It is also important to consider Beijing’s motivations here, with concerns over social inequality (reforms relate to privately funded after-school tutoring) and a declining birth rate (based on the theory that education costs act as a deterrent) viewed as likely drivers.
4: Do your homework on Chinese companies
Investors should also expect the affected companies to respond quickly to the changing regulatory landscape – in fact a few of the stronger players in the space have demonstrated an adroit ability to do just this in the past. In recent episodes, companies have been quick to embrace proposed changes to show their willingness to comply with and adhere to the changing regulatory landscape – this has tended to result in day-to-day implementation of policy that has ended up being less draconian than first thought.
Equally, the sector at the heart of the opinion paper (the K9 after-school tuition sector) has been under regulatory scrutiny for the last two to three years now, with many of the attendant risks well noted in offering prospectuses. So as ever, prudent investors should heed the motto of caveat emptor as they make their investment decisions.
We have no direct exposure to China’s private education sector in our corporate debt strategies.
5: Focus on fundamentals and keep an eye out for opportunities
The policy shift will have different implications for equity markets than for fixed income investors – most of the bond issuers in this space are investment-grade rated and have robust balance sheets that should be able to absorb shocks.
It is also important for investors to differentiate the impact these policy changes might have on the equity narrative compared with the fixed income narrative of the affected companies. Policies that might have an outsized impact on growth or profits could have a meaningful impact on the prospects for equity valuations, but could yet leave the company with a resilient credit profile that is now more attractively priced.
That said, we would not be surprised to see further negative spill-over into China’s corporate bond market as investors digest these recent developments. Against this backdrop, we will continue to do what we always do – even when headlines cause a sense of panic in segments of the market: carefully assess risk and underlying company fundamentals while looking for mispricing opportunities arising from any market dislocation.
