“I can hardly imagine that the authorities would just simply ban online gaming once and for all,” Global Times editor Hu Xijin said Wednesday.
China was in damage control mode after an overwrought broadside lamenting the addictive nature of games like Tencent’s “Honor of Kings” caused another bout of severe nausea among investors weary of grappling with an absurdly mercurial regulatory blitz out of Beijing.
Tencent rebounded, and Hong Kong shares enjoyed their first net inflow from the links in three weeks, as Chinese investors bought more than $320 million in city shares. Sentiment was buoyed by the People’s Daily, which struck a more nuanced tone. “Preventing online game addiction and protecting minors is an arduous and systematic project requiring the combined efforts from the government, society, schools and families,” the Party mouthpiece said. That’s less severe than the language employed the day before by the state-run Economic Information Daily, which likened games to narcotics.
Read more: Opium Wars
A separate piece in the Securities Daily said that a concerted effort to promote “healthy development” of the gaming industry is “imminent.” The goal is to curb and prevent addiction. Additional regulation is necessary, the commentary said.
“In general, investors may decide they need to take China’s government at its word when it says the crackdown on tech and private education isn’t just about concerns over financial and social stability, but that there’s also an overt moral dimension,” Bloomberg’s Shen Hong wrote Wednesday, in a short blog post, before quipping that “Chinese equity investors may want to add good parenting guides to their reference libraries along with treatises on options pricing and earnings valuation models.”
Jokes aside, I’ve long implored market participants and analysts to drop any and all pretensions to the notion that capital markets can somehow “discipline” dictatorial governments and autocrats. More often than not, they “discipline” market participants.
That’s not to say autocrats can’t be brought to heel by, say, a currency crisis. Turkey’s Erdogan routinely brings the country to the brink of economic calamity before softening his stance on rates, only to repeat the cycle once the lira stabilizes, for example. It’s just to say that if autocrats prize power above all else, it makes no sense to suggest that capital markets can dissuade them from a given set of priorities unless and until market stress threatens their grip on power. That’s self-evident. Or at least it should be.
One managing director at a Shanghai investment firm summed it up well in remarks to Bloomberg Wednesday. “Even though the wording may seem less harsh today than it was yesterday, that doesn’t change the fundamental theme of late,” he said, noting that Beijing is intent on “making Internet giants give up some of their profits and to give more spending power to the people.”
In any event, it’s also worth noting that the Caixin services PMI posted a big beat. At 54.9, the headline print was well ahead of the 50.4 the market expected and miles above the highest estimate from the handful of economists who braved a guess. But it was littered with caveats. “As the July surveys were conducted after the epidemic in Guangdong province was brought under control, and before COVID-19 resurged in Jiangsu province, the services sector expanded rapidly, though the manufacturing sector was slightly weaker,” the accompanying color said, adding that “the resurgence of the epidemic in some parts of China at the end of July is expected to hurt August’s PMI readings.”
The Caixin PMIs for last month “suggest the economic recovery is not on sure footing [and] still faces enormous downward pressure,” the survey went on to say. That echoed the assessment from the Politburo readout, which described the world’s second-largest economy as “not yet solid.”
Headwinds are piling up. Half of China’s provinces are dealing with the Delta variant officially, and likely all of them unofficially. That, despite what Nomura’s Ting Lu aptly described as “draconian” virus protocols. He suggested that between “stringent” COVID containment measures and flooding, the outlook for growth is deteriorating.
Obviously, it’s impossible to know what the real number of new infections is in China, but officially, the country is coping with the worst outbreak since January. Pang Xinghuo, the deputy director of Beijing’s Center for Disease Prevention and Control described a “critical phase” in the country’s epidemic response. “We can’t let loose a single hidden risk,” Pang cautioned. In the capital, officials committed to adopting the “strictest measures and most decisive actions” possible to curb the spread.
“While the number of cases are still relatively low compared to the US and elsewhere, these new outbreaks — happening in cities such as Nanjing, Wuhan, Yangzhou and Zhangjiajie — are showcasing the limitations of China’s zero-tolerance approach to COVID,” The New York Times wrote Wednesday, adding that “they may also undermine the Communist Party’s argument that its authoritarian style has been an unquestionable success in the pandemic.”
The same linked article quoted Chen Xi, an associate professor of public health at Yale. “Such a powerful government has been breached by Delta,” he said. “This will be a very important lesson — we cannot let our guard down.”
The details of recent containment efforts make for a rather stark juxtaposition with… well, with most nations, western and otherwise. As The Times summarized, more than five million people are under stay-at-home orders in Zhangjiajie and Zhuzhou, some 13 million residents in flood-ravaged Zhengzhou were compelled to wait in line for testing starting last week, Nanjing residents were subjected to four rounds of testing and in Wuhan, the original global epicenter, all 12 million residents are being tested again after just three cases (!) of the Delta variant were confirmed. (Imagine the White House commanding Georgia to test every, single person in the state immediately, with no questions asked, due to three new cases.)
On the bright side for kids in China, more lockdowns means more time for “Honor of Kings.”
Will need interesting to see if institutional investors come back to the Chinese techs. If not, maybe this is a boon for other Asia consumer/tech – something like CPNG that got whacked along with the TCEHY but, other than kneejerk derisking, wouldn’t seem to have much in common.