The moment the government starts determining what you are allowed to earn as an investor, it is usually wise to be gone. In Europe, there is more regulation than in the United States. In some cases, such as in the financial sector, there has been de facto nationalisation since the Great Financial Crisis. The average bank employee has to deal with more rules than the average civil servant.
Shock adjustments in China
The difference between the Chinese autocracy and Western democracies is that Beijing can change gear quickly. Every adjustment quickly becomes a shock. The most radical is the approach to commercial education. In China, your career and life course depend on your alma mater. Admission to the best universities is based on the Gaokoa, a nationwide test held every year in the summer. Parents will do anything for a high score and will not take more than one for that reason alone. The government’s crackdown on commercial tutoring is a typical case of fighting the symptoms. The problem is the test itself. Only a small percentage can go to the best universities. Because of the many maths tests, these are not the most creative students, a problem that also exists in the United States. There, in 2015, Obama even caused the bankruptcy of a few listed companies active in the field of commercial education.
Less drastic is the regulation of meal delivery. The discussion is the same as in the West, it is about the protection of workers’ rights, including the income of the delivery driver. The new rules for the housing market are un-shocking. Xi Jinping stated when he took office that houses are there to be lived in, not to be speculated with. For many years, measures have been taken in China to curb speculation on the housing market and these measures are part of that. No reason to panic.
Regulation of Chinese Big Tech
Perhaps most sensitive is the approach to Alibaba and Tencent, not only because they are the figureheads of the Chinese IT sector, but also because of the relatively heavy weighting of these companies in the index. Just as the US government looks at its Big Tech companies, Beijing also believes that both parties have too strong a market position. The adjustment that Beijing wants is for third parties to have access to the platforms of Alibaba and Tencent. That should ensure more competition. Beijing is also not convinced of the added value of each service provided by these two companies. Gaming is compared to opium for the mind and, according to Xi, staring at a screen for too long is bad for your eyes. The fact that third parties are also gaining access to these two major platforms may be a disappointment for these two companies, but not for their competitors.
Chinese listing in the United States is finite
An additional problem for Alibaba is its listing in the United States. Now the Americans want to get rid of the Chinese companies listed in the US, the reason being that they can never be completely transparent about the influence of the Chinese government. In that respect, Washington and Beijing are on the same page. Beijing, too, would prefer Chinese companies not to be listed in the US. The Chinese are already drowning in dollars. Apparently not everyone was aware of the latest wishes from Beijing. This became painfully clear with Didi’s IPO. Two days after its initial listing, the government removed the Didi app from the app stores due to concerns about data collection. Earlier, the Chinese regulator had already said that the IPO could not go ahead and those who do not want to listen should feel free to do so in China. Nevertheless, the activities of Didi, Tencent, Alibaba and Meituan are an essential part of the Chinese economy. China does not want to destroy these companies, only to regulate them for the benefit of Chinese workers and Chinese consumers. This is something that is quite normal in Europe, not even in the United States would it be a reason for a sharp price drop.
New social contract in China
Chinese laws and regulations usually come in waves. The government almost always comes down hard on them at first, but eventually a workable compromise is worked out for everyone. That does not mean that investing with the government is more fun in China than outside it. Especially in China, there are many state-related companies where the investor has to look carefully whether the unpredictable influence of the government is sufficiently discounted in the valuation. But Beijing is usually fairly open about its intentions and that means investors did not have to react as surprised. Apparently, China is still analysed too much on the basis of what is written in the Western media. The Communist Party’s main objective is to stay in power. The party therefore does not want any disgruntled Chinese in Tiananmen Square. Until recently, that meant that everyone in China was entitled to a job. That has succeeded. To keep every Chinese person happy now, the new social contract consists of good education, better healthcare and a higher level of social security. Only then will Chinese people have more children, although it is known that richer people have fewer children.
Xi as a good father
What the Chinese government is actually doing is implementing ESG policies with an emphasis on the social component. China is in the process of building a welfare state. Xi is the good father who would rather not see children playing games and ruining their eyes. He is the man who ensures that parents do not have to bend over backwards to raise their only child. He is the great helmsman who ensures that workers are not exploited and that houses remain affordable. At the 18th party congress in November 2012, he already promised: better education, more jobs, higher incomes, better social security, better healthcare, better houses and even a cleaner environment. All things that will further improve the growth potential of the Chinese economy. That is good for investors in China in the future, in the short term investors can benefit from the lower prices.