Bad Mouths, Bad Debt, Bad Bets

China’s never-ending deluge of decrees aimed at ameliorating perceived social ills continued Monday. Teenagers can only play online games for an hour a day on Friday, Saturday and Sunday, a notice from the National Press and Publication Administration said. They’re allowed an hour on holidays as well.

The rule applies to online service providers, and there will be “inspections,” apparently. Violators will be “strictly” punished.

Some expected Chinese tech shares to resume declines this week after the the Cyberspace Administration announced a campaign to scrub the internet of commentary that “bad mouths” the world’s second-largest economy.

“For a period of time, some commercial website platforms and their media accounts have repeatedly issued financial news in violation of regulations, distorted and interpreted economic policies, sang bad news about financial markets, acted as ‘bad mouth’ bloggers, spread rumors, etc,” the regulator said, in characteristically colorful prose.

There are eight categories of violations. The first targets “unreasonable comments, distortions and interpretations” of China’s financial policies and macroeconomic data, as well as attempts to “maliciously sing about our financial markets, and slander China’s economy.” The second seeks to prevent the “reprinting and conveying” of what Beijing called “overseas misinterpretations without any standpoint and judgment.” Third, China is set to go after anyone “spreading rumors” or “revealing exclusive revelations” while citing “informed insiders.” That sounds like a warning to media outlets citing “people familiar with the matter” and echoed Donald Trump’s incessant harangues against what he claimed were fabricated sources. Fourth, “tampering with financial news, taking it out of context or engaging in one-sided misinterpretation” is banned. Fifth, “acting as a financial ‘bad mouth,’ while maliciously singing or driving up the price of individual stocks, speculating on regional property market fluctuations, and disrupting normal market order,” is illegal. Sixth, one shouldn’t “spread negative information that threatens, intimidates, or blackmails relevant stakeholders.” Seventh, China will no longer allow netizens to “incite sadness, anxiety, panic and other emotions.” Finally, eighth, “fraudulently using the names of experts and scholars to open financial columns,” is a very bad idea.

If you’re not laughing by now, I fear you may lack a pulse. Of course, there isn’t much that’s funny about the situation to free press proponents in China and you can be sure the effort to cleanse the internet of various “bad mouths” and doomsayers won’t be confined to those who willfully break laws or otherwise engage in activity that actually is malicious. Rather, this will be a lot like Recep Tayyip Erdogan’s threats against anyone who speaks ill of “his” lira when it’s careening into another one of its regularly-scheduled death spirals, usually because of something he said or did.

In any event, Chinese tech was quick to convey a commitment to compliance. As Bloomberg noted, “technology firms and social media operators including Tencent and ByteDance’s news aggregator Toutiao and Douyin, the Chinese equivalent of TikTok, pledged to abide by the rules and regulate financial information-related content.”

Financial “bad mouths” aren’t the only thing being scrubbed from the internet in China. So too are celebrities finding themselves erased as part of Xi’s efforts to rein in so-called “fan culture,” which regulators claim is too “chaotic.” At least one major US bank said the new guidelines on the “fan-based economy” could have some financial impact on “affected companies.” That bank may want to rethink its assessment, lest it should find itself accused of being a “bad mouth” to the detriment of access to China’s capital markets.

Also on Monday, the People’s Daily’s said live streaming influencers and the brands they promote need to be regulated with their own, dedicated credit rating system. The Ministry of Commerce is currently seeking public consultation on such an initiative. I’m not sure the People’s Daily’s counts as “public consultation.”

Somehow, Chinese tech shares managed a gain to start the new week. The Hang Seng Tech Index rose 1% on the session (figure below). The gauge’s nascent bounce faltered late last week amid reports that Xi will likely ban some overseas tech IPOs.

Notably, Meituan followed JD.com in reporting better-than-expected revenue for the second quarter. Sales were 43.76 billion yuan during the period. Analysts were looking for 42.36 billion. Food delivery revenue of 23.13 billion yuan was also a beat.

Meanwhile, the Huarong saga is finally winding down. The too-big-to-fail bad debt manager (which is poised to get an ~$8 billion lifeline that will see Citic take the reins from the Finance Ministry) finally released 2020 results. It lost nearly $16 billion. Leverage reached 1,300 times and its capital buffer was decimated. Regulators require bad debt firms to maintain a capital adequacy ratio of 12.5%. Huarong’s was 4.2% at the end of last year.

