Register For Our Mailing List

Register to receive our free weekly newsletter including editorials.

Home / 434

Is China’s regulatory reform stifling ‘animal spirits’?

  •   Chi Lo
  •   17 November 2021
  •      
  •   

Some investors worry that regulatory tightening in China could strangle growth in its private sector, which is now dominated by technology companies and e-commerce platforms. Such concerns have wiped about USD1 trillion off valuations on China’s stock market over the past year. The poor sentiment has spilled over to other Asian markets and their tech sectors.

Why is China taking the risk of damaging these new drivers of economic growth when building a high-tech economy is part of its ‘common prosperity’ policy framework? Is there evidence of China’s regulatory overdrive negating investment incentives in its private sector?

How badly damaged is the private sector?

Many players see Beijing’s regulatory campaign, which started in 2020, as a move to exert greater control over the private sector and the technology firms and make them subservient to the Communist Party under the guise of an anti-monopoly policy. According to this school of thought, the survival of China’s private sector is under threat.

On closer examination, though, the e-commerce and technology companies subjected to the crackdown are a small share of the large and growing private sector. We have found no evidence of significant damage done to the private sector despite media reports to the contrary.

Reflecting the continued growth of the private sector is:

  1. The sharp decline in state-owned enterprises (SOEs) as a share of total industrial firms (Exhibit 1)
  2. The strong increase in private-sector employment in the industrial sector (Exhibit 2)
  3. The significant rise in the share of private investment at the expense of the SOEs’ share (Exhibit 3).

All this suggests that the large private and tech companies hit by Beijing’s measures play a small part in the overall private sector. While they may have made the news headlines, their situation is not representative of the whole private sector.

We have also found no evidence as yet of the much-feared decline in private investment in the wake of the regulatory tightening.

High-frequency investment data shows that while the growth rate of fixed asset investment by non-state-owned companies [1] has slowed, it has continued to outperform SOE investment by a wide margin since the regulatory campaign began (Exhibit 4). In fact, SOE investment has been contracting since early 2021, while non-state and private investments have continued to grow.

Why the crackdown?

Beijing is taking the opportunity arising from the economy’s Covid recovery to tighten oversight. It aims to align the private sector’s interests with Beijing’s strategic targets. Indeed, such reform is long overdue, as poor oversight has allowed many Chinese private companies, notably the internet firms, to prosper and add to moral hazard problems in the system. 

Granted, China needs proper regulation for its private and tech sector. The question is whether it has now over-tightened and, thus, risked strangling innovation and incentives in the private-sector. This concern has understandably spooked markets, leading to a sharp sell-off in Chinese equities, especially tech and e-commerce stocks.

However, we believe China is just catching up with global practices of tighter supervision of tech companies rather than pursuing a more aggressive agenda to rein in corporate profits or destroy private capital.

Evidence shows that other countries, notably the US, the EU, South Korea and Japan, have been active in probing technology firms for alleged collusion and monopolistic practices and bringing anti-trust cases against global tech companies. [2]

What makes China different is that it has stepped up tightening efforts on the internet sector faster than other countries. An examination of Asia’s new regulations and remedy measures suggests they are broadly in line with those implemented by Europe and the US. [3]

For example, Chinese anti-trust laws allow for fines of 1-10% of annual turnover for anti-monopoly violations. This is consistent with most practices around the world. However, China and most Asian countries have been lagging in implementing the laws. They are catching up now and China has become even more active in enforcement.

Market implications

In a nutshell, China’s regulatory tightening since 2020 is, arguably, a tactical shift of its reform policy under the ‘dual circulation’ framework to tackle intensifying domestic and geopolitical challenges. Beijing still wants the private sector to drive innovative change and fund the development of high tech.

The regime change may have been abrupt, hurting the valuations of some of the best-known private companies and unsettling the stock market. However, the resultant correction now appears to have priced in most, if not all, of the regulatory concerns.

Repricing the internet sector under the new regime should give China’s tech sector a new investment horizon when the dust has settled.

 

Chi Lo is the Senior Market Strategist APAC of BNP Paribas Asset Management based in Hong Kong. The information published does not constitute financial product advice, an offer to issue or recommendation to acquire any financial product. You will need to seek your own advice for any topic covered in the article. 

