The question of “Is China still investable?” has been heatedly discussed among global investors in both private and public markets. Precisely, it was raised after the Chinese government launched an investigation into Didi’s initial public offering followed by a regulatory policy that overhauled commercial after-school tutoring into a nonprofit sector overnight.
Drastic upheavals aside, it is far more crucial to grasp the underlying logic and reasoning driving such regulatory changes. These policies are only one tranche of the sweeping regulatory moves Beijing has taken since early 2021 to address key structural challenges.
China faces an unprecedented demographic crisis—an aging population and dwindling workforce, compounded by a sharply declining birth rate. To lift the birth rate, Beijing must tackle the "Three Big Mountains" of property, education, and health care. Slowing GDP growth has pushed Beijing to reset priorities on social equality for small businesses and working-class employees, tightening regulations to curb prohibitive pricing in these three industries.
Deteriorating Sino-US relations have galvanized Beijing towards building a self-reliant, self-sustaining economy, shifting the focal point of innovation away from applications in internet to breakthroughs in deep tech.
For the tech sector in particular, tight regulation is the new normal—laissez faire is history.
In short, the China investment paradigm has radically transformed. For the tech sector in particular, tight regulation is the new normal—laissez faire is history. Thus, many established investment frameworks are untenable moving forward. Global discord on China’s investability centers on a nearly ubiquitous assumption—that there is nothing wrong with existing investment approaches. The default can become a blind spot for asset allocators and fund managers alike.
It has become markedly clear that investing in China requires adhering to policies aligned with the Chinese Communist Party’s long-term vision. It is unsound to make decisions purely based on industry trends and corporate development. Up-to-date policy and regulation acumen are now essential and must be applied to any future investment in China. Nevertheless, China’s economy will continue to grow. Healthy returns can be achieved so long as proper adjustments are made.
Some asset allocators (including LPs) 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. However, the sustained success of this task is predicated upon asset allocators themselves knowing China well enough to discern true structural expertise from industry-based proficiency.
It is risky for asset allocators to assume that fund managers understand China well due to access to specific government officials. Interior designers for NBC Studio 1A may know how the sets for The Today Show are assembled; however, only the architects of Rockefeller Plaza can explain the functionality and construction of this New York City landmark from its earliest design concept to its unseen scaffolding.
Likewise, understanding China implicitly requires knowing how the Chinese Communist Party uses its unique regime structure to manage China’s macroeconomic engine: at the top, how the Politburo and Seven Plenary Sessions establish core national interests and policy vision; in the middle, how the Central Financial and Economic Affairs Commission lead the design of every single economic policy directive; finally, at the bottom, how various ministries implement and deliver commission policies that impact the lives of billions.
Comprehensive, holistic, and nuanced policy proficiency is a core competency and should be normalized as a requirement for any fund manager operating in China. They should not only make decisions derived from composite insights between industry and government, but also serve as a bridge, channel, and educator for their global asset allocators. “Is China still investable?” is not the question we should continue asking. Rather, we should question whether global asset allocators will vigilantly adapt to the new landscape, willingly make strategy adjustments, and capably identify investment partners to navigate China’s vast, complex, ever-evolving ecosystem.