China's crackdown is a boost for ESG. Really.

FOR investors sent scurrying for the exits in recent weeks and months by regulatory actions in mainland China, the temptation is to view events through the lens of political risk, and conclude that investing in China is off-limits except for those with a high risk tolerance.

Viewed through this lens, the past year has been marked by several regulatory crackdowns and share price corrections, especially those afflicting technology giants. Alibaba was hit by anti-monopoly findings. Ant Financial was forced into a reorganisation. Didi Chuxing was confronted by data security demands. Capital markets panicked, sending China's science and technology stocks down sharply.

The playing field for the private education sector is being redesigned, and most recently, the announcement of "common prosperity plans" and curbing high profits and incomes has left investors confused. Previously unchallenged risk-on attitudes towards Chinese equity have been dampened by uncertainty at best and pessimism at worst.

However, investors should be looking through a different lens - the Chinese government's lens, which is effectively showing their blueprint for ESG (environmental, social and governance). What they should be seeing is changes in response to a well-flagged government shift to address the "S" in ESG, "Chinese-style".

China has in the past made huge economic strides, and huge profits. But this has come at the expense of huge social costs, which is rippling through a greater income gap and rising cost of living. For example, what emerged after a period of rapid growth and expansion in the technology industry was a "winner takes all" approach, which created extremely high barriers to entry, stifling and suffocating small and medium enterprises.

The era of online traffic supremacy and platforms chasing ever cheaper and more convenient services has resulted in jobs being sacrificed and intensified social divisions. Given that the ultimate objective of the Chinese government is to treat all 1.4 billion people of its population equally, although impossible in reality, they must continue in this endeavour.

Western observers criticise the changes as anti-capitalist. They are not. The new regulations are in response to these social issues and to try to manage growing inequalities. The introduction of a series of regulatory measures is demonstrating the government's determination to take on company managers on matters of fair competition, responsibility for products made, and social benefits accrued.

Protecting the overall interest of society is the overarching principle. China is not that different from other markets on matters of corporate social responsibility (CSR). Focusing on employees and the community, on supporting needs in education or to alleviate poverty - these CSR issues are similarly discussed when formulating ESG policy in Western markets.

There are some differences, naturally. Europe is moving towards very strict requirements in areas such as green financing. Asset managers and asset owners need to comply or explain. Such is not yet the case in China. China is at a different level of economic development, with different institutional oversight.

TAKE A CALM VIEW

One area that cannot be defended is the uncertainty caused, which we all know markets hate. It is fair to point out that investors would probably be less nervous and markets less volatile if the implications of these regulatory actions provided more top-down clarity, and we had more guidance from Chinese regulators.

Even though defining regulations and avoiding unintended consequences is easier said than done, the timeliness of information dissemination could definitely improve, with more channels opened up and international reach. While there are cultural differences, learning from their counterparts in other international institutions, or even past experiences would help avoid wrong-footing the investment community.

Opening up a dialogue with all parties to collect feedback and ideas in the form of consultation before the policy is issued, would give markets more time to digest and understand policy, cause less disruption and importantly, protect the entrepreneurial spirit that China still needs to thrive and grow.

However, ultimately the repeated introduction of multiple measures shows that the Chinese government is still adjusting its supervision in the face of the unknown, as they are still learning and writing the rule book as they go.

The investment challenge has arisen because investors who previously made exceptional gains following thematic paths to their portfolio construction have been unable to cope with the new environment.

This is not a reason to avoid the Chinese market. The smart response is for investors to focus on bottom-up evaluation, and inject social and governance elements into the investment analysis to find valuable companies with low risk costs.

In the face of an increasingly severe regulatory environment, if social costs are not included in a company's business decision-making, the company may even lose its operational legitimacy.

Applying a passive investment strategy does not work when an entire sector is subject to government scrutiny. When new education policies were applied, the online education giants listed in the United States shed more than US$19.1 billion in a single day (July 23). Investors need to be more cautious in identifying the operating risks of technology and emerging industries, assessing the company's sustainable development capabilities, and urging companies to establish a sustainable development framework to obtain healthy business growth.

That leaves a massive opportunity for active investors.

China is still a high-growth and low-price-to-earnings ratio market. There is significant potential in its emerging industries and innovative technologies. Take a calm view to the short-term price mismatch caused by political factors, return to bottom-up fundamental analysis, and choose regional or industry-based companies that have both economic and social value advantages.

• The writer is founder and CIO of Chartwell Capital Limited, a Hong Kong-based investment management provider. He is also author of The Value Investors: Lessons from the World's Top Fund Managers.