Ramaphosa and his allies dream of replicating the China Model. That’s a scary thought for two big reasons. The first is brilliantly articulated in the WSJ piece republished below. The second was shared by the new IRR head John Endres in our interview this week – in a Constitutional Democracy, the application of Beijing’s approach to economic policy ushers in the worst of all worlds. There are none so blind as those who will not see. – Alec Hogg
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Regulators are pushing companies to do more to serve the Communist Party’s goals, rattling markets.
By Jing Yang, Keith Zhai and Quentin Web of The Wall Street Journal
In recent months, China has blown up what would have been the world’s largest initial public offering, launched probes into some of its biggest technology companies, and wiped out more than $1 trillion in market value while investors scramble for cover.
There are many signs it isn’t over yet.
Investors, analysts and company executives believe the government is just getting started in its push to realign the relationship between private business and the state, with a goal of ensuring companies do more to serve the Communist Party’s economic, social and national-security concerns.
The government’s far-reaching ambitions under Xi Jinping promise serious and often unpredictable implications for business, these people say—and keeping foreign investors happy isn’t a priority.
That means more risk for people who have plowed billions of dollars into China’s fast-growing companies hoping to capitalize on the only tech industry that can rival Silicon Valley.
“This round of governance storm has not yet reached the stage of calming down,” said Fang Xingdong, a former internet entrepreneur and founder of Beijing-based think tank China Labs. China’s biggest private companies have benefited from years of lax regulatory oversight, he said, and it will take a long time for authorities to address it.
Since November, Chinese regulators have taken more than 50 actual or reported actions spanning antitrust, finance, data security and social equality, a July 29 roundup by Goldman Sachs Group Inc. shows—more than one move a week.
Among the moves were scuttling Ant Group Co.’s blockbuster listing; fining sister company Alibaba Group Holding Ltd. a record $2.8 billion for antitrust failings; and blocking a Tencent Holdings Ltd. -backed merger.
If anything, the pace intensified in July, which saw the opening of a cybersecurity review into Didi Global Inc., days after the ride-hailing firm went public in New York, and an abrupt declaration that after-school tuition should become a not-for-profit industry. Other targeted industries include real estate and food delivery.
In a private meeting with representatives of global banks and investment firms on July 28, the vice chairman of the China Securities Regulatory Commission, Fang Xinghai, told attendees that recent crackdowns were meant to fix industry-specific problems and that China has no intention of decoupling from global markets, according to people familiar with the discussions.
Some financiers who attended said they weren’t persuaded. They noted that Beijing had effectively torpedoed a multibillion-dollar industry—after-school tutoring—with a single administrative order.
The CSRC and the State Administration for Market Regulation, which has a broad remit ranging from antitrust to food delivery, didn’t respond to faxed requests for comment.
Chinese authorities have sent mixed signals about whether they intend to keep going.
On Tuesday, a Chinese newspaper affiliated with state news agency Xinhua criticized online gaming as “opium for the mind.” The article raised concerns that Tencent’s popular games could be swept up into a broader regulatory crackdown. In a sign of how fragile investor sentiment has become, that was enough to trigger a market selloff. The article later disappeared before re-emerging in a toned-down form, without the “opium for the mind” line.
The same day, the Communist Party’s top propaganda department, which has control over what books, movies and games are released, issued a new rule to limit the role of algorithms in content distribution, a move that could rein in the growth of companies such as ByteDance Ltd. and Tencent.
The department didn’t respond to a request for comment.
The government has offered few details about the various investigations it now has under way, or when they will be completed. In some cases, detailed policies have yet to be implemented.
Authorities have been combing records and questioning data collection by some companies, according to employees of technology companies. Officials have downloaded contracts and financial records, and collected emails and internal communications.
They have also told some companies they should cut their market share to meet antimonopoly requirements.
Particularly worrisome to some investors and company officials is that regulators themselves don’t seem to know where it all ends.
In late July, regulators put forward new guidelines requiring companies to provide basic benefits to delivery drivers, such as a minimum wage and insurance coverage. When some companies contacted China’s relevant regulator seeking more details, the regulator gave little guidance and said it is also trying to figure it out, according to one of the people.
China has a history of engineering sudden policy changes according to long-term goals. Sometimes the consequences are severe. In December 2020, a top Chinese banking regulator said the peer-lending industry had been “zeroed out” following a crackdown starting in 2018.
