It’s only been a month since my last note, and I’m already missing the days when US President Donald Trump’s craziest antic was to threaten to annex Greenland. US assets and policy uncertainty are post-exceptionalism. So where to invest now? My previous notes were pro-emerging markets ex-China.
In October 2024 I wrote of my disdain for Chinese assets because of poor earnings and shareholder unfriendliness from the Chinese Communist Party. On paper, China’s Western-like corporate law framework, where listed companies have boards, shareholders vote, financial statements and directors’ duties are published, was a fig leaf for the state-focused behaviour of many companies.
Many Chinese listings are state-owned, state-controlled or just “leaned-on”. Management careers depended more on political obeisance than shareholder returns, so Chinese listed companies prioritised strategic or political objectives over shareholder returns. Minority investors suffered — and markets noticed.
Between roughly 2012 and now, China delivered strong economic growth, yet corporate earnings flatlined, and earnings per share moved largely sideways, interrupted by shocks from regulatory tightening, the property downturn and extended Covid lockdowns. Result: share prices drifted.
Recently Beijing has begun signalling that this model needs to change, a shift driven largely by the China Securities Regulatory Commission (CSRC), the country’s main market watchdog. Through a series of policy directives and enforcement actions — often described in market commentary as sets of “measures” aimed at strengthening capital markets — regulators are pushing Chinese corporate management towards a more explicit focus on shareholder value. Given the mercurial character of Chinese regulators, we may ask: “Why would they do that?”
The reason seems to be that Beijing realised weak equity markets can become an economic problem. China is an export economy going through a supply chain transition, which requires vast savings pools. Property was a substantial savings avenue that is no longer fit for purpose. When property stops being the easy household wealth engine, Beijing has a stronger incentive to make equities look more investable and less like a casino.
Also, Chinese leadership wants capital markets to support growth, confidence and financing — not undermine them. In a new world race for technological supremacy, China wants equity markets to finance advanced manufacturing, tech upgrading and strategic industries.
When property stops being the easy household wealth engine, Beijing has a stronger incentive to make equities look more investable and less like a casino
Authorities concluded that equities were not giving investors enough back, and this is where the governance push comes in. The CSRC’s market value management guidance says listed companies should improve investment value through dividends, share buybacks, investor relations, disclosure, M&A and equity incentives. It also specifically requires certain major index constituents to establish market value management systems and long-term “below book value” companies to disclose valuation improvement plans.
Regulators are increasingly pressing profitable companies that hold large cash balances but pay nothing to shareholders to explain themselves. Firms are being encouraged (and, in some cases, informally pressured) to establish clearer dividend policies or share buyback programmes.
In state-owned enterprises, management evaluation increasingly incorporates return on equity, dividend policy and the stability of the company’s market value, linking executive careers more directly to investor outcomes.
The crackdown on abusive practices means related-party transactions and inflated financial reporting now face enforcement action. Executives involved in serious cases face personal consequences. Regulators are making delisting rules more credible, increasing pressure on persistently weak or poorly governed companies.
One visible result of the new emphasis has been a rise in dividends and share buybacks, even though earnings growth still remains patchy. Regulators hope that stronger investor returns will help rebuild confidence and channel household savings into equities rather than property — something Beijing increasingly views as important for financial stability.
What do we as investors from a democracy do about this? None of this means that China is suddenly adopting a Western model of shareholder capitalism, but the tolerance for harm to minority shareholders is narrowing. It’s important to remember we are dealing with an entity driven by pragmatism rather than ethics. Right now, this pragmatism has swung back in favour of minorities after a 15-year divergence. Chinese equities look investable because improved earnings will follow the better behaviour. I have one caveat — in terms of country risk, I vastly prefer other SE Asian options to either China or Taiwan.
Lucas is a portfolio manager at Vunani. These views are personal
