US$300,000 in fuel costs for a super tanker delivering Middle East oil to Europe. These markets may be pricing in a general rise in costs, but the main stock market indices held up well after a strong Thursday. The FTSE 100 increased by +0.13% and the S&P 500 by +0.67% as of Friday morning.

In the UK, department store John Lewis announced last week that six more stores will close, including those in York and Sheffield. The company stated that the stores were already financially challenged before the pandemic and, after reporting a heavy annual loss for 2020, the chain did not have another choice. There is a possibility that John Lewis will not entirely move out of these locations as the retailer looks at other options to supply its products locally, one being a click and collect presence. However, John Lewis now estimates that 60-70% of its future sales will take place online, which could mean more store closures for one of Britain’s best-loved high-street retailers. In some more positive news for the Yorkshire region, the S&P 500-listed company LabCorp, together with Leeds-based developer CEG, have submitted plans for a new life sciences research facility in the Holbeck Urban Village, on Leeds’ South Bank.

Please note that investments and income arising from them can fall as well as rise in value. This communication is for information only and does not constitute a recommendation to buy or sell the shares of the investments mentioned.
Chinese Markets Falter Amid Regulatory Concerns

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