How Should Investors React to China’s Crackdown?

China’s high-profile regulatory curbs on private companies have done more than inflict losses on domestic and international investors. They have also raised questions about whether the Chinese market as a whole risks becoming “uninvestible” for foreign investors, what that means for other financial markets and how investors could react.

Two reasons have been cited for the Chinese government’s recent crackdown on sectors ranging from ride-hailing to private tutoring: A desire to minimize the risk of both big data abuse and adverse social effects as part of the bigger effort by the central authorities to assert stronger control on the private sector; and the government’s desire to limit reliance on Western capital at a time of recurring political tensions, particularly in China-U.S. relations. The result has been large losses for investors because of the big underperformance of Chinese markets in both absolute terms and relative to opportunities in other markets, and particularly so for Chinese technology companies listed in the U.S.