Economists say the worst of China’s regulatory crackdown is over

Traders work during the IPO of Chinese ride-hailing company Didi Global Inc on the floor of the New York Stock Exchange (NYSE) in New York, U.S., June 30, 2021.

Brendan McDermid | Reuters

BEIJING — The worst of China’s regulatory crackdown is over as Beijing focuses on supporting growth, economists said.

That doesn’t mean the end of regulation — which has swept internet technology, real estate and other industries over the past year — but signals fewer major changes to come, analysts said.

China’s economy slowed to 4% year-on-year growth in the fourth quarter, despite growing 8.1% for the year as a whole. Weak consumer spending dampened growth, while a slew of regulatory developments added to business uncertainty on top of the coronavirus pandemic.

China’s leaders’ new priority for 2022 is to champion 5% growth, Macquarie’s chief China economist Larry Hu said in a note on Wednesday. This means that “the anti-monopoly peak, the ownership crunch peak and the decarbonization peak are all behind us.”

“The spike in regulation means fewer and less intensive regulatory changes this year, as the focus on regulation last year has given way to a focus on growth,” Hu added in an e-mail. -mail. “In other words, it means the worst is over, but not a return to the past.”

In 2021, Beijing clamped down on the alleged monopolistic behavior of internet giants such as Alibaba, real estate developers’ heavy reliance on debt and regional failures to reduce carbon emissions. Abrupt changes disrupted business, including power cuts in factories and massive job losses in after-school tutoring centres.

But in recent months, official statements point to a softening in Beijing’s stance, analysts said.

“As senior official Han Wenxiu said in December, the government will refrain from initiating policies that have a negative impact on economic growth,” Zhiwei Zhang, chief economist at Pinpoint Asset Management, said Thursday. “President Xi [Jinping] also published an article reiterating the importance of the digital economy. I expect the government to focus on economic stability this year.”

Zhang does not anticipate a reversal of regulations, just fewer major changes. His question is “how and when will the government implement the policies it already announced last year, such as the property tax pilot program and registration-based IPO reform.”

This week’s announcements added signals of how Beijing would reduce its rigidity.

In December, top leaders had already removed references to anti-monopoly, housing policy and carbon neutrality from an economic to-do list for 2022, Macquarie’s Hu said.

Steelmakers have another five years to cut emissions

Then on Monday, China’s top economic planning agency and two ministries delayed the target year for the steel industry to hit the five-year carbon emissions peak to 2030.

The additional five years can reduce the burden on steelmakers by allowing them to spread out decarbonization investments and avoid large short-term capital outlays, Moody’s analysts said in a note Wednesday.

They do not expect the change to affect the country’s goal of reaching peak carbon emissions by 2030. “The government will continue to implement strict capacity and production control of steel while encouraging environmentally friendly projects,” the analysts said. “Such efforts, along with the extension, will also help support stable steel supply and prices.”

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On Tuesday, the People’s Bank of China announced that loans for affordable rental housing would not count against the limited amount banks can lend to the real estate sector, freeing up more capital to support the real estate sector.

More communication with the markets

On the same day, the official newspaper of the Communist Party of China, People’s Daily, published an editorial stating that while rules on the use of capital are needed to reduce monopolistic behavior, among other things, the economy still needs capital to grow.

Beijing’s crackdown on alleged monopolistic behavior has particularly targeted internet technology companies like Alibaba that are listed in the United States. This and other political developments since Chinese ride-sharing company Didi listed in New York in late June have given international investors pause to pour money into the country. .

The People’s Daily article “suggests that regulatory restrictions on the internet sector will remain in place, but are likely to become more rules-based, with uncertainty fading as the regulatory framework takes shape,” said Bruce Pang, head of macroeconomic strategy and research at China Renaissance. in a note on Tuesday.

Regulation consistent with policy themes such as common prosperity — moderate wealth for all, rather than the few — and sustainable development will remain, Pang said. But “we believe that the authorities have begun to carefully manage the pace and intensity of the regulatory campaign in order to achieve the main economic and social development objectives set for the next 5 to 10 years”.

He noted how Chinese officials have begun to communicate better with the market about the motives and reasons for regulation as well as future areas of government oversight. “Investor concerns may be driven less by the substance of proposed regulations and more by communication,” he said.

The Shanghai Composite rose more than 3% this week – the first trading week of the month due to a public holiday – after falling more than 7.5% in January. The Hang Seng index is up more than 4% this month after gains of 1.7% in January.

KraneShares CSI China Internet ETF (KWEB) – a US-listed exchange-traded fund that includes overseas-listed Chinese stocks – plunged more than 50% last year amid regulatory uncertainty. The ETF is up 5.4% so far in 2022.

Not the end of regulation

Maximum regulation is certainly not the end of regulation, Macquarie’s Hu said in his report. He pointed to a similar regulatory spike in late 2018, which served as a turning point for a sell-off in mainland China stocks, even as local governments and companies continued to act.

China’s system of government often means that local authorities compete for Beijing’s attention through sometimes extreme enforcement measures. The official language of central government directives then often warns against “blindly” shutting down a business sector.

For 2022, Beijing has focused above all on stability. In the second half of the year, the ruling Chinese Communist Party is expected to hold a meeting to determine the top leadership positions, including the planned extension of President Xi Jinping’s term beyond that of his predecessors.

The political push for stability comes after a year in which the Party celebrated its 100th anniversary. Meanwhile, the country had an economy that was rebounding quickly enough from the pandemic to weather what analysts said were painful but necessary changes to address long-standing issues.

Today, growth is slowing as China also grapples with novel coronavirus outbreaks.

“The 2020-2021 regulatory flurry has brought many unintended consequences,” Hu said. “For example, business confidence has weakened, the real estate sector has plunged and commodity prices have surged.”

“The consequence of [Beijing’s] campaign style is that things could easily be overdone. Accordingly, senior leaders should refine from time to time, decide when to claim victory and move on to the next campaign,” Hu said. “It’s happened so many times over the past hundred years, and it will continue to happen in the future.”

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