China’s asset markets: What price politics?
How should investors incorporate political risk into their view of asset markets?
This question has assumed greater importance over the last year thanks to a global pandemic that has occasionally exposed government incompetence, an escalation of the tit-for-tat trade war between China and the US and a chaotic transition period between presidents Donald Trump and Joe Biden.
Investors in Chinese equities, in particular, have myriad risks to consider.
The most obvious are the moves against Chinese companies by the US government, or by its regulators.
The inclusion of China National Offshore Oil Corp and Xiaomi on the US sanctions list in January is one example. The New York Stock Exchange’s decision to delist Chinese telecommunications companies is another.
The fact that the NYSE changed its mind twice on the delistings shows just how unpredictable regulatory actions can be.
There are also risks to Chinese companies from their own government.
The high-profile cancellation of Ant Financial’s $34 billion listing in November, a decision made after the deal had been priced, shows that nothing can be taken for granted.
This all raises difficult questions for equity investors. This publication has previously extolled the virtues of intrinsic models of valuation, which use cash flows, interest rates and estimated risk premiums to guess future prices.