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RBC Wealth Management Reduces Asia Ex Japan Exposure Over China Concerns

Another asset management firm is reducing its holdings in Asia ex Japan due to concerns about China’s regulatory crackdown on certain sectors such as fintech and for-profit education.

RBC Wealth Management has reduced its weighting in Asia ex Japan stocks from “overweight” to “market weight” and cites China’s regulatory crackdown on sectors such as for-profit education and fintech as a reason to act. The company’s move goes hand in hand with similar actions by asset managers such as Pictet.

Beijing’s moves have rocked global investors with the suddenness of change, and hit stocks in a myriad of sectors. (This publication also wrote about the issues here and here.)

“The combination of Chinese regulatory fervor and the increased threat posed by the Delta variant has led us to reduce our long-recommended allocation of stocks from Asia ex Japan from overweight to market weight,” said RBC Wealth Management in a press release. “We believe this is an appropriate stance as valuations have declined and are below historical averages. The MSCI China Index is currently trading at 13.9 times the consensus earnings estimate for 2021 compared to its five-year average of 15.7x, while the MSCI AC Asia ex Japan Index is trading at 14.5 times its current annual profit compared to its five-year average of 16.2 lies.

The Canada-based company said it was waiting for a number of positive signals before becoming more optimistic about China: large fintech companies are fully compliant; Chinese companies resume onshore and offshore IPO plans; major digital platforms announcing measures to improve employee benefits; and technology companies opening up their systems or services to one another.

“In the past few months, a whirlwind of regulatory changes has swept the business and investment landscape in China, putting pressure on Chinese equities. China’s tenacious approach appears to be the new normal given the overarching socio-economic goals of regulators, “the company said.

China has been tightening the screws in certain sectors for months. In April, China’s Ministry of Industry and Information Technology announced that it would take steps to stabilize commodity prices, fight speculation, and encourage smelters and manufacturers to hedge on futures markets. Regulators also enacted provisions to keep fintech companies firmly in the community. This prompted Ant Group, Alibaba’s fintech group, to announce that it will be restructuring as a financial holding company to ensure that its finance-related businesses are fully regulated.

China is trying to reduce the cost of living for families, particularly the high cost of education – a big issue at a time when Beijing is trying to encourage couples to have more children – reversing the longstanding and controversial “one-child” policy.

Chinese authorities recently prevented after-school tutoring companies from making a profit. The education industry in China is “massive,” said RBC WM, with sales of $ 120 billion, as children compete hard for access to good schools and receive a lot of tutoring at exorbitant costs for parents.

“This has given China a headache, which, following its decades-long one-child policy, is facing the demographic challenge of a rapidly aging population. The high cost of education is making the Chinese reluctant to accept the newly relaxed rules that encourage three children per family, ”the company said.

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