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08 October 2021

Cracking Down

If the past few months have shown us anything, it is that China’s autocratic intervention can be deployed at the drop of a hat. Its most successful ‘free-market’ enterprises are no longer immune from state control, and investors were startled as President Xi Jinpin announced a flurry of regulatory actions against the country’s ‘technology Titans’. While it is not unusual to witness the Chinese government engage in an assault on capitalism, the swift and unexpected announcements appeared to upset financial markets in their lack of forewarning.
 
There have now been over 50 responses to regulatory offences by a number of firms, ranging from anti-trust abuse to data violations (See: The Chinese Way). Most notable are the region’s greatest success stories being quashed: Ant Group’s US$37bn initial public offering was suspended just days ahead of its listing; Tencent was ordered to end exclusive music licensing deals; and, more recently, the ride hailing app Didi was ejected from app stores just days after its listing in New York.
 
While surely Mr Xi has little appetite for stamping out prosperity, the attack has wiped around US$1tn from stock markets. On the contrary, his goal seems to centre around shaping the industry before it becomes uncontrollable and misaligned with state ambitions. Lowering the barriers to entry and ensuring the industry’s wealth is shared amongst small and large businesses is surely a good thing. After all, the country’s Western counterparts demonstrate the Technology sector’s tendency to consolidate into monopolistic behemoths. Though, perhaps the knee-jerk response was not the best policy, and to maintain investment (particularly from overseas investors), he will have to tread more carefully in future. Expectations must be set, and the boundaries need to be clearer.
 
Indeed, the Technology industry seems to have snuck up on leaders. In the absence of any robust regulation, firms have capitalised on their network effects to grow at a rate of knots. Didi, like Uber, has fast become one of a small set of taxi firms in the gig economy. The more users and partners (aka drivers) it gains, the more attractive the product becomes to new users. The app now has more users than there are Americans. Though there are some that, for now, have avoided the firm hand of the Chinese State: social media platform ByteDance has seen its user base grow exponentially in the last few years (See: The Carrot and the Stick).
 
While all this has created anxiety in investors, it also presents an opportunity. China’s economic growth prospects remain some of the strongest in the world. First out of the pandemic and on the right side of inflation (See: Chinese Inflation: The Other Story), the country is poised to resume its rapid economic expansion plans. It also remains underserved as a consumer-led economy; household consumption represents a mere 39% of Chinese GDP, whereas in America this is almost 70%. If nothing else, this is an ideal environment to build new brands in the world’s second-largest economy.
 
This article was taken from the August 2021 Market Insight. To subscribe to our investment publications, please visit www.redmayne.co.uk/publications.
 
Cracking Down
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