What can we expect from China’s regulator in the coming period? This is a vital question given the restrictions recently imposed by Beijing in the education sector. Among other things, antitrust risk hangs over the market, with the government trying to address economic dominance.
Antitrust risk is one of three risk areas for regulatory intervention that the analysts Gavekal/Redtech identifies in its monthly contribution to Fondsnieuws.nl, Investment Officer Luxembourg’s sister publication. This research firm specialises in China’s internet and mobile industries.
Looking back, the research firm expects the top-down “rectification” of structural problems in China’s Internet sector to be nearly complete. “No major sector has remained unscathed and management across the industry has a better sense of what is expected, and should therefore be better able to steer clear of the biggest problems.This suggests that future regulations will be more modest and focused on course corrections rather than large-scale changes.”
Regulations will become so heavy that only the largest incumbents will have the scale to carry the burden, Redtech says. “In the recent past, the weight of the regulatory burden has helped established companies consolidate their leadership in education (New Oriental and TAL) and gaming (NetEase and Tencent). In others, such as e-commerce, crackdowns on the market leader create opportunities for competition.”
Three risk areas
When it comes to future threats and opportunities on the Chinese regulatory front, the research firm sees three main risk areas: antitrust risk, reform risk and content risk.On antitrust risk, Redtech mainly points to risks to e-commerce companies such as Alibaba and Pinduoduo (PDD), which were fined in March for subsidies that led to “misleading prices.”
“PDD may also face future risks from its discount model, which some merchants have complained about.” Food stores, local services, travel agencies and ride-hailing companies like Didi also face antitrust risk, the agency writes in the article found in the appendix.
Reform risk
Reform risk involves, for example, the impact of government intervention on payment services such as at Tencent, as well as companies that provide tutoring and online healthcare. Content risk can include video services that share sensitive content, but also gaming companies, which (may) face political risks and moral hazards.