Things are improving. Sort of. Leverage has declined markedly to “just” four times higher than end-2019 levels, while the firm’s capital adequacy ratio was 6.3% at the end of the second quarter. Essentially, the company is plodding along, zombie-like, servicing debt and negotiating lifelines. “What is gone is gone,” Chairman Wang Zhanfeng said, promising to “learn from the lesson and take it as valuable experience.” Hopefully Wang is sincere. Xi executed his predecessor. (“What’s gone is gone.”)

In other news, China’s banking and insurance commission is investigating Ping An Insurance’s property investments, Reuters reported. Ping An was “ordered to stop selling alternative investment products, which are typically tied to the property market,” sources said. Ping An had 54 billion yuan in exposure to China Fortune Land Development Co and subsequently booked an impairment provision tied to related investments. As Reuters helpfully reminded folks, “the regulatory probe into Ping An’s property portfolio comes against the backdrop of Beijing sharpening its scrutiny of the country’s red-hot real estate market by tackling unbridled borrowing that has fueled concern about financial risk.”

Note that all of the above encompasses just the past 72 hours. It’s a dizzying rollercoaster. “Like all regulatory reforms before, the end of it will be unheralded and visible only in the rear view mirror,” one analyst told Bloomberg on Monday.


 

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7 thoughts on “Bad Mouths, Bad Debt, Bad Bets

  1. Talk about bubbles! Sounds like Xi has a serious God complex and is living in the bubble of his own thoughts, completely detached from reality.
    I can think of a few other historical world leaders who also had similar states of mind, for which there was not a good ending- at least for those individuals.
    This won’t end well. Remember the 2 child policy?

  2. If you have nothing better to do, try a simple thought experiment of having Xi and Powell change places. What would Chinese and US financial markets look like in 6 months.

  3. The “bad mouth” decree sounds anticipatory. The government took a “just whack ’em” approach to tech regulation, likely deems it a success, and may now be ready to roll out more, everywhere, and wishes to stifle the recalcitrants in advance. The idea of sector-specific social credit scoring is particularly clever; it foretells a virtually unlimited ability to automate and refine authoritarianism as desired. In industry, one tries to scale up to achieve success. In politics, you scale down.

    Yes, sounds like Xi’s political thought is evolving and Chinese society is about to become more productive: “Let a thousand lawns be mowed”. Sounds pretty good, unless you’re a blade of grass.

  4. For me , I look at all of this in context of a Culture War.. Much like a pendulum swings on each swing it tests it’s parameters and the goal is to exploit the opponents weak spot as well as to counter what the opponent perceives yours to be. US lead the similar battle 30 years ago against the Soviet Union but it lead with it’s energy complex and Free Market Capitalism gambit. Against China the Achilles heal is not the same and at this point in time neither is ours so we we lead trying to project American culture which because of the repressive nature of China (lots of reasons for that ) has a market for our version of Democracy and Xi like was Putin is very aware of the playing field . These two Leaders have one advantage and that is a political system that is not in constant disarray . The battle focus is pretty clear through a Geopolitical lens .

  5. Seems like the CCP’s rapidly growing, granular, and arbitrary control of behavior and business models should have a negative effect on private enterprise and capital markets’ dynamism.

    If China analysts, strategists, and brokers become actively censored, it will be interesting to see how investors and capital allocators react.

  6. To me those game rules for teens don’t seem to be such a bad idea. Maybe if our teens followed the same rules they might be better prepared for college. A recent survey reported that of their own volition a majority of graduating HS seniors in the US said they were not prepared for college. I taught those students in college for 40 years and they were rarely prepared. Our current K-12 education system has been well and truly broken for decades.

    Those eight rules sounded to me that they could easily have been written by the religious “divines” of 17th Century America. A look at the writings of Increase Mather and his son Cotton will show just how high-handed early US religious leaders were. They did burn witches then. Also a peek at the kinds of rules emanating from the ultra-conservative Islamic Right would show many of the same prohibitions and even more violent punishments than proposed by Xi. They still stone people to death in parts of the Mideast. Control of the masses has been the objective of governments and religious leaders for centuries. No surprise that badmouthing is a no-no in 21st Century China.

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