The Chinese government has begun the new year with plenty of action. It revoked subsidies on renewables, and also fined Alibaba [BABA], Tencent [HKEX:700], and Bilibili [BILI] for a lack of disclosures on corporate actions. However, this comes as no surprise. Last year, the administration came crashing down on several sectors — mainly technology —with a series of tough regulations.
They form part of the Chinese government's move towards “common prosperity”, a phrase that denotes China’s ambition to tackle its wealth gap. The government has a stronger focus on business morality to enforce control over the private sector.
China’s 2021 tech crackdowns
In April, the State Administration of Market Regulation imposed a record $2.75bn fine on Alibaba for engaging in a practice called "choose one from two" where an e-commerce platform bars vendors from selling on rival sites, according to Reuters. In June, the Cyberspace Administration of China (CAC) told ride-hailing company Didi [DIDI] to stop accepting new users. As a result, shares of both Alibaba and Didi tanked.
Record fine Chinese regulators imposed on Alibaba in April
In September, China’s Central Bank and its National Development and Reform Commission outlawed cryptocurrency mining and made all cryptocurrency transactions illegal. The People’s Bank of China (PBOC) said cryptocurrencies must not circulate and barred overseas exchanges from providing services to China-based investors. It also banned financial institutions, payment companies and internet firms from facilitating cryptocurrency trading nationally.
In November, the Personal Information Protection Law was introduced, meaning companies would have to comply with strict new rules on collecting and handling private data. It requires better storage, explicit consent from consumers and stricter guidelines on Chinese citizens’ data when transferred abroad.
In other crackdowns, the government told broadcasters to shun artists with “effeminate styles", has regulated the sale of fan merchandise to tackle celebrity fan culture and cut the amount of time children under 18 can play online games. The government has also barred private, for-profit tutoring companies from raising capital overseas.
Chinese property firms crumble
In 2020 the property sector was instructed by regulators to “improve order” to reduce high levels of borrowing in real estate. It also brought in borrowing caps on developers and property loans from banks.
This brought property giant Evergrande [HKEX:3333] close to default this year, threatening a collapse of the entire Chinese economy. The group had borrowed over $300bn to become one of China’s biggest firms, but it was forced to sell off some of its properties at discounted prices to stay afloat because of the new property rules.
It also struggled to pay the interest on around $1.2bn of international loans and in December was declared to be in default by rating agency Fitch. This threatens to cause huge problems for the Chinese property and banking sectors and even batter global markets.
All of the sound and fury in China significantly impacted investor confidence. Evergrande’s share price collapsed 89% in 2021, while tech stocks such as Alibaba and Tencent are down 49% and 19%, respectively. Didi fell 65% and on Tuesday 4 January, the iShares MSCI China ETF [MCHI] has a year-to-date total daily return of minus 16.76%.
Instead, investors have turned to more appealing sectors to the government, such as semiconductors and electric vehicles, as it strives to meet carbon reduction targets.
The uncertainty is also hitting the economy. The World Bank expects China’s GDP to grow 8% in 2021, down from a forecast of 8.5% in June. It has also cut its 2022 forecast from 5.4% to 5.1%, which would mark its second slowest pace of growth for the country since 1990.
"Downside risks to China's economic outlook have increased," the World Bank said, as reported by CNN. Renewed domestic COVID outbreaks could cause further disruptions to economic activity with "a severe and prolonged downturn" in the highly leveraged property sector having significant reverberations across the economy.
World Bank's expectated growth for Chinese economy in 2022, down from an expected 8% in 2021
Outlook for Chinese stocks in 2022
More regulations are expected to come, such as banning online brokerages from offering offshore trading services to mainland clients. Alex Roberts, a Shanghai-based counsel at Linklaters, told Reuters that regulators will also look deeper into the network security of big technology companies.
Meanwhile, Logan Wright, director of China markets research at Rhodium Group, told Reuters: “Investors have been forced to consider a series of new regulatory risks over the last year, and those fears are not going to disappear any time soon."
These structural and regulatory changes could, however, end up being positive for tech firms, argues Bill Street, chief investment officer at Quintet Private Bank. “China’s ongoing structural transition is likely to boost strategic technology and advanced manufacturing sectors – further supported by currency depreciation – as well as services.”