THIS MATERIAL IS A MARKETING COMMUNICATION.
Reading the Tea Leaves: Making Sense of Beijing’s Policy Shifts
China’s astronomical growth over the last decade is a testament to the country’s will to abolish absolute poverty, driven by Chinese President Xi Jinping’s pledge in 2012 to transform the “impoverished and backward Old China, into the New China”.1 In spite of this monumental achievement, an accelerated economic shift bought income inequality and social issues amid a less regulated environment among emerging sectors. As China shifts its focus onto the next stage of economic development, fast-growing industries now face heightened regulatory scrutiny.
China’s Pivot to Common Prosperity
After years of prioritizing a high-growth economy, Chinese policymakers are keen to pursue common prosperity by striking a balance through security, supply chain self-sufficiency and social equality. The government’s regulatory intentions—all in the name of sustainable growth—is a stark contrast against some investor misconceptions that Chinese policymakers want to wind up internet businesses.
In the past, Chinese policy had been supportive towards innovation, especially for companies within the internet sector. This encouraged China’s digital transformation while cultivating a young, skilled talent pool primed for the technology industry.
However, regulation failed to keep pace with a fast-growing industry, resulting in anti-competitive behavior, social issues, concerns over data security and implications of “disorderly capital expansion”. Big technology platforms had simply grown too big, too quickly. These companies rose in prominence at a time when many small and medium-sized enterprises struggled amid slowing economic growth during the COVID-19-crisis.
That said, Beijing’s regulatory crackdown should not come as a surprise to investors. The Chinese government has long been aligning its sectors with its sustainable growth blueprint.
For example, news that education giants will be heavily regulated and should not expand aggressively to ease the financial pressures of childcare, had already been flagged by the Chinese State Council in 2018.2 The creation of a minimum wage for food-delivery drivers had long been in the making, since delivery employees’ working conditions were exposed in 2020.3 While hefty fines for big tech firms came swiftly after an investigation revealed tech platforms imposed penalties for merchants that sold goods on rival sites.
Re-Balancing Corporate Influence
New regulatory requirements for data, fintech, carbon emissions, after-school tutoring and property are set to re-shuffle the amount of influence corporates had on markets, as they will need to re-position their businesses. The move will likely support smaller businesses that were previously squeezed by large corporates that had greater access to capital. These changes fall directly in track with the party line of “improving livelihoods”, especially for low to mid-income groups.
Conversely, regulators are set to start rolling back the very tax incentives that allowed big internet platforms to thrive, implementing higher tax levies in the country’s latest move to rein in the internet giants. At the same time, we expect government to focus more on strategic sectors as electric vehicles, clean energy, semiconductors.
While internet platform companies involved in areas crucial to day-to-day living will fall under more scrutiny, it doesn’t necessarily mean other business will be impacted. Market concerns that similar measures will spread to other sectors, are mostly overdone.
Regulatory Precedence Sets a Roadmap for Industries
Increased regulatory scrutiny is not a new concept, nor is it exclusive to China. E-commerce and social networking giants in the US also face tighter regulation, with the prospect of being broken up for violating anti-trust laws.
In 2017, China’s regulation on “irrational” cross-border investment guided companies on investing overseas to prevent unhealthy competition and corruption.4 While a large-scale decline in Chinese overseas investment ensued, the crackdown resulted in greater emphasis on the quality of overseas investment projects, over pace.
Likewise, the gaming industry has seen its fair share of regulatory measures. Most recently in August 2021, China ordered online gaming companies to restrict gameplay to an hour for children on Fridays, weekends and public holidays, a significant escalation in the country’s protection of minors since 2019.5 The move follows from a huge online gaming overhaul between 2018-2019, where policymakers introduced new game approval processes to regulate content in line with Chinese values, and restricted the number of digital gaming licenses issued.
Overall, regulatory crackdowns on the gaming sector show that the Chinese government has been fairly consistent with its aim to protect the mental and physical wellbeing of children.
Less News Might be Good News
The essence of common prosperity is to elevate living standards for low-income groups to address the wealth gap, rather than target equal wealth. Income inequality in China is a serious issue that the government is addressing. Despite some investor misconceptions that Beijing wants to redistribute or equalize wealth, China’s policy decision is not pegged to the Gini coefficient—typically used as a measure of income inequality—and is primarily focused on reducing everyday spending in housing, education and healthcare, while reforming income distribution.
Regulatory concerns over monopolistic practices and data privacy, along with revisions to tax and employment benefits have been largely priced in by the market. While policy implementation this time round has had widespread market impact, further changes may be more considerate towards capital markets, and may include high-level consultation with industry leaders.
