In China, The Onslaught Continues

“Even more complicated and grim.”

That’s how the Politburo characterized the external environment at a meeting chaired by Xi Jinping.

The Party was alluding to the pandemic, apparently, but the assessment could easily double as an oblique reference to international relations. None of the headlines out of China Friday screamed “cooperation” or otherwise suggested the “Cold War 2.0” meme can be retired.

More immediately germane (if you’re a market participant anyway), China described the world’s second largest economy as “not yet solid,” and vowed enhanced cross-cyclical macro adjustments. Whatever that means. Bloomberg noted that “some analysts have said the comments mean authorities will take a longer time frame when considering policy support and avoid overstimulating the economy.”

Liquidity will be “reasonable and sufficient.” The yuan will stay “basically stable.” That’s “basically” the same language Beijing has employed for years, even when the yuan wasn’t stable — “basically” or otherwise.

Additionally, the Politburo “urged” stabilization in housing prices and expectations, which just means the property crackdown is real. And likely to continue. Beijing will also institute stricter supervision of overseas listings, although there were no fresh details. The “system” for foreign listings will be “improved,” the Party said. Earlier this month, Beijing effectively created a veto system, but reports this week indicated officials may have softened their tone amid the rout in Chinese equities.

Separately, the Transport Ministry promised to discipline ride-hailing companies and for-hire trucking transport platforms in the event they exhibit monopolistic behavior. That doesn’t sound promising for Didi, which is on the ride of its life (pun fully intended) since making the comically naive mistake of going public in the US against the advice of Beijing.

“Some” online ride-hailing companies “infringe drivers’ rights,” the ministry said, citing “irregular” operations by some firms and attempts to stymie competition. No companies were named. But plenty of companies are worried, I’m sure.

As if that wasn’t enough, the Internet Society of China, acting “on behalf” of China’s Ministry of Industry and Information Technology, instructed Tencent, Alibaba, Meituan, Xiaomi, ByteDance, Ant Group and a half-dozen other firms, to enhance oversight of data security protocols, with an emphasis on the “export” of critical information.

The English translation of a press release documenting the proceedings was amusing. The meeting, which also included Baidu and, was aimed at “further improving ideological understanding, guiding and urging companies to earnestly assume the responsibility of data security.” Participants “exchanged knowledge and shared their respective typical data security aspects and work experience.”

All pretensions to “targeting” and efforts to allay investor fears aside, it was obvious Friday that Beijing isn’t really “backing off.” Mainland shares dropped nearly 1%, finishing the week 5.5% lower (figure below).

It’ll take more than that to persuade the Party that the collateral damage in equities outweighs the social benefits of the regulatory blitz.

“The recent crackdown on after school tutoring, which could effectively turn industry players into non-profit companies and stop them from accessing the capital markets (notably foreign capital), continued disciplinary actions around anti-monopoly practices, more investigations into disorderly capital expansion, and intensifying measures to cool housing prices, have signaled that the Chinese authorities are prioritizing social welfare and wealth redistribution over capital markets in areas that are deemed social necessities and public goods and/or important elements to strategic goals by policymakers (e.g. boosting discretionary incomes, and population growth), consistent with their repeated emphasis of promoting fair growth and ‘broad prosperity’ since late last year,” Goldman’s Kinger Lau wrote, in a note appropriately called “Investing under a new regulation regime.”

The Hang Seng Tech Index, after rebounding from dramatic declines, slumped again Friday, falling 2.5%. The broader city gauge logged a 1.4% loss. Volatility surged this week (figure below).

Also Friday, China’s banking and insurance regulator pledged to accelerate efforts to “deal with” high-risk institutions in a bid to circumvent financial risks. That was according to a statement on the CBIRC’s website. Among other measures, regulators will ensure bank and insurance money doesn’t find its way into the property market “illegally.” The “resurgence” of risky shadow banking activities will not be permitted.

“The new regulations announced in the past weeks have reinforced our view that the prevailing tightening cycle is unprecedented in terms of its duration, intensity, scope, and the velocity of new policy announcements, as reflected by our proprietary regulation proxy,” Goldman went on to say, in the same noted cited above, adding that although the regulations “are arguably backed by clear policy intentions and social merits, and could improve social equality if executed in a prudent manner, the equity market has taken a significant hit given the uncertainty centering on related companies’ growth and profitability outlook, risk premium, business legality, and existential/going concern.”

As of the end of June, overseas entities held 3.84 trillion yuan in Chinese bonds and 3.76 trillion yuan in Chinese stocks. Both figures were “basically stable” from May, to use the PBoC’s preferred description.


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2 thoughts on “In China, The Onslaught Continues

  1. Add to this the story of Sun Dawu, an agriculture tycoon (of and for the people) recently sentenced to 18 years in Xi’s prison.
    Crimes against “The Party”.
    Just another version of the same old story.

  2. Feels like there is a sense of denial or disbelief that any government would decide on a strategy in which profit maximization is not job 1, and through that lens more or less believes the worst of market impact in CQQQ is done, which may or may not be correct but on the margin seems slightly naive. While the National Team maybe be used to moderate the volatility the direction of travel looks clear and it may take a while for that to sink in for many investors as it is noted than Northbound flows remain strong as it does for many of the China linked ETFs listed in the US. Not sure this is a buy-the-dip situation. Although that is not to say that there is not a sharp rebound coming in the weeks ahead. I am just finding it a little hard to trust. And that lack of trust that many have might just be the reason for higher risk premium in Chinese assets to be a semi-permanent feature.

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