Global Economy: Can China’s New Regulatory Drive Actually Boost Emerging Markets?

As China continues to enact new laws that deepen the state’s oversight over its largest businesses, global investors are asking whether the new laws can actually benefit other emerging markets. This comes as the Chinese government has continued to rattle markets in recent weeks with regulatory crackdowns aimed at the country’s technology titans.

According to Reuters, up to half a trillion dollars in market value at exchanges in Hong Kong and mainland China were wiped out in only a week. Other economic sectors from construction to cryptocurrencies have also fallen into Beijing’s cross-hairs, after warnings and court rulings were taken against players in both areas.

In response to this blitz of regulatory action, the Chinese yuan experienced some of its largest losses in value since the global spread of the COVID-19 pandemic in March 2020. For China, this new campaign appears to adhere to a plan outlined by President Xi Jinping to support “common prosperity” over the “excessive income” of a wealthy elite.

To some market observers, this has cooled their enthusiasm for investing in China, but others see it as an opportunity to explore different options. In particular, they are looking at markets where commodity prices are likely to rise to fuel a global economic recovery that would include China's.

While the COVID-19-induced recession has exposed how economic disruption in China can spill over into global markets, Beijing’s recent interventions do not appear to carry that same risk.

Caesar Massry, a managing director for emerging markets at Goldman Sachs, said in a research note cited by Barron's that so long as risk remained confined to domestic regulations over wider market concerns, any spillover will be limited.

Bank of America strategist Jure Jeric also posited that emerging markets can actually see gains if Chinese stocks "cough" in response to unexpected regulatory changes.

Reshma Kapadia wrote in Barron's on Monday that the divergence of views over the consequences of China’s new policies could reflect the difficulties in grouping emerging markets together in one bloc. She noted that this moment provides “reason to think carefully about how investors are tapping emerging markets,” especially through EM indexes that are still heavily exposed to Chinese markets.