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Analysis: No Painless Profit: Why Promoting China Reform Should Hurt Investors




A Chinese yuan banknote is seen in front of the stock chart shown in this illustration taken on May 7, 2021. REUTERS / Dado Ruvic / Illustration

SINGAPORE, July 28 (Reuters) – Massacre in China’s financial markets signals the beginning of a new era, investors say, as the government puts socialism ahead of shareholders and regulatory changes tear apart the old book of games.

Reserves and sentiments have taken a toll as Communist Party rulers seek to reclaim the property, technology and education sectors to curb cost pressures and better serve ordinary people.

The new model seems to set the common prosperity, as President Xi Jinping said, before the rise of helmets, investors say.

According to some analysts, it is the most important philosophical shift since former leader Deng Xiaoping set development as the top priority 40 years ago.

“Chinese entrepreneurs and investors need to realize that the era of reckless capital expansion is over,” said Alan Song, founder of private equity firm Harvest Capital. “A new era that prioritizes justice over efficiency has begun.”

Bankers and investors say it was announced last November when regulators torpedoed Jack Ma’s fintech Ant Group rankings, publicly cutting off Ma’s wings and burning the global funds that had been paid, predicting a larger piece of aircraft in the world.

In the nine months that have passed since then, developers, commodity speculators, crypto miners, other tech giants, and, more recently, teacher firms, have all faced radical rule changes or regulators are watching in aggressively on their businesses.

The Hang Seng Tech Index (.HSTECH), launched last July and featuring beloved internet-turned blue chips like Tencent (0700.HK) and Alibaba (9988.HK), has amassed 40% since from February to record low levels.

“The spectrum of state intervention in private sector control has created a crescendo of panic sales,” analysts at investment bank Jefferies said in a note. “The authorities are trying to reduce social inequality while preventing excessive price increases that are undermining the cost of living.”

Zhaopeng Xing, China’s senior strategist at ANZ, said the set of policies, unveiled around the centennial of the Chinese Communist Party, underscores the political will to strengthen the Party’s roots.

“These policies were announced to reflect the progressiveness of the Party” and the appeal to the masses, Xing said. “They send a message that China is not a capitalist country, but embraces socialism.”

The messages in the months leading up to the July 1 Party centenary were also clear, analysts say. “Common prosperity” is the long-term goal, Xi said earlier this year, and China’s development should focus on people’s expectations for a better life, urban-rural gaps and income gaps.

The Information Bureau of the State Council of China did not immediately respond to a request for comment.


Investors have so far responded with the alarm that passed on Tuesday towards panic. They threw health stocks (.HSHCI) in anticipation that the sector will be next on the line of fire, even when the property and education sectors support.

The costs of housing, medicine and education were the “big three mountains” drowning Chinese families and filling their consumption, said Yuan Yuwei, a fund manager at Olympus Hedge Fund Investments, who had cut developers and education firms.

“This is the most powerful reform I have seen in many years and the most populist one. It benefits from measures at the expense of the richest and most elite groups,” Yuan said.

The free-falling share price of the salutary firm Didi (DIDI.N), which was found by regulators a few days after its listing in New York, has raised questions about China’s full engagement in foreign markets. of capital.

Credit risks are also rising in a country that is still recovering from COVID-19 as authorities seem comfortable allowing state-affiliated or very large corporations – previously seen as protected species – to move forward by default.

“Over the past 20 years, the Chinese authorities may have turned a blind eye to some illegal business practices, tax evasion or wrongdoing because the economy was booming,” said Ming Liao, the founding partner of the private equity firm. based in Beijing Prospect Avenue Capital.

Now that the economy is slowing down “the question becomes how to split the cake. So the need to weigh justice versus efficiency”.

NEW PARADIGM As the Party prepares for a 20th national congress, which will decide whether Xi remains its secretary general for an unprecedented third term, analysts think he will continue with his pillars for reform. one of which is a thriving middle class.

The party seems determined to emphasize its socialist roots and compare them against a perception of social problems in capitalist centers like Hong Kong, they say.

Investors also say that the sustainability of exports provides a protection for policymakers to build a new growth step from domestic demand and remove dissatisfaction due to inequality.

Although household incomes have outpaced economic growth, both are slowing and, according to a study published by the Institute of International Finance (IIF), a trade association for banks, household incomes are still below pre-pandemic levels.

Top 10% of households in China account for 47.5% of household wealth, IIF estimates, while a 2019 survey by recruitment firm 51job Inc. showed that nearly 40% of parents spent 20-30% of their income on education of children – seen as unstable.

“The old era is over and a new era has begun,” said Jack Liu, a veteran math teacher at Gaotu Techedu Inc. (GOTU.N), one of the firms disrupted by education reform.

“For many tutoring companies, a teacher’s ROI (return on investment) is the north star metric … In the future, industry players need to fully understand government policies and unify the interests of individuals, companies and the country,” he said. ai.

Foreign fund managers say they are keeping their nerves, but are changing strategy. Citi Private Bank said this week in a note that it was increasing its exposure to China but looking for companies listed in the country outside the rules.

Prashant Bhayani, Asia Investment Officer at BNP Paribas Wealth Management, was also looking for exposure to widespread land-laundering outside the technology and education sectors as customers had questions about the shock.

“We have seen concerns, not only from North America and Europe, but also from Asia, about what is the latest game in politics,” he said.

“It’s definitely a concern, in the sense that these are the areas that were making the most of the pandemic and have been thematically identified as mega-trends, so it has to do with positioning.”

Edited by Vidya Ranganathan and Nick Macfie

Our standards: Principles of Trust of Thomson Reuters.




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