Another day, another sweeping regulatory overhaul in China, where Beijing is making it clear that fake Capitalism with Chinese characteristics is only as good as its weakest communist link. Late on Wednesday, China released a five-year blueprint calling for greater regulation of vast parts of the economy, providing a sweeping framework for the broader crackdown on key industries that has left investors reeling.
The document, first highlighted by Bloomberg and jointly issued by the State Council and the Communist Party’s Central Committee, said authorities would “actively” work on legislation in areas including national security, technology and monopolies. Law enforcement will be strengthened in sectors ranging from food and drugs to big data and artificial intelligence.
“The people’s growing need for a better life has put forward new and higher requirements for the construction of a government under the rule of law,” it said. “It must be based on the overall situation, take a long-term view, make up for shortcomings, forge ahead, and promote the construction of a government under the rule of law to a new level in the new era.”
As Bloomberg notes, investors have been seeking to make sense of a regulatory onslaught in recent weeks that has roiled markets, particularly after authorities banned profits in the $100 billion after-school tutoring sector. A recent attempt by Morgan Stanley to summarize all the regulatory "resets" unveiled in recent months no less than 30 events in a list that is growing by the day.
Over the past year Chinese authorities have launched anti-monopoly probes into some of the nation’s largest tech companies such as Alibaba, while also mandating cybersecurity reviews for foreign listings -- a measure that has created problems for Didi Global.
“We can’t draw too much insight about enforcement and the potential shape of crackdowns from one document or another,” said Graham Webster, who leads the DigiChina project at the Stanford University Cyber Policy Center. “Much depends on what bureaucrats and their higher-ups land on in terms of priorities month after month.”
Wednesday's outline is an update of an earlier plan that ended in 2020. In an explanatory Q&A, officials responsible for the document highlighted the need to modernize national governance, build digital governance and increase the public’s overall level of satisfaction.
- “Actively promote legislation” in areas such as national security, technological innovation, public health, culture and education, ethnic religion, biosecurity, ecological civilization, risk prevention, anti-monopoly, and foreign-related issues
- “Intensify law enforcement in key areas related to the vital interests of the people” including food and medicine, public health, natural resources, ecological environment, safety production, labor security, urban management, transportation, financial services, education and training.
- Ensure “healthy development of new business forms” with “good laws and good governance” related to digital economy, Internet finance, artificial intelligence, big data, cloud computing and other related legal systems
- Strengthen the execution of administrative decision-making: “Once a major administrative decision has been made, it shall not be arbitrarily changed or suspended without legal procedures.”
- Use the internet and big data in law enforcement: “Strengthen the construction of the national ‘Internet + supervision’ system, and realize the integration and aggregation of data from supervision platforms by the end of 2022.”
- Promote openness in government affairs: “Adhere to openness as the normal, non-openness as the exception, and have the government become more open and transparent to win more understanding.”
While many of the sectors named have been mentioned in previous announcements, the addition of food and drugs was new and could make investors nervous until new regulations are defined, according to Gary Dugan, chief executive officer at the Global CIO Office.
“A five-year term to the crackdown at least gives definition to the time extent of the regulatory reset,” he said. “However, it will be a long time for investors to fret about pending changes.”
Understandably, China’s sweeping plan to overhaul legislation on everything from national security to technological innovation brought pockets of pain to some insurance, healthcare and food stocks Thursday. The lack of specificity in the State Council statement saw the impact on the broader market muted, despite weeks of turmoil that have rocked investor confidence.
Some examples: ZhongAn Online P&C Insurance fell 11% to its lowest since Jan. 12 while the sector bellwether Ping An Insurance declined 2.6%. The CSI 300 Health Care Index dropped 1.5% while a gauge for consumer staples stocks fell 2.6%.
And as the regulatory resets persist, so does pressure on China's stocks: the benchmark equity gauges in Hong Kong and China saw small declines compared to their recent wild swings. The CSI 300 Index closed 0.8% lower and the Hang Seng Index declined by a similar magnitude.
Alas the pain may just be starting for China investors, where according to Bloomberg, "what looked like a year of regulatory risk for Chinese stocks could last for another five after the statement late Wednesday." It also signaled more scrutiny of anti-monopoly practices and strengthened law enforcement in sectors ranging from food and drugs to education tutoring.
Here’s what analysts and investors are saying:
Global CIO Office (Gary Dugan)
- “A five-year term to the crackdown at least gives definition to the time extent of the regulatory reset, however it will be a long time for investors to fret about pending changes”
- “While much of the announcement of the framework is consistent with what we have seen thus far, the addition of food and drugs is new and until there is a definition of the scope of any new regulations investors will be nervous”
- “We will be hoping that the Chinese authorities set out a clear philosophy around regulatory change so that investors can invest with a sense of security around the assumptions they can make with respect to regulatory change”
Emperor Securities (Stanley Chan)
- “Investors are sensitive toward any regulation news, so I think both drug and insurance companies will face some pressure today. But the impact will be less than the education and internet sector, as the regulators seem to just want to improve the industry environment, and market participants are mentally prepared for more policy uncertainties”
Bloomberg Intelligence (Marvin Chen)
- “The crackdown is not over and we think we are in the seventh inning stretch of the long game”
- “China has always laid out 5-10 year long term plans and these reforms reflect a holistic approach to improving the lives of the lower-middle class, so it is not too surprising from this perspective that insurance is a next potential target”
- Markets can see “more volatility in the near term, potential for valuations to reset lower to account for changing policy risks”
Mito Securities (Hajime Sakai)
- “While the Chinese government might be tightening on a micro-level, they are putting forth macro policies that are market friendly, such as lowering reserve requirement ratio. So those two cancel out in terms of impact“
- “If you look at Chinese equities it feels like the state has its foot on both an axle and the brake. But there is no need to be so pessimistic, as the impact should be limited to sectors”
- “There shouldn’t be a big shock to global equities. Funds that are specializing in China could be hit, but it’s hard to think that this will rock the entire global market”
Bloomberg Intelligence (Mia He)
- It seems like high-level guidance so far with no specific sectors
- The focus on technology innovation will apply to pharma industry but “anti-monopoly may not be applicable in biotech/pharma”
- Pharma could differentiate itself due to “different drug targets and treatment platforms”
- Biotech companies that focus on innovative drugs include Zai Lab, Innovent and BeiGene
Citigroup (Michelle Ma)
- “There might be short-term but manageable impacts given insurers and intermediaries could be more conservative in sales procedures, while irrational behavior by non-listed and aggressive players should moderate”
- “Listed online insurers and distributors have strictly followed guidance and been highly aware of potential regulatory inspection since they received the draft notice in Feb 2021”
Bloomberg Intelligence (Steven Lam)
- More scrutiny of insurance product sales online should be positive for ZhongAn as it will help balance business growth and consumer interests in the longer term
- “Tighter measures on sales practices, product management, claims processing and information security for online insurance products should be a positive development” for Ping An, PICC and CPIC
- Of the 11 areas pointed out by the regulator, three could be of key focus: misleading ads that overstate product features or discounts, forced bundling of insurance products with other scenarios such as travel and online lending products and excessive channel fees paid to draw customers