China’s crackdowns and the cracks in the system

China’s crackdowns and the cracks in the system

Beijing seems to be going after some of the biggest private companies in every sector, with political goals in mind

According to Chinese economist Hui Shan, the government intends to regulate specific actions . Credit: Reuters Photo

China’s crackdowns on sectors ranging from e-commerce, technology to real estate, school tutoring and casino industries are ostensibly intended to make the economy more equitable and productive in the long term.

According to Chinese economist Hui Shan, the government intends to regulate specific actions such as anti-competitive behaviour and data collection that infringes privacy and national security. Though the Chinese authorities are placing more emphasis on technological industries, their focus has now shifted to “hard tech” industries, such as semiconductor and aerospace from “soft tech” sectors, like internet companies.

Primavera Capital’s founder Fred Hu argues that China’s regulatory goals to rein in tech businesses are similar to what other countries are doing, the difference is that “China has taken a far stronger, and arguably more heavy-handed, approach to regulation and enforcement, which has clearly had a devastating impact on investor sentiment and markets in the short term.”

The “10-point plan” released in August 2021 by China’s State Council and the Communist Party’s Central Committee, outlines tighter regulation of much of its economy for the next five years. It says that new rules will be introduced covering areas including wealth equity, national security, technology and monopolies in the world’s second-largest economy. The regulatory shakeup centres on the phrase “common
prosperity.” 

China’s anti-monopoly regulations focused on the so-called “platform economy.” Beijing has already launched anti-monopoly investigations into some of the country’s biggest technology firms. In April, Alibaba paid a record $2.8 billion fine after a probe found that it had abused its dominant market position for years. Alibaba has lost over $400 billion in market value on its US listing.

Gaming giant Tencent, TikTok owner ByteDance and Huawei were all dragged into the geopolitical battle between the US and China. Tencent has also been affected by China’s latest efforts to combat gaming addiction among minors. In August, under-18s were banned from playing video games for more than three hours a week. Tencent has lost more than $347 billion in market value since mid-February.

China’s largest provider of private educational services, New Oriental Education & Technology Group Inc., has seen the market value of its US-listed shares fall by $7.4 billion since July, when Beijing issued new rules barring for-profit tutoring on the school curriculum. Beijing wants to ease pressure on school children and reduce the cost burden on parents, which has contributed to a drop in birth rates. But analysts warn that the new rules threaten to decimate the country’s private education sector. 

Macau, the special administrative region, is the only jurisdiction under Chinese sovereignty where casinos are allowed to operate, making it the go-to destination for mainland China’s high-rolling millionaires. Tables at Macau’s 41 casinos generated six times the revenue of the 144 casinos in Las Vegas, racking up $360 billion in earnings in 2019. The gaming industry contributed over half of the city’s $54 billion pre-pandemic GDP. The tighter grip from China’s regulators comes at a tough time for the casino companies already reeling from slumping traffic as the Covid-19 pandemic drags on. Concerned about Chinese people losing money in Macau’s casinos, Beijing will begin reviewing the casino industry’s practices. China’s regulatory overhaul could see its officials supervising the casino companies in the world’s largest gambling hub. Shares of Macau casino operators shed as much as a third of their value, losing about $18 billion last Wednesday.

Real estate contributes about 28% to China’s GDP. China’s regulatory push to wean property developers from excessive borrowing is spilling over into loan losses at banks and pain in credit markets as cash-strapped builders fall into distress, raising the risk of fallout rippling across the economy. This year, 274 Chinese real estate companies went bankrupt -- on an average, one every working day. Some real estate analysts say that the bankrupt real estate companies were mainly small and micro real estate companies. 

But the “mother of all” real estate bankruptcies is unfolding in China’s second largest real estate company, Evergrande. Alarm bells rang this week, with news that the world’s most indebted real estate developer is struggling to make loan payments on its more than $300 billion in liabilities — a sum equivalent to 2% of China’s GDP. Evergrande borrowed through banks, trusts, wealth investment products, corporate bonds, commercial paper and from front-end suppliers. Some 1.5 million customers have paid advances for Evergrande homes that are yet to be built.

“Evergrande’s collapse would be the biggest test that China’s financial system has faced in years,” Mark Williams, chief Asia economist at Capital Economics, wrote in a September 9 briefing note. Not only would a collapse of Evergrande be catastrophic for investor confidence and credit markets, it would also reflect poorly on the ruling Chinese Communist Party (CCP) under President Xi Jinping. The cracks in the market economy under a dictatorial rule are clearly visible.

(The writer is a retired corporate professional)

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