Right On Target

No industry is safe from China as its government continued to crack down on companies left, right, and center this week.

 

🕰 Recap

  • The Chinese government has been coming down hard on the tech sector, proposing new rules in January to break up its biggest online payments players.
  • A few months later, ecommerce giant Alibaba got hit with a $2.8 billion fine.
  • Didi became the next victim just days after the ride-hailing giant made its stock market debut.
  • And China extended the crackdown to even more sectors this week, sending Chinese stocks sharply lower.

 

✍️ Connecting The Dots

No government wants to see a single firm dominating a particular industry – and especially not China’s. So when it saw Alibaba stifling competition in the online retail industry, it was quick to slap the firm with a $2.8 billion fine – 4% of its revenue in 2019. That was just months after the Chinese central bank proposed new rules to break up the biggest players in the online payments industry, Alipay and WeChat Pay.

Then China’s crackdown shifted to a new battleground: data. The root of the issue was the vast amounts of personal data collected by internet platforms, making the government nervous about privacy and security. Take Didi as an example: the ride-hailing giant has access to hundreds of millions of Chinese customers’ personal details, while counting major international companies among its shareholders after its US stock market debut. That didn’t sit well with the Chinese government, who earlier this month ordered the country’s app stores to remove Didi from their platforms.

But while the intensifying crackdowns were so far mostly focused on tech firms, the Chinese government issued new rules this week that would virtually obliterate the country’s fast-growing $100 billion for-profit education industry. Among the many rules proposed is one that would ban for-profit education companies from, uh, making profits. The realization that no industry is safe from China’s ire prompted investors to dump the country’s shares, with a popular index of Chinese stocks down more than 4% in the week.1

 

🥡 Takeaways

1. Chinese firms are damned if they do, damned if they don’t.

Tech, online payments, for-profit education – these were all among some of the fastest-growing industries in China, and also some of the most popular with foreign investors. But the pattern of crackdowns suggests there’s a winner’s curse for Chinese companies: the most successful ones become too powerful and/or attract too many foreign investors, nudging them into the government’s regulatory crosshairs. Following that pattern, companies in the property, healthcare, and insurance industries may just be next.

2. US-listed Chinese stocks are having a torrid year.

On top of all the headaches Chinese firms are facing, those listed in the US have another problem to contend with – this time stemming from US regulators. Chinese companies listed on US stock exchanges face the ongoing threat of being delisted if they don’t let American authorities audit their accounts, which the Chinese government isn’t exactly keen on. The ongoing uncertainty has pushed a popular index tracking 98 of China’s biggest US-listed firms down more than 40% from its February peak.

 

🎯 Also On Our Radar

American private equity firm Carlyle Group is looking to raise as much as $27 billion for its latest flagship fund, in what would be the private equity industry’s biggest fund ever. Investors have been flocking to private equity firms like Carlyle, since they haven’t had many ways to make a decent return in a world of rock-bottom interest rates and sky-high stock market valuations. Case in point: funds offered by these firms took in more than $500 billion in the first half of the year – 70% more than the same period in 2020.

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