Stocktake: Investors reminded of risk of investing in China

Chinese stocks entered a bear market last week as investors took fright after regulators effectively banned the country’s $100 billion private tutoring industry.

Though unexpectedly severe, the restrictions didn't come out of the blue. China has been flexing its regulatory muscles for some time, particularly in the tech sector, where shares have plunged since February's peak.

That sell-off has gathered pace. Hong Kong’s Hang Seng index last week suffered its biggest two-day decline since the global financial crisis. So did the Nasdaq Golden Dragon China Index, which consists of China’s biggest US-listed companies.

Emerging markets, too, are affected. China accounts for 38 per cent of the MSCI Emerging Markets index, which last week hit seven-month lows. Already cheap, EM stocks now trade on just 13 times estimated earnings and are well below their average relative to developed markets.

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Cheap can get cheaper, however. Further pressure from regulators will likely weigh on Chinese stocks over the next six to 12 months, says BCA Research. Similarly, market strategist Jeroen Blokland says investors have been reminded that China remains a centrally-planned economy; a higher risk premium is warranted.