China’s not losing importance in the eyes of investors, despite the world’s second-largest economy’s slump this year. The country remains one of the world’s most-prized emerging economies, and even Hong Kong’s Hang Seng has picked up the pace recently for investors after a horrid start to the year. Over the last five days, the Hang Seng gained nearly 2.3%, although the index is still in the red for the year so far.
China’s government is trying to stave off a prolonged economic slump with mixed success so far, but this emerging market star still faces plenty of challenges ahead — starting with its heightened regulations, and investigations into numerous companies and industries. Is China ready to perform for investors who are tired of waiting patiently for gains?
China’s shaky foundation
China’s certainly receiving all the attention these days, and it won a small victory this week when the Chinese yuan became the ninth most-traded currency in the world, according to the ranking from the Bank of International Settlements. There’s an upside and a downside to this: While the rise of China’s yuan, and liberalization from Beijing currency regulators, has made it easier for domestic Chinese firms to exchange currency, some of the increased trade has come as cash has flowed out of China in the country’s credit crunch.
Don’t accuse Beijing of sitting still while the latter has happened, however. Government regulators have intentionally refused to resort to stimulus-style moves in order to help weed out corruption and poorly run businesses, a long-term move that’s positive for both the economy, as a whole, and China’s business climate. This week, Beijing opened the door to allow a few chosen publicly listed firms to recapitalize in order to ease that crunch, and to reinvigorate domestic investment.
Yet, China’s investment climate isn’t anywhere near the standards of leading developed economies — particularly in regards to both local government corruption and regulation of foreign multinational firms that investors have paid especially close attention to lately. Both have come together with GlaxoSmithKline plc (ADR) (NYSE:GSK)‘s ongoing investigation by country authorities. Chinese police have accused the company’s China segment of engineering corruption; but regardless of the details, the situation’s making it tough for GlaxoSmithKline plc (ADR) (NYSE:GSK) to even stick around in China altogether.
Sources cited by The Daily Telegraph state that GlaxoSmithKline plc (ADR) (NYSE:GSK)’s harboring reservations over its stay in the country as the investigation intensifies. It seems almost unthinkable that GlaxoSmithKline plc (ADR) (NYSE:GSK) would abandon China entirely — leaving a pharmaceutical market expected to eclipse $300 billion by 2020 as the world’s second-largest market would be disastrous. But GlaxoSmithKline plc (ADR) (NYSE:GSK)’s woes in the country have to give investors pause when considering investing in a company betting heavily on China for growth. Chinese regulators ordered a number of recalls in the auto industry last month, and while that’s been one of the biggest investor boons during the economy’s slowdown, the tightening vice of regulation means that investors need to keep a close eye on China.
Some Chinese firms, however, still offer plenty of potential to heady investors. Rising telecom giant China Mobile Ltd. (ADR) (NYSE:CHL) hasn’t had a good year, with shares down more than 7% in 2013 — but that didn’t stop the stock from picking up more than 3% last week alone. China Mobile Ltd. (ADR) (NYSE:CHL)’s on the cusp of a new wave of middle class, urban consumers in the country, and it won even bigger news on Friday when reports emerged that Apple Inc. (NASDAQ:AAPL)‘s newest iPhone will become available for China Mobile Ltd. (ADR) (NYSE:CHL).
It’s a huge win for Apple Inc. (NASDAQ:AAPL), naturally, considering that China Mobile Ltd. (ADR) (NYSE:CHL) boasts more than 700-million subscribers. Apple’s also seen Chinese revenue fall recently — sales in the Greater China region fell 14% in the fiscal third quarter. For China Mobile Ltd. (ADR) (NYSE:CHL), however, it’s an equally giant win as the company looks to stave off competitors that have already embraced Apple products in the past, and are now advancing on the company’s dominant market share.
For investors of either company, it’s a great deal, and an example of the upside that China still brings.
The article Will China’s Corporate Crackdown Scare Off Investors? originally appeared on Fool.com and is written by Dan Carroll.
Fool contributor Dan Carroll has no position in any stocks mentioned. The Motley Fool recommends Apple. The Motley Fool owns shares of Apple and China Mobile.
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