Government regulation of Chinese tech companies and the private education sector has caused turmoil in the Chinese stock market in recent weeks, triggering noticeable turbulence in emerging market equities. The Chinese leadership is pursuing several goals with its measures. One is to exert more control over the sources of funding for domestic companies to limit dependence on foreign capital providers. It also wants to monitor the tech giants' data sharing even more closely to prevent sensitive and strategically relevant information from falling into the wrong hands.
The interventions in the commercial education sector, which is no longer allowed to operate for profit, are intended to cushion the financial burden on families. In this way, the state authorities want to counteract China's unfavorable demographic development. With the strict regulation of private education providers, a growth market worth billions was closed practically overnight. Not only has this weighed heavily on the country's stock markets, but it has also raised concerns among global investors that Chinese authorities may target other industries in the future. Overall, the regulatory orgy shows that China is far from a "model capitalist country." While the Chinese leadership is unlikely to go so far as to place the entire economy under its supervision, after all, the innovation and productivity of private companies is a key contributor to the country's prosperity. Nevertheless, investors still need to factor in a risk premium for government intervention when making investments in China.
Another issue that is currently affecting the markets is the development of interest rates. Global long-term interest rates have fallen noticeably in recent months as the recovery momentum has faded. In the meantime, however, the markets seem to have sufficiently priced in two of the most important factors dampening interest rates: monetary tightening in China and the spread of the highly contagious delta virus. At present, therefore, the risks of interest rate rises are once again coming into focus. Possible triggers in the course of the year could be robust economic data, such as most recently from the US labor market. In the medium term, the large spending package with which the US plans to invest around two trillion dollars in renewing its infrastructure over the next eight years should also have an effect in the direction of higher interest rates. Against this backdrop, professional investors should take the risk of rising market interest rates seriously and adjust their asset allocation accordingly. One way to do this is to invest in financial stocks that structurally benefit from rising interest rates.