Sunday, January 16

This is where Xi can strike next in China’s regulatory crackdown


China’s drive to tighten regulation in swaths of the country’s industries is showing signs of abating, creating some relief among global investors. But a number of unsolved problems remain that could still have a far-reaching impact on industries and financial markets alike.

The severity of the penalty for Didi Global Inc.’s controversial initial public offering in the United States, the result of a corruption investigation in China’s massive financial industry, and the details of a planned expansion of property tax lawsuits are just some of the potential investor concerns.

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Read: Behind China’s crackdown on tech companies

China’s scrutiny of everything from technology to online tutors to real estate sparked a selloff that at one point wiped out more than $ 1 trillion of the nation’s global stock value. The MSCI China Index is down 15% this year, below world stocks by most since 1998. President Xi Jinping seeks to reshape the economy, address inequality and reduce financial risk without destabilizing growth.

The following are some of the main areas of focus for different industries as Xi’s crackdowns continue:

Technology:

  • Didi probe: Investors are awaiting the outcome of China’s regulatory investigations into ride-sharing giant Didi, logistics platform Full Truck Alliance Co., and online contracting firm Kanzhun Ltd., following their US quotes earlier. of this year. Regulators are weighing a series of possible penalties for Didi, including a fine and the introduction of a state-owned investor, Bloomberg reported in July. The Cyberspace Administration of China suggested that the three companies explore the sale of shares in Hong Kong, Dow Jones reported last month, adding that investigations may be concluded in November.
  • OPI ANT: What will happen to Ant’s IPO remains an open question, a year after Beijing canceled what would have been the world’s biggest debut. Bankers say they have stopped receiving regular communications from the company and some doubt it will return to the market before 2023, Bloomberg News reported last month. On the bright side, Jack Ma recently traveled to Europe, according to Hong Kong media reports, suggesting improving relations with the government.

  • Big dataChina has made it clear that the government will play a central role in controlling the data and that private companies must abide by Beijing’s priorities. Xi’s administration has debated a variety of proposals, from nationalizing data under a government-controlled company to establishing guidelines for companies to manage their own data. The final decision will have wide ramifications for almost every tech company.
  • Break down silos: The efforts of Chinese officials to break down the closed ecosystems operated by their largest companies are being closely watched. Authorities are considering asking the companies of Tencent Holdings Ltd. to ByteDance Ltd. to allow rivals to access and display their content in search results, Bloomberg News reported in October. Such a move could further break down online barriers and shake up Internet advertising.

Read: EM-FX hits 2-month low, stocks hit by Chinese tech crackdown

Markets:

  • Listings abroadRegulators in Beijing are still defining rule changes that would allow them to prevent Chinese companies from listing abroad, even if the unit selling shares is incorporated outside of China, using the Variable Interest Entity model. The move would close a loophole long used by tech giants to circumvent restrictions on foreign investment in sensitive sectors, although it is not yet clear what this would mean for VIE companies already listed abroad, particularly in The USA.
  • HONG KONG IPO: Companies planning to go public in Hong Kong may be exempt from first seeking approval from China’s cybersecurity watchdog, Bloomberg News reported in July. If confirmed, the listing process for Hong Kong would be less burdensome than for the US Uncertainty over Hong Kong’s treatment is weighing on the city’s IPO market, which is going through a dry spell.

Finance:

  • Corruption investigationThe main anti-theft body launched a two-month inspection of 25 financial institutions in October, including the central bank, banking and insurance regulator, lenders and bad debt managers. The investigation will look at whether officials and banks were too close to private companies, including China Evergrande Group, Didi and Ant, the Wall Street Journal reported. The last major investigation into the industry came in late 2015 following a stock market crash and resulted in the arrests of bankers and brokerage executives, among others.
  • CROSS-BORDER BROKERS: The future of Chinese cross-border brokers is in doubt after a central bank official questioned the legitimacy of their operations, causing Futu Holdings Ltd. and Fintech Holding Ltd. shares to drop gray zone by allowing Chinese investors evade capital controls and trade stocks in markets like Hong Kong and New York.

Property

  • Real estate taxInvestors are looking forward to the details of China’s plans to expand property tax testing to more areas of Shanghai and Chongqing and to start taxing homeowners. The plan, reported by Xinhua in late October, did not say where the new tests will be applied. Hainan, which is emerging as a free trade center, and Shenzhen are considered among the possible candidates. While the five-year plan suggests that a nationwide tax is unlikely to be implemented anytime soon, concern over the potential impact of testing has weighed on property stocks. A developer index fell for seven days in a row after the news.

Luxury articles:

  • Taxes / common prosperity: Xi’s “common prosperity” campaign poses a potential risk to luxury goods makers like Burberry Group Plc and Cie Financiere Richemont SA if it leads to greater efforts to crack down on conspicuous consumption. China’s tax system still favors the rich, which means that one way to redistribute wealth would be through higher taxes. The country is also one of the only major economies that does not apply an inheritance tax. So far, there have been few public signs that tax reforms are in the offing. Chinese consumers are the main driver of global sales of high-end products.

Macau Casinos:

  • Casino review: The Macau government is considering regulations to tighten restrictions on operators, including appointing government representatives to “supervise” companies. The proposed changes could be made in a revision of the casino law, which will be approved before Macau issues new gaming licenses to operators. Current licenses expire in June of next year. The sector could remain “almost uninverted” until clarity on the new licenses, JPMorgan analysts wrote in an Oct. 1 note.

Hong Kong:

  • Anti-sanctions lawWhile Beijing is reportedly not imposing a law against Hong Kong sanctions for now, it remains a looming concern over the city’s financial markets. The law builds on legislation passed on the mainland in June, which gives the Chinese government broad powers to seize assets from entities implementing US sanctions. In August, China’s top legislature postponed a vote on the enforcement of the law in the former British colony, and a local delegate said it had been delayed pending further studies.

Read: Don’t look at China through a western lens

© 2021 Bloomberg


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