Obviously not. Unless you work at Goldman:
In recent months, the Chinese government has embarked upon a regulatory tightening cycle unprecedented in terms of its duration, intensity, and scope. Regulations targeting specific sectors, including internet platforms, education and property markets, have wiped out more than $1tn of market cap from Chinese equities since their recent peak in mid-February. At the same time, President Xi Jinping has announced a new “common prosperity” agenda to promote more sustainable and equitable growth. As investors and observers try to wrap their heads around these regulatory and policy shifts, what they—and potential future actions—mean for the Chinese economy, its markets and beyond is Top of Mind.
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To start answering these questions, we first turn to a number ofChina watchers, including GS’s Chief China Economist Hui Shan, Primavera Capital’s Fred Hu, Oxford University’s George Magnus, Tsinghua University’s David Li and CSIS’s Jude Blanchette, to better understand the government’s motivations, the forward-looking regulatory outlook and whether these developments mark a meaningful shift in the relationship between the government and the private sector/markets in China.
Shan, Hu and Li generally don’t view these shifts as an attack on the private sector. Rather, Shan and Li argue that the government is targeting certain behaviors and industry practices that work against its goal of achieving sustainable and socially responsible growth by taking actions to safeguard consumer data and national security, protect gig economy workers and level the playing field for lower-income households. According to Li, that suggests that sectors that touch on social areas, media and culture could become regulatory targets in the future, while most others will likely remain unscathed. And Hu sees the motivations behind the recent tech regulations as strikingly similar to concerns in other countries over possible abuses of market power, data security and consumer privacy in the digital era.
But Magnus and Blanchette argue that these regulatory actions are mostly motivated by the government’s desire for power and control, and represent an extension of a pattern of the Chinese state reasserting its dominance over the private sector in recent years. And they also see strong political motivations behind these shifts in the run-up to the 20th National Party Congress of the Chinese Communist Party (CCP) in the fall of 2022, where President Xi is widely expected to break with decades of tradition and stay in power for a third term. Indeed, Magnus suspects that this is just the beginning of a broad campaign to further bring the private sector to heel and implement the“common prosperity” agenda, suggesting that sectors like real estate, social care and healthcare could soon be targeted. That said, Blanchette notes that the government needs markets, and so isn’t looking to move away from them entirely, but rather aims to ensure that they serve the CCP and China’s national goals.
Given their differing POVs, it’s no surprise that our contributor salso disagree on the potential economic impacts of these shifts. While Shan and Li both believe that the abrupt and heavy-handed implementation of the new rules will likely be a drag on growth in the short term, they are still relatively positive about China’s longer-term outlook, as they and Hu don’t believe new regulations will hinder innovation. In particular, Li points to China’s sizable domestic market, plentiful capital and large and talented engineering workforce as reasons to remain optimistic about the continued prospects for innovation and growth. But Magnus is more concerned, arguing that the net result of government intervention into business operations will be to add to the structural economic headwinds China already faces, and complicate the path towards improving productivity.
But the key question amid all of these shifts is: “Is China investable?” Magnus and Blanchette believe that investors looking at China today should tread cautiously. But GS Asia Pacific Strategists Tim Moe and Kinger Lau argue the answer is still broadly “yes”, because regulations aren’t likely to structurally impair companies’ earnings. That said, until policy communications improve and/or companies adapt, they prefer exposure to mainland-listed China A shares, which are more insulated from further regulatory tightening risk and more favorably exposed to potential macro policy easing ahead. And in terms of sectors, they favor those aligned with China’s national development objectives, including foundational/”hard”technology, green/renewable energy and “New Infrastructure”.
And with tech in particular in the crosshairs, we dive deeper into what these regulatory shifts mean for tech investing. Hu contends that while the “hard tech” space (e.g. semiconductors, robotics, etc.) is a safe haven given it has been spared from recent regulation, it would be a mistake for investors to ignore China consumer tech. He advises investors to look for companies with strong technologies, solid business models and leaderships that promote a “governance and compliance culture”. And Piyush Mubayi, GS Lead Analyst for China Internet, believes that the shifts will ultimately create an environment more favorable to the internet sector’s sustainable growth and global competitiveness.
Meh. On ethical, geopolitical and regulatory risk grounds, stay right away from China.