July 12, 2021 BARRON’S 11
One example: China is targeting
after-school course providers, as it
tries to lower child-care costs and en-
courage families to have more chil-
dren. Nonetheless, Semple sees oppor-
tunity in China Education Group
Holdings (839.Hong Kong), which
could make acquisitions as Beijing
forces public universities to divest
affiliated private ones.
Of the large internet stocks, Semple
favors Tencent, the top position in his
fund, over Alibaba, another holding.
Alibaba faces more competitive pres-
sures, Semple says, and Tencent has
an advantage with its Weixin messag-
ing and videogaming franchises,
which provide a high-quality, rela-
tively low-cost flow of users for its
other businesses.
Tencent also has quietly complied
with the government’s requirements,
with CEO Ma Huateng keeping a low
profile, says Martin Lau, managing
partner and a portfolio manager at
FSSA Investment Managers, which
oversees $37 billion. That’s a positive,
given the backlash that met outspoken
Alibaba and Ant co-founder Jack Ma.
Many Chinese internet companies’
fundamentals are sound. However,
complying with the stringent rules on
collecting and safeguarding user data
probably will reduce their profits from
that area, says Xiaohua Xu, a senior
analyst at Eastspring Investments.
Alibaba and other internet compa-
nies, including JD.com, are cheap
enough to attract value investors. But
volatility is likely, with investors recal-
ibrating growth expectations as Bei-
jing rolls out new rules, and reviews
past deals. In addition, widely held
U.S.-listed Chinese stocks, including
Alibaba, could become proxies for
investors’ China angst.
Despite the yellow flags, investors
have reason to keep China in the mix.
“If you are buying growth, the world
has twin engines: the U.S. and
China,” says Jason Hsu, chairman and
chief investment officer of asset man-
ager Rayliant Global Advisors and
co-founder of Research Affiliates.
But, he adds, the U.S. is more expen-
sive. “And whenever there is risk—
andtheworldseesChinaasrisky,
with this deepening that bias—that
means opportunity.”B
“This is a regulatory minefield, and those who expose
themselves to the sector are taking on a lot of volatility.”
Arthur Kroeber, head of research, Gavekal Research
complex. The S&P Dow Jones Indices
and FTSE Russell decided this month
to boot more than 20 Shanghai- and
Shenzhen-listed concerns affected by
the order.
Other companies could also be
banned and face similar fallout, with
Reuters reporting on July 9 that the
Biden administration is considering
adding more Chinese entities to the
banned list over alleged human rights
abuses in Xinjiang.
As investing in China
gets more complicated,
the case builds for inves-
tors to choose a fund
manager who can navi-
gate these complexities
and invest locally. Failure
to do so could be costly.
The iShares MSCI China A ETF
(CNYA) is up 3% over the past three
months, while the Invesco Golden
Dragon China ETF (PGJ), which fo-
cuses on U.S.-listed Chinese compa-
nies, is down 14% in the same span.
“Regulation is here to stay. Investors
will just have to get used to this,” says
Tiffany Hsiao, a veteran China investor
who is a portfolio manager on Artisan’s
China Post-Venture strategy. “This is
capitalism with Chinese characteris-
tics. China is obviously still a Commu-
nist state. It embraces capitalism to
drive innovation and improve produc-
tivity, but it’s important for companies
that do very well to give back to soci-
ety—and Chinese regulators will re-
mind you of that.”
As a result, she says, investors
must move beyond the widely held
internet titans to find stocks that
could benefit from the regulatory
scrutiny that the giants face. Veteran
investors are stressing selectivity,
searching in local markets for compa-
nies that are outside the crossfire.
“A company can have great funda-
mentals and interesting opportunities,
but get blindsided by government ac-
tion, which is increasingly active,” says
David Semple, manager of the VanEck
Emerging Markets fund (GBFAX).
“You need a higher degree of convic-
tion than normal to be involved.”
Semple is gravitating toward com-
panies he’s familiar with, in sectors
that could get hit by regulation, but
with less impact than investors think.
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