The sell-off in various Chinese stocks has been one of the big investment stories of the year. The threat of regulatory interference from China was quietly bubbling away as 2021 began, but few people thought it would blow up to become such a major force on the markets.

China-related products were among the most sold investment trusts by AJ Bell Youinvest customers in August, illustrating how many investors have been spooked by Beijing getting tough with regulations in various sectors. They include Fidelity China Special Situations (FCSS), JPMorgan China Growth & Income (JCGI) and Pacific Horizon (PHI).

Only Fidelity China Special Situations appeared in the most bought investment trusts during August, suggesting that investors are still cautious towards the geographic region.

You can also see caution on a wider basis in the performance of the Hong Kong Hang Seng index. It has tried twice since late July to claw back losses but hasn’t been able to sustain any meaningful recovery.

Some of the key Chinese names to have suffered include internet groups Alibaba and Tencent, and search engine Baidu which has nearly halved in value in the past six months.

There have been fears that China has launched an attack on capitalism and wants to turn private sector companies into state-owned enterprises. Ultimately, will Beijing seek to take more control by holding the puppet strings?

The key regulatory focus has been on data privacy, companies having market positions that are too dominant and the structure of Chinese companies listed on foreign stock exchanges, such as New York. The first two points are relevant to a company’s growth prospects and the last is relevant to Western investors’ ability to own shares in these businesses.

The risks are certainly growing, and it seems that profits could come under pressure if companies must navigate more red tape.

Nervous investors may wish to reduce Chinese exposure, even if some damage has already been done to their portfolio, as all signs suggest further disruption on the regulatory front this year.

Mark Martyrossian, chief executive at Aubrey Capital Management, says investors have previously experienced troubles in China but share prices bounced back as business fundamentals returned to the fore. He also says selling the likes of Facebook, Apple and Alphabet would have been a mistake when the US regulator came knocking, as shares prices recovered.

It’s easy to make such comments in hindsight, but an investor would have to be very brave to go all-in with China-related stocks and funds at present.

Making an investment decision requires looking at both the good and bad points, and in this author’s view the balance is not currently in favour of buying.

There is no point fighting negative market sentiment when there are still so many unknowns. It’s better to wait and let the dust settle before putting more money into this area. There is a lot to debate with China at present and Shares will continue to update readers on events.

DISCLAIMER: AJ Bell is the owner of Shares magazine. The author (Daniel Coatsworth) and article editor (Tom Sieber) own shares in AJ Bell.

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