China’s recent announcements that it will pause its long-running regulatory crackdowns on leading tech firms is drawing skepticism from analysts. And the significant bump it gave the country’s stock markets early this week has turned into a sharp correction.
Pledges to ease off what has been a year of intense scrutiny of tech and internet companies, some with significant fines, have come from multiple government agencies, and have become increasingly vocal since they began late last month.
Last week, China’s top decision-making body, the Politburo, accused by President Xi Jinping, said its sometimes harsh policies toward the sector would be tweaked to “support the healthy development of the firms.” Separate cabinet-level meetings concluded with similar pronouncements. Multiple media outlets have reported that China’s top internet regulator, and perhaps Xi himself, is set to meet with representatives from large domestic tech companies.
This stoked a stock rally that continued well into this week, with the benchmark Shanghai Composite Index, large-cap CSI 300 Index, and Hong Kong’s Hang Seng Index all up more than 15% over five trading days. Big tech firms, such as
Alibaba Group Holding
(700.Hong Hong), and
(3690.Hong Kong) saw similar leaps.
Yet those rallies have begun to deflate, as investors continue to receive few specifics on the regulatory easing, and Xi this week publicly reaffirmed a commitment to China’s zero-Covid policy, which has further dented the country’s anemic economic growth.
The short-lived shot in the arm to China’s struggling equities markets is particularly dismaying for investors, because the tech-sector announcements came just days after China began slowly rolling out stimulus measures to boost its flagging economy, with officials saying much more supply- and demand-side help was on its way.
“Given the disastrous economic and social impact of the [Covid-19] lockdowns, I now expect the government to double down on that planned easing, ”Andy Rothman, investment strategist at Matthews Asia, wrote in a recent note.
“Stronger credit flows to corporates and households. More rate cuts, including for mortgages. More government spending, including for public works projects. Support for small firms, including loan and rent relief. Possibly direct aid to consumers to jumpstart post-lockdown spending, ”he added, cautioning that,“ It will take time for all of this to get underway, so I don’t expect to see a visible recovery until the second half of this year . ”
Bruce Pang, head of macro and strategy research at China Renaissance (HK), told Barron’s that “market sentiment is still in the front seat. And all the negative factors such as macro slowdown, policy overhang, regulatory crackdowns, lockdowns, and geopolitical risks are not yet fading, disrupting investors’ sentiment and confidence. ”
Pang added that “we think the market needs to wait much longer than before to see broader and sustainable recovery only when China successfully stabilizes growth and delivers real recovery with an effective policy spur and reopening agenda.”
When asked if the reprieve in tech crackdowns was simply a direct response to the economic woes, Hong Kong University Business School Professor Fangzhou Lu told Barron’s, “Yes, totally.” Though it’s hard to predict, that could mean any sustained revival in China’s economy would remove regulators’ motivation to lay off the tech firms.
“Regulatory pressure could be the new normal,” Pang said. “Internet giants will continue to be exposed to regulatory uncertainty in cases relating to: revamping to finance holding companies, data security, consumer privacy, anti-trust, and juvenile protection, among others.”
But if reports are correct, the temporary reprieve stands to benefit some tech players, particularly those who have faced past punishments for alleged monopolistic practices and poor worker conditions.
Last year, China’s government took 1% stakes in
(WB) and TikTok creator ByteDance. It now plans similar investments in two of the country’s biggest firms, Tencent and
with the aim of gaining further influence within the companies, The Wall Street Journal reported last week.
“Some investors have been concerned that last year’s regulatory crackdown was an effort to roll back China’s private sector,” Matthews Asia’s Rothman said. “That is unlikely.”
“We’ve already seen some negative consequences of poor implementation, but I expect these to be improved in the coming quarters,” he said.