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2021 marks a century since the founding of China’s Communist Party, and the country has widely celebrated its remarkable recovery from the Covid-19 pandemic and rapid transformation into a global superpower. China was the first country to overcome the pandemic and restart its economy. It was also the only major economy in the world that experienced growth in 2020.

While China is expected to enjoy GDP growth once again in 2021 and 2022, there are signs that the country’s policymakers are looking further ahead and preparing the country to prosper in a post-pandemic world.

Reading between the tea leaves, RHB believes the government remains committed to their 2035 long-term objectives and targets listed out in the next Five-Year Plan (2021-2025) in the 5th Plenum meeting in October 2020. The route to achieving these goals, however, may have shifted somewhat.

Observing the slew of new regulatory measures implemented by the Chinese government this year, RHB believes that its core policy objective has moved to “Common Prosperity”. Its focus is to uplift the overall wellbeing of the citizens rather than to enrich specific segments of society first for subsequent trickle-down effects.

The series of regulatory measures have taken the market by surprise, given that they affect a variety of key sectors such as internet, education and property. However, understanding the long-term goal of the regulators is key to the interpretation of the recent changes.

RHB believes that these changes are positive for the future of the Chinese economy and that they will happen sooner or later. The current market blips are merely short-term “side effects”.


A year of regulatory changes

As part of its “Common Prosperity” initiative, the Chinese government has tightened its regulations to ensure social equality and reduce the financial burden for its people. This year, policy actions were taken against internet, property and education companies — sectors that are closely related to every individual.

The regulatory crackdown on the country’s internet sector took centre stage, given the high profiles of the internet giants. China has long been trying to prohibit monopolistic acts within the internet sector. Shortly after the Chinese regulators issued anti-monopoly guidelines in March, a record-breaking fine of US$2.8 billion was imposed on Alibaba for anti-monopoly violation. The Ant Group was revamped and turned into a financial holding company overseen directly by China’s Central Bank.

Separately, the US$100 billion Chinese education sector was subjected to key rule changes, and the strict regulations imposed on various companies came as a surprise to the market. For instance, existing afterschool institutions (ASTs) must be registered as not-for-profit institutions, and foreign capital is not allowed to control or participate in their shares. ASTs are also banned from providing classes on weekends, hiring foreigners outside China to teach courses and advertising on various media platforms.

These new clauses devastated the private education sector in China. But they are aligned with the Chinese government’s agenda to curb rising education costs — which is partly contributing to the nation’s declining birth rates — and alleviate academic pressure on students.

While the crackdown in the education sector occurred when technology companies were under increasing scrutiny. RHB believes they are entirely separate issues. And given that it addresses key social concerns, it was generally well received by the Chinese population.

Stricter regulations may appear negative at first glance, leading to spooked investors selling their holdings. However, RHB believes the Chinese government is targetting “grey areas” in existing rules and regulations that have historically been used to tolerate regulatory inconsistency or ambiguity.

China’s move to tighten regulations on its most prominent tech companies is also very similar to how the European and US governments regulate their tech giants. On July 9, US President Joe Biden signed an executive order targeting Big Tech to boost competition and reduce anti-competitive practices. The EU’s Antitrust Commission and the US Federal Trade Commission have also taken action to reduce the influence of large corporations such as Amazon, Google and Facebook.

RHB believes that the Chinese government does not wish to fully curtail the growth of its vibrant private tech sector, given that it has long kept a more laissez-faire approach which has yielded benefits for both private and public sectors. Instead, based on the conciliatory tone by the targeted companies, it seems more likely that the government and Big Tech are looking to find a mutually beneficial partnership rather than have a full-on battle.


Bringing home successful companies

Two days after Chinese ride-hailing pioneer Didi’s listing debut in the US in June, the Chinese government announced a series of enforcement actions against the company over alleged misuse of customer data. Didi’s ride-hailing application was swiftly taken off various app stores, with Chinese media suggesting that the regulators could impose severe, perhaps even unprecedented, penalties on the company. That could be a fine, the suspension of certain of its business operations or the introduction of a state-owned investor.

A forced delisting or withdrawal of Didi’s US shares was also deemed possible, although it is unclear how such an option would play out. Deliberations of such an action being taken are currently at the preliminary phase and the outcomes are far from certain.

It is easy to dismiss this as an isolated event, where the Chinese government has retaliated against Didi’s decision to go ahead with its US listing despite resistance from the Cyberspace Administration of China. But RHB believes this signals the start of the Chinese government taking the reins of the IPO destinations of its widely successful private tech companies.

Triggered by Didi’s listing in the US, Chinese authorities announced new rules that requires almost all domestic companies seeking to list in foreign domiciles to undergo an extensive cybersecurity review. Companies holding data of more than one million users must obtain cyber-security approval as such information could be “affected, controlled, and maliciously exploited by foreign governments”.

In addition, the cybersecurity review will also examine the potential national security risks arising from foreign IPOs. This would make it extremely difficult for any Chinese technology company to list in the US for the foreseeable future. All this adds a new page to China’s rulebook in managing its widely successful tech companies.

In the past, Chinese tech giants, such as Alibaba, JD.com and Baidu Inc, would conduct listings in the US. As at July 2021, 248 Chinese companies were listed on various American exchanges with a total market capitalisation of US$2.1 trillion. But with the launch of the Starboard in Shanghai and the introduction of dual-class share listings in Hong Kong in 2019, it is evident that Chinese authorities are keen to move these big companies back home to keep a closer eye on them.


The path forward

To fully assess the impacts of regulatory changes implemented by the Chinese government on the country’s economy, we must understand what the Chinese government is targeting for the future.

Before the pandemic, the strained relationship between China and the US — marked by former US president Donald Trump’s blanket tariff list and tit-for-tat retaliatory measures between the two countries — was the most critical factor in relation to global economic performance. There were hopes that the two countries would resolve their differences with a more moderate Biden administration.

Indeed, the discourse among both countries has become more cordial and diplomatic, but they remain far apart as each side holds on to its respective trade demands. With political discourse yielding little results, it is only logical that the Chinese government continues to reduce foreign dependence in its key economic areas by acting more protectionist and nationalistic.

The gap between the US and China in the global hierarchical order has never been narrower. And China is looking to enhance its global influence by expanding its dominance in key innovative areas such as electric vehicles, green energy and big data.

China is also pushing towards self-sufficiency. Import substitution trend across the country’s technological value chain has fuelled an upcycle in the industrial automation sector. The Chinese government also focuses on the industrial Internet of Things (IoT) by supporting high-tech companies to develop their own technology and brand recognition.

While RHB acknowledges that recent changes made by the Chinese government have caught the market off guard, it is essential to understand that these changes are positive for the country’s long-term development.

While investors are likely to be concerned, we would like to urge for calm. Chinese companies that can adapt and evolve in this new regulatory environment will prosper under the more defined framework endorsed by the Chinese authorities.

At RHB, our Relationship Managers and Investor Specialists stand ready to advise you on the investment strategy riding on the potential opportunities in China to achieve your financial goals.