“Is China still investable?” That’s the question that is being debated among global investors in both private and public markets. Not long after China launched an investigation into Didi’s IPO — followed by a policy overhaul of its after-school education industry — the U.S.-listed stocks of Chinese companies went into a tailspin that wiped out more than $1.5 trillion from their combined market capitalization within less than a year.
Moreover, the companies are at risk of being forced off American stock exchanges due to a longstanding dispute over the U.S. Public Company Accounting Oversight Board’s (PCAOB) access to the firms’ complete audit work papers. In recent weeks, Beijing has signaled that it is willing to reach a deal with the PCAOB to prevent such delistings. So, it is not too late to discuss the “investability” question and its underlying assumptions.
Going into 2021, my tech-focused growth fund in China was on track for one Hong Kong and five U.S. IPOs, but only one actually came to pass. My remaining investees suspended their American IPO plans, and are now anxiously awaiting a green light to resume. Within my portfolio, the liquidity value of my two listees has evaporated by 90%. Believe me — we’re all in the same boat, weathering the same storm.
So why did Beijing suddenly tighten regulatory oversight in 2021?
Deteriorating Sino-U.S. relations and foreign tech dependency have galvanized China’s desire to build a self-reliant economy supported by deep tech. The dwindling workforce and record low birthrate have compelled action to head off an escalating demographic crisis. Finally, slowing GDP growth has forced a reset of priorities on social equality for small and midsize enterprises and working-class employees, addressing prohibitive pricing in the “Three Big Mountains” of property, education, and health care.
Beijing has long prioritized efficiency over equality to support the growth of the tech industry, exercising significant leniency when faced with noncompliant — and often illegal — business practices. Didi is a prime example.
In China, taxi drivers are legally compelled to carry local commercial driving permits. Violations subject both drivers and their platform employers to prosecution (See the Risk Factors listed on page 26 of Didi’s prospectus). In order to protect passengers’ safety, local governments in China cracked down on illegal taxi practices — except in the case of Didi. As more investors grew increasingly reckless and complacent about regulation, Beijing decided compliance could no longer be neglected.
Tight regulation is the new normal — laissez faire is history
Questions on China’s investability implicitly assume that there is nothing wrong with existing investment approaches. However, China investment’s paradigm has been radically transformed, and many established frameworks based purely on industry potential and corporate development have become untenable moving forward.
It’s clear that investing in China requires attentive alignment with the Chinese Communist Party’s long-term vision. Up-to-date policy and regulation acumen is now an essential tool and must be applied to any future investment in this market.
In short, faced with this new investment landscape, investors are the ones who must lead the way.
Even in the U.S., there are plenty of parallels that we can observe. Over the past decade, the media industry has seen content move en masse to digital domains. Decentralized media is thriving, with websites such as The Information, The Wire China and Punchbowl News displacing the readership of much larger legacy platforms. Netflix’s streaming dominance has spawned competitors to roll out Disney+, Peacock, Paramount Plus, etc.
Savvy investors smell change and make adjustments, exemplifying vigilance, judgment and courage.
Fear not — China’s economy will continue to grow
In March, the Belfer Center at Harvard Kennedy School published a report, The Great Economic Rivalry: China vs the U.S., which detailed China’s path to becoming the world’s No. 1 economy in terms of GDP in the near future. According to the IMF, China’s economy was already 115% of the size of the U.S.’ in terms of the purchasing power parity in 2020.
According to the Belfer Center’s report, from 2013 to 2016, the most frequent adjective used by the elite press to describe China’s economy was “slowdown” whereas it was “recovering” for the U.S. economy. Perhaps a less biased measure is China’s 6% average annual growth versus the U.S.’ 2% over the same period.
China’s sustained growth will surely yield healthy returns. This is why even in the wake of sweeping regulatory moves, institutional investors such as the Canadian Pension Plan Investment Board — which kept its 2025 allocation target for China at 20% — have yet to change.
Benefiting from China’s growth can be achieved, but the proper adjustments have to be made.
Some asset allocators have overhauled their fund manager requirements in China, filtering for those who deeply understand Beijing as a core condition before considering any other competencies. The key challenge is not finding those who are “new economy” savvy, but identifying the few who are able to decipher signals between strategic policymaking, latent regulations and functional jurisdictions.
Simply put, asset allocators must find Chinese fund managers who are able to preemptively avoid policy pitfalls. At my fund, we subscribe to a Policy Pitfall Prevention investment axiom.
During the second half of March, I spoke to more than 500 institutional investors through various investment bank webinars on U.S.-listed Chinese stocks and regulations. Without exception, I was asked to address China’s investability in every single session.
My advice: “Is China still investable?” is not the question any of us should be asking.
Rather, we should ask if global asset allocators have the vigilance to adapt to China’s changes, the willingness to reconfigure their investment methodology, and the capability to discern Chinese fund managers with true structural expertise from those who only offer industry-based proficiency.
This is China’s “Catch-22” — global asset allocators can’t get timely China insights without a policy savvy investment partner, but also can’t find the right partner without first having the insights to determine whom to select.
Liao Ming is a founding partner of Prospect Avenue Capital Co. Ltd., a growth capital fund focusing on China’s technology sector.
The views and opinions expressed in this opinion section are those of the authors and do not necessarily reflect the editorial positions of Caixin Media.
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