The latest initiatives are motivated by much bigger ambitions, with a heightened sense of urgency for Beijing to act.
The country has seen an export-led rebound from the Covid-19 pandemic, leaving leaders more room to fine-tune the economy and risk upsetting foreign investors. Gross domestic product grew 12.7% in the first half of this year, putting the country firmly on target to beat its full-year target of 6%.
Meanwhile, tensions with the U.S. have remained high under President Biden. That has sharpened China’s focus on security and self-sufficiency.
Against that backdrop, Mr. Xi is moving assertively to address social, economic and national-security priorities that in many cases have lingered for years.
“It is not the first time that there’s a U-turn in China’s regulatory framework,” said Morgan Stanley Chief China Economist Robin Xing. A difference this time, he said, is that U.S.-listed, data-rich companies are a target, “making the impact of the reset more palpable for global investors.” Based on earlier overhauls of Chinese regulation, Mr. Xing estimates it will take a year or two for more clarity to emerge on China’s new framework.
China’s to-do list is long. Among other things, authorities want to tackle runaway education, healthcare and housing costs, all of which could make it harder to arrest the country’s decline in population growth.
China last year said it had succeeded in eradicating extreme poverty, achieving a decades long goal of becoming what it called a “moderately prosperous society.” Its priority has since shifted to addressing a persistent gap between rich and poor. Concern over the issue helps explain China’s stepped up attempts to improve competition in e-commerce and other markets, and to secure better deals for gig workers such as the food-delivery drivers who work for online giants such as Meituan.
In tech, China’s concerns to some extent mirror those of Western governments about market power, data usage, and other problems. Beijing also saw the sector’s power as a challenge to its own, factoring into its crackdown.
For investors, understanding the rationales only goes so far, said Logan Wright, director of China markets research at Rhodium Group.
“That doesn’t really change the perception that there may be more regulatory risk on the horizon. And that this isn’t really finished,” he said.
There are natural limits to what the securities regulator can do to reassure investors about China’s plans, said Lyndon Chao, head of equities at the Asia Securities Industry and Financial Markets Association, a trade group whose members include banks, brokerages and asset managers.
“These are policies at a much higher level, driven by matters such as national security and common prosperity. The CSRC can try to mollify the market with assurances but these national policies are beyond their control,” he said.
Still, Mr. Chao added: “I do think the top leadership cares about foreign investors, because in the heightened competition now between the U.S. and China they know they need to make friends and influence people.”
Market concerns have also been fanned by worries about companies being delisted from U.S. exchanges, or about the long-term viability of legal structures used by many Chinese groups.
Under a 2020 law passed by then-President Donald Trump, Chinese companies could eventually be kicked off U.S. exchanges if they won’t share audit working papers with U.S. regulators. For China, that could risk allowing key data, such as detailed information about Chinese consumers and government agencies that may be included in the papers, to end up in the hands of a foreign government.
The recent action against tutoring companies singled out the use of variable interest entities, or VIEs, the legal workaround through which many Chinese companies in sensitive sectors have been able to list abroad.
From a peak in February, some $1.1 trillion of market value has vanished from the stocks of six top Chinese technology companies, including Alibaba and Tencent. That is a drop of more than 40%.
BofA Securities strategists have recently recommended investors shift holdings from Chinese growth stocks into shares elsewhere in the Asia Pacific region, and called the recent history of foreign investors participating in China’s high-growth stocks “incompatible with likely upcoming strategies.”
Some other investors and analysts see the recent crackdowns as likely to benefit China in the long-term—and see investment opportunities in the meantime, too. Many companies that are listed on China’s domestic exchanges in Shanghai or Shenzhen focus on sectors that are more closely aligned with national priorities, such as semiconductors, electric vehicles and artificial intelligence.
Wim-Hein Pals, head of the emerging markets equity team at Robeco, an asset manager, said China remained an interesting investment opportunity. “It has been too easy to make money in China,” Mr. Pals said. “The last few days have definitely changed that perception, and it’s about time.”
“What has changed is the realization that there is one entity that has the power in China,” he added.
Write to Jing Yang at [email protected], Keith Zhai at [email protected] and Quentin Webb at [email protected]
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Appeared in the August 6, 2021, print edition as ‘China’s Corporate Crackdown Raises Investor Anxiety.’