 

[1] Non-state-owned firms include private firms, collectives, cooperatives, joint enterprises, foreign private firms and sole propriety ownership.
[2] “A Cheat Sheet to all of the Antitrust Cases Against Big Tech in 2021”, Quartz, 29 September 2021 at https://qz.com/2066217/a-cheat-sheet-to-all-the-antitrust-cases-against-big-tech-in-2021/.
[3] “APAC Regulatory Fears Drive US$1tn Selloff: Overreaction or Signal of More to Come?” UBS Q Series, Global Research, 20 October 2021.

 


 

Leave a Comment:

RELATED ARTICLES

Three themes and companies to play China's rise

China’s new model is a plan for a hostile world

Five trends shaping investments in China: 2021 and beyond

banner

Most viewed in recent weeks

16 ASX stocks to buy and hold forever, updated

This time last year, I highlighted 16 ASX stocks that investors could own indefinitely. One year on, I look at whether there should be any changes to the list of stocks as well as which companies are worth buying now. 

UniSuper’s boss flags a potential correction ahead

The CIO of Australia’s fourth largest super fund by assets, John Pearce, suggests the odds favour a flat year for markets, with the possibility of a correction of 10% or more. However, he’ll use any dip as a buying opportunity.

2025-26 super thresholds – key changes and implications

The ABS recently released figures which are used to determine key superannuation rates and thresholds that will apply from 1 July 2025. This outlines the rates and thresholds that are changing and those that aren’t.  

Is Gen X ready for retirement?

With the arrival of the new year, the first members of ‘Generation X’ turned 60, marking the start of the MTV generation’s collective journey towards retirement. Are Gen Xers and our retirement system ready for the transition?

Why the $5.4 trillion wealth transfer is a generational tragedy

The intergenerational wealth transfer, largely driven by a housing boom, exacerbates economic inequality, stifles productivity, and impedes social mobility. Solutions lie in addressing the housing problem, not taxing wealth.

What Warren Buffett isn’t saying speaks volumes

Warren Buffett's annual shareholder letter has been fixture for avid investors for decades. In his latest letter, Buffett is reticent on many key topics, but his actions rather than words are sending clear signals to investors.

Latest Updates

Investing

Designing a life, with money to spare

Are you living your life by default or by design? It strikes me that many people are doing the former and living according to others’ expectations of them, leading to poor choices including with their finances.

Investment strategies

A closer look at defensive assets for turbulent times

After the recent market slump, it's a good time to brush up on the defensive asset classes – what they are, why hold them, and how they can both deliver on your goals and increase the reliability of your desired outcomes.

Financial planning

Are lifetime income streams the answer or just the easy way out?

Lately, there's been a push by Government for lifetime income streams as a solution to retirement income challenges. We run the numbers on these products to see whether they deliver on what they promise.

Shares

Is it time to buy the Big Four banks?

The stellar run of the major ASX banks last year left many investors scratching their heads. After a recent share price pullback, has value emerged in these banks, or is it best to steer clear of them?

Investment strategies

The useful role that subordinated debt can play in your portfolio

If you’re struggling to replace the hybrid exposure in your portfolio, you’re not alone. Subordinated debt is an option, and here is a guide on what it is and how it can fit into your investment mix.

Shares

Europe is back and small caps there offer significant opportunities

Trump’s moves on tariffs, defence, and Ukraine, have awoken European Governments after a decade of lethargy. European small cap manager, Alantra Asset Management, says it could herald a new era for the continent.

Shares

Lessons from the rise and fall of founder-led companies

Founder-led companies often attract investors due to leaders' personal stakes and long-term vision. But founder presence alone does not guarantee success, and the challenge is to identify which ones will succeed in the long term.

Sponsors

Alliances

© 2025 Morningstar, Inc. All rights reserved.

Disclaimer
The data, research and opinions provided here are for information purposes; are not an offer to buy or sell a security; and are not warranted to be correct, complete or accurate. Morningstar, its affiliates, and third-party content providers are not responsible for any investment decisions, damages or losses resulting from, or related to, the data and analyses or their use. To the extent any content is general advice, it has been prepared for clients of Morningstar Australasia Pty Ltd (ABN: 95 090 665 544, AFSL: 240892), without reference to your financial objectives, situation or needs. For more information refer to our Financial Services Guide. You should consider the advice in light of these matters and if applicable, the relevant Product Disclosure Statement before making any decision to invest. Past performance does not necessarily indicate a financial product’s future performance. To obtain advice tailored to your situation, contact a professional financial adviser. Articles are current as at date of publication.
This website contains information and opinions provided by third parties. Inclusion of this information does not necessarily represent Morningstar’s positions, strategies or opinions and should not be considered an endorsement by Morningstar.