While the direction of these policies may not change, we largely expect less policy noise in the near term which could become an encouraging tailwind for Chinese equities. As the government focuses on supporting other industrial sectors such as electric vehicles, clean energy and semiconductors, we’ll be closely observing sectors favored by the latest policy amendments.
Staying Ahead with Mirae Asset’s Latest Insights
1 Politburo Standing Committee Members' Meeting, Xi Jinping, 15 November 2012.
2 The National People’s Congress of the People’s Republic of China, 2018
3 SCMP, Meituan, Ele.me relax food delivery time targets after backlash over risky conditions for riders, 9 September 2020.
4 Reuters, China to curb "irrational" overseas Belt and Road investment, 18 August 2017.
5 Bloomberg, China Slashes Kids’ Gaming Time to Just Three Hours a Week, 30 August 2021.
Disclaimer & Information for Investors
No distribution, solicitation or advice: This document is provided for information and illustrative purposes and is intended for your use only. It is not a solicitation, offer or recommendation to buy or sell any security or other financial instrument. The information contained in this document has been provided as a general market commentary only and does not constitute any form of regulated financial advice, legal, tax or other regulated service.
The views and information discussed or referred in this document are as of the date of publication. Certain of the statements contained in this document are statements of future expectations and other forward-looking statements. Views, opinions and estimates may change without notice and are based on a number of assumptions which may or may not eventuate or prove to be accurate. Actual results, performance or events may differ materially from those in such statements. In addition, the opinions expressed may differ from those of other Mirae Asset Global Investments’ investment professionals.
Investment involves risk: Past performance is not indicative of future performance. It cannot be guaranteed that the performance of the Fund will generate a return and there may be circumstances where no return is generated or the amount invested is lost. It may not be suitable for persons unfamiliar with the underlying securities or who are unwilling or unable to bear the risk of loss and ownership of such investment. Before making any investment decision, investors should read the Prospectus for details and the risk factors. Investors should ensure they fully understand the risks associated with the Fund and should also consider their own investment objective and risk tolerance level. Investors are advised to seek independent professional advice before making any investment.
Sources: Information and opinions presented in this document have been obtained or derived from sources which in the opinion of Mirae Asset Global Investments (“MAGI”) are reliable, but we make no representation as to their accuracy or completeness. We accept no liability for a loss arising from the use of this document.
Products, services and information may not be available in your jurisdiction and may be offered by affiliates, subsidiaries and/or distributors of MAGI as stipulated by local laws and regulations. Please consult with your professional adviser for further information on the availability of products and services within your jurisdiction. This document is issued by Mirae Asset Global Investments (HK) Limited and has not been reviewed by the Securities and Futures Commission.
Information for EU investors pursuant to Regulation (EU) 2019/1156: This document is a marketing communication and is intended for Professional Investors only. A Prospectus is available for the Mirae Asset Global Discovery Fund (the “Company”) a société d'investissement à capital variable (SICAV) domiciled in Luxembourg structured as an umbrella with a number of sub-funds. Key Investor Information Documents (“KIIDs”) are available for each share class of each of the sub-funds of the Company.
The Company’s Prospectus and the KIIDs can be obtained from www.am.miraeasset.eu/fund-literature/ . The Prospectus is available in English, French, German, and Danish, while the KIIDs are available in one of the official languages of each of the EU Member States into which each sub-fund has been notified for marketing under the Directive 2009/65/EC (the “UCITS Directive”). Please refer to the Prospectus and the KIID before making any final investment decisions.
A summary of investor rights is available in English from www.am.miraeasset.eu/investor-rights-summary/.
The sub-funds of the Company are currently notified for marketing into a number of EU Member States under the UCITS Directive. FundRock Management Company can terminate such notifications for any share class and/or sub-fund of the Company at any time using the process contained in Article 93a of the UCITS Directive.
Hong Kong: This document is intended for Hong Kong investors. Before making any investment decision to invest in the Fund, Investors should read the Fund’s Prospectus and the information for Hong Kong investors (of applicable) of the Fund for details and the risk factors. The individual and Mirae Asset Global Investments (Hong Kong) Limited may hold the individual securities mentioned. This document is issued by Mirae Asset Global Investments (HK) Limited and has not been reviewed by the Securities and Futures Commission.
Copyright 2023. All rights reserved. No part of this document may be reproduced in any form, or referred to in any other publication, without express written permission of Mirae Asset Global Investments (Hong Kong) Limited.