© Reuters. FILE PHOTO: A Chinese yuan banknote is seen in front of the stock market chart displayed in this illustration taken May 7, 2021. REUTERS / Dado Ruvic / Illustration

By Tom Westbrook

SINGAPORE (Reuters) – The carnage in China’s financial markets marks the start of a new era, investors say, as the government puts socialism ahead of shareholders and regulatory changes destroy the old playbook.

Actions and sentiments have taken a beating as Communist Party leaders seek to remake the property, technology and education sectors to reduce cost pressures and better serve ordinary people.

According to investors, the new model appears to put common prosperity, as President Xi Jinping said, ahead of catastrophic growth.

According to some analysts, this is the most significant philosophical change since former leader Deng Xiaoping made development his top priority 40 years ago.

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

Bankers and investors say it was announced last November when regulators torpedoed Jack Ma’s Fintech Ant group listing, publicly chopping Ma’s wings and burning global funds that had paid off, anticipating a slice of the larger float of the world.

In the nine months that have passed since then, developers, commodity speculators, crypto miners, other tech giants, and lately tutoring companies, have all faced sweeping changes in rules or have seen regulators aggressively scrutinize their activities.

The Tech Index, launched with fanfare last July and made up of Internet darlings that have become gargantuan blue chips such as Tencent and Ali Baba (NYSE :), has cratered 40% since February to hit record lows.

“The specter of state intervention in private sector control has created a crescendo of panic selling,” analysts at investment bank Jefferies (NYSE 🙂 said in a note. “The authorities are trying to reduce social inequalities while cracking down on excessive price hikes that lower the cost of living.”

Zhaopeng Xing, senior China strategist at ANZ, said the set of policies, unveiled on the centenary 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 to appeal to the masses, Xing said. “They send the message that China is not a capitalist country, but embraces socialism.”

The message in the months leading up to the Party’s centenary on July 1 was also unequivocal, analysts said. “Common prosperity” is the primary long-term goal, Xi said earlier this year, and China’s development should be centered on people’s expectations for better lives, urban-rural gaps and income gaps.

The Chinese State Council’s Information Office did not immediately respond to a request for comment.


Investors have so far reacted with an alarm that flipped into panic on Tuesday. They have ditched healthcare stocks, anticipating the sector will be next in the crosshairs, even as the real estate and education sectors falter.

The costs of housing, medical care and education were the “three great mountains” choking Chinese families and crowding out their consumption, said Yuwei, fund manager at Olympus Hedge Fund Investments, who had bypassed developers and education companies.

“This is the most forceful reform I have seen in many years, and the most populist. It benefits the masses at the expense of the wealthiest groups and the elites,” Yuan said.

The free fall in the share price of ride-sharing company Didi, which found itself in the crosshairs of regulators days after its New York listing, raised questions about China’s future engagement with the markets. of foreign capital.

Credit risks are also rising in a country still recovering from COVID-19, as authorities seem comfortable allowing state-linked companies or very large businesses – previously considered protected species – to switch to the default.

“Over the past 20 years, Chinese authorities have been able to turn a blind eye to some illegal business practices, tax evasion or wrongdoing as the economy has grown robustly,” said Ming Liao, founding partner of Beijing-based private equity firm Prospect Avenue Capital.

Now that the economy is slowing, “the question becomes how to share the pie. Hence the need to weigh equity against 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 believe he will continue his pillars of reform, including a thriving middle class.

The Party seems determined to emphasize its socialist roots and pit them against a perception of social problems in capitalist centers such as Hong Kong, they say.

Investors also argue that the resilience of exports provides a buffer for policymakers to build a new stream of growth from domestic demand and avoid dissatisfaction with inequality.

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

The richest 10% of families in China account for 47.5% of household wealth, IIR estimates, while a 2019 survey by recruiting firm 51job Inc found that nearly 40% of parents spent 20%. to 30% of their income for children’s education, which is considered unsustainable.

“The old era is over and a new era has begun,” said Jack Liu, a veteran math professor at Gaotu Techedu Inc, one of the companies shaken by the education reforms.

“For many tutoring companies, the return on investment (return on investment) of a teacher is the measure of the North Star… Going forward, industry players need to fully understand government policies and unify the interests of individuals, businesses and the country, ”he said. .

Foreign fund managers say they’re keeping their cool, but changing course. Citi Private Bank said in a note this week that it was increasing its exposure to China, but was looking for domestically listed companies outside the sights of regulators.

Prashant Bhayani, Director of Investments Asia at BNP Paribas (OTC 🙂 Wealth Management, was also seeking exposure to the wide range of onshore equities outside of the tech and education sectors, as clients had questions about the repression.

“We have seen concerns, not only from North America and Europe but also from Asia, over the end of the policy,” he said.

“It’s certainly a concern, in the sense that these are the areas that were getting the most out of the pandemic and that were identified thematically as mega-trends, so it’s also about positioning.”