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Please note that tax, investment, pension and ISA rules can change and the information and any views contained in this article may now be inaccurate.

Three things the Franklin Templeton Emerging Markets Equity team are thinking about today

1. China is in the middle of a tightening regulatory cycle, implementing anti-monopoly, data security and industry-specific regulations. The underlying thread that ties the intense regulatory activities across many industries lies in Beijing’s determination to develop China into a ‘modernized socialist economy’, including objectives of common prosperity, green development and independence in key technologies and industries. Geopolitics also plays a key role. It is critical to evaluate the alignment of companies with China’s long-term strategic goals. Regulatory cycles are not uncommon in China—policy and regulatory scrutiny should be seen as ongoing risks when it comes to investing in China, to be carefully monitored and integrated in company research and portfolio management. We don’t believe government regulatory efforts aim to curtail digital sector growth as a whole.

2. In China’s education sector, we believe that current regulatory scrutiny on the AST (after school tutoring) industry is driven by the government’s desire to reduce the educational burden on children and parents, in the context of government concerns regarding the country’s slowing birth rate. Key stipulations in the new policy included that AST must be ‘not-for-profit’ entities, in which case all profits and cashflows must be reinvested into the business and sponsors (shareholders) cannot lay claim to profits, foreign investors can no longer invest in AST via the Variable Interest Entity structure, which could likely result in company de-listings, and AST institutions are not allowed to use capital markets for financing.

3. ͏͏͏Although concerns of widening regulatory changes in China’s internet sector weighed heavily on stock prices in July, more recent efforts by the securities regulator to ease market concerns offered investors some comfort. Similar to many regulators globally and as seen in the past in China, we believe that recent actions serve to ensure that private enterprises remain aligned with the government on issues such as market competition, product safety, social policies, public good and national security. Over the medium term, we see the larger challenge to China’s internet sector being rising competition, which will require from investors greater emphasis on fundamentals and stock selection.

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