Goldman Sachs says $3.2 trillion worth of Chinese stocks at risk of further regulatory crackdown

Published Thu, Sep 16 20217:30 PM EDT

A group of Chinese listed companies totaling $3.2 trillion in market capitalization could be at risk of further regulatory crackdown by Beijing, according to an assessment by Goldman Sachs . Most of those companies are in industries such as internet, education, media and entertainment, real estate, as well as health care, the investment bank said in a report. Goldman didn't name any of the firms it deemed to be at risk. "While the scope of tightening is clearly broad-based, the fact pattern so far suggests to us that social welfare is high up on the policy agenda, and that policymakers may prioritize social fairness/stability over capital markets in areas that may be considered social necessities," the bank said. China's government has in the last few months reviewed and tightened regulations targeting big tech , after-school education companies and the property market . Those actions sent shares of affected Chinese companies plunging, including tech giants Alibaba and Tencent , and private education firm TAL Education . Beijing's regulatory crackdown has wiped out more than $1 trillion in the market capitalization of Chinese stocks, compared with their recent peak in mid-February, according to Goldman. Those losses were mostly concentrated in tech companies listed offshore, or outside mainland China, it added. How to invest Goldman said the new regulations will affect Chinese stocks in two ways: flattening the trajectory of future earnings growth and reducing their valuation. But the regulations will not severely hit the profitability of the companies, said the bank. That's due to the strong underlying demand for digital services, adaptability of the firms and the Chinese government's commitment to support the development of key technology, explained Goldman. The bank said there is still value in offshore-listed Chinese stocks. But factors such as clear communication from senior policymakers, transparency around the new regulations and "significant" actions by listed firms — such as restructuring and share buybacks — are needed to stabilize the market, said Goldman. "As such, we prefer to invest in Chinese stocks through the mainland-listed A shares market, which appear to be more insulated from further regulatory tightening risk," said the investment bank. Mainland-listed stocks also have more to gain if Chinese authorities ease fiscal or monetary policy later this year, compared with those listed offshore, added Goldman. The Wall Street giant said it favors "industries that are less subject to regulatory scrutiny and are aligned with national development objectives." That includes semiconductors, business-to-business software, renewable energy, electric vehicles and 5G networks.

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A group of Chinese listed companies totaling $3.2 trillion in market capitalization could be at risk of further regulatory crackdown by Beijing, according to an assessment by Goldman Sachs.