Baillie Gifford China fund says crackdown ‘sensible’

The £265 million Baillie Gifford China Growth Trust plc has described Beijing’s crackdown on internet companies as “remarkably sensible.”

The Baillie Gifford fund said the market has largely taken recent regulatory moves in Beijing “as an attack on the private sector” but that the China Growth Trust disagrees and “would note that the vast majority of regulation in the internet space has been remarkably sensible.”

Amid China’s crackdown, the closed-end fund reported its net asset value per share (NAV) fell 14.2% in the six months to July 31 and its share price fell 21%.

“The last six months has been a volatile period for Chinese growth equities …” said the investment trust.

We saw a marked sell-off in US listed Chinese stocks, including Yatsen, KE Holdings and Bilibili …

“Positive contributors to performance included CATL, China’s leading battery manufacturer, and Li Ning, a leading domestic sportswear manufacturer …

Over the period, we have made a number of investments in companies exposed to China’s green transition and to its industrial upgrading, including Longi Green Energy.”

At the end of June 2020, Edinburgh-based Baillie Gifford had about £45 billion invested in Chinese public and private companies.

Baillie Gifford had total assets under management and advice of £352 billion as at June 30, 2021.

Baillie Gifford China Growth Trust has a portfolio of 63 securities.

On the Beijing regulation, the China Growth Trust said: “Over the past two years we have seen increased regulation in the ‘new mountains’ of healthcare, education and property.

“This regulation has sought to reduce the principal costs associated with child rearing and the barriers to consumption growth.

“The State Council’s ‘Double Reduce Policy’ in the education sector (where the company has no exposure) is the most severe example of increased regulation.

“In response to inappropriate advertising by education companies, the government has effectively forced a wholesale restructuring of these businesses resulting in a significant cooling of sentiment towards China.

“This cooling of sentiment has also affected valuations of the big internet platforms.

“Here, the government continues to work through anti-monopoly probes at a number of these businesses whilst trying to tackle what it terms the ‘disorderly expansion of capital’.

“The market has largely taken these regulatory moves as an attack on the private sector.

“We disagree and would note that the vast majority of regulation in the internet space has been remarkably sensible.

“Weeding out practices such as forced supply exclusivity and differential pricing is a positive for the companies we own.

“It encourages them to double down on what they do best i.e. building platforms that create significant value for all stakeholders.

“As such, we remain happy to own companies such as Alibaba and Tencent at modest overweight positions.

“We continue to believe that, on balance, Alibaba’s business is a strong force for good within Chinese society and therefore likely to continue growing over the next decade.

“Its ecommerce platform has created millions of jobs within China and continues to bring goods and services to the poorest of consumers.

“With ecommerce penetration below 30%, we think the growth opportunity and returns for shareholders remain sizeable, particularly given the current valuation.

“Tencent’s social media platform, WeChat, remains the de-facto app via which almost all Chinese consumers organise their lives and via which Chinese corporates increasingly connect with their customers, suppliers and other stakeholders.

“Comparisons with Facebook do not do this business justice.

“Whilst the market obsesses over regulation which affects less than 10% of Tencent’s business (namely restrictions on gaming time spent by under 18s), our attention lies elsewhere.

“Outwith the internet space, the government continues to show support for sectors which will be key for China’s next decade of growth, namely, advanced manufacturing, industrial upgrading and the renewables industry, all of which present sizeable opportunities for long term growth investors.

“It is here that we are increasingly focusing our investment research.”