China’s Regulatory Crackdown Spooks Investors

China’s Education Sector in the Spotlight

Chinese stocks declined Monday after the government confirmed it is adding education companies to the list of industries it is keeping in check from a regulatory standpoint. Over the weekend Beijing said it will prohibit certain tutoring firms from profiting off their services. It was among the more assertive steps Chinese regulators have taken to rein in an industry it blames for exacerbating inequality and increasing financial risks for the country.

The moves spooked investors, who worry more regulatory crackdowns are coming. Strategists are now guessing where Chinese regulators will focus next, and are also wondering if they factored in enough regulatory risk when assessing the valuation of existing publicly traded companies. Among the declining stocks were Tencent (TCEHY), Meituan (MPNGY), Alibaba (BABA), Tal Education (TAL), and Koolearn Technology.

Tech Companies Crackdown Intensifies

The education sector was not the only industry to feel pressure. On Monday China’s Ministry of Industry and Information Technology ordered the country’s internet giants to fix certain anticompetitive practices and data security threats. The companies have six months to meet the new standards.

Beijing said the new rules are a result of the sector disrupting market order, mishandling user data, and violating other regulations. Regulators did not list specific tech companies but it is the same criticism that has been lodged against Tencent and Alibaba in recent weeks. With yet another Chinese regulator and government body looking at the tech sector, it added to the selloff in Chinese stocks.

Traders in Two Camps

On Monday the selloff in Chinese stocks was broad-based, with all 10 industries in the MSCI China Index declining the most in about 14 months. It is a stark difference from the previous trading day. On Friday the index was close to reaching a new all-time high.

Investors are in two camps when it comes to the selloff in Chinese stocks: some think it represents a buying opportunity, while others are concerned about more crackdowns. They point to increased regulation of internet companies, commodities producers, and the real estate sector.

With the Chinese government clamping down on various industries, particularly ones which get foreign attention and investment, Wall Street is spooked. Whether fears last largely depends on the fallout from the regulatory crackdown on Monday and in recent weeks.

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