China’s Crackdown on The Private Sector Raises Risks

Losses mount as the government targets private enterprises and tech firms.
An analysis by Michael Lelyveld
A construction employee works on the upper floors at the buidling site of the Wuhan Greenland Center skyscraper in Wuhan, capital of central China's Hubei province, Sept. 28, 2020.

China's new measures to rein in property investment are raising questions about a wave of crackdowns on private enterprises, internet platforms and tech firms.

In one of the latest moves, Bloomberg News reported on Aug. 12 that private equity firms would be barred from receiving required registrations from the government-backed Asset Management Association of China (AMAC) for property investments, effectively blocking funds for real estate projects.

The restriction is seen as a response to recent decisions made by leaders of the Chinese Communist Party (CCP) at a Politburo meeting on economic policies and priorities for the second half of the year.

“At the July 30 meeting, the top leadership stressed that as a long-term mechanism for the smooth functioning and healthy development of the property market is being established, an overall restructuring of the industry would be in order,” the official English-language China Daily said.

The investment restriction is seen as another hurdle for property developers, who have already faced tougher regulation of bank loans and trust funding, Bloomberg reported.

Real estate development has been subject to over 320 new regulations or amendments since the start of the year, according to Centaline Property Agency Ltd., the report said.

While the restrictions and restructuring plans appear to be part of a new wave of pressure on the private sector, many threads of previous policies have contributed to the property rules.

The most frequently cited factor is President Xi Jinping’s dictum that “housing is for living in, not for speculation.”

The populist slogan reflects social and economic pressures that have been building for over a decade as property prices have raced ahead of average incomes, turning empty apartments into stores of wealth for those with money to invest.

The wealth gap between urban property owners and migrant workers from rural areas has been perpetuated by rising real estate prices, clashing with CCP claims of ending extreme poverty and creating “a moderately prosperous society in all respects.”

Despite advances in earnings since 2013, the average income of rural dwellers in China remained 39 percent of that of urban residents last year, according to official figures cited by Nikkei Asia.

Investors bullish on property market

Property prices have continued to climb despite the maze of restrictions on investment. Commercial housing sales rose 21.5 percent in the first seven months of the year in terms of floor area and 30.7 percent in terms of value, the National Bureau of Statistics (NBS) reported last week.

In an attempt to curb prices, authorities have suspended land sales in some major cities, choking off a revenue source that earned 8.4 trillion yuan (U.S. $1.3 trillion) for local governments last year, Bloomberg said separately on Aug. 16.

China’s property curbs have also been driven by the government's push to reduce financial risks.

Concerns have grown over investments in major real estate developers like the Evergrande Group, with estimates of outstanding debt running as high as U.S. $300 billion (1.9 trillion yuan), The New York Times said.

The government’s pressures on real estate development also reflect its resistance to calls for more investment-led stimulus to revive economic growth and COVID-19 recovery.

Investors remain bullish on the property sector despite the new rules, shifting their focus to projects that provide new housing for rent in keeping with the “overall restructuring of the industry” and government policies, Reuters said.

But alternate readings of the government's intentions have not been ruled out, particularly with respect to recent crackdowns on private enterprises and technology companies.

In recent months, the government's heavy-handed regulators have demonstrated a nasty habit of finding fault with high-flying private companies just as they have launched public offerings, leading to disastrous losses for investors.

The pattern was set last November with the suspension of a U.S. $34-billion (220-billion yuan) initial public offering by the Ant Group, an ambitious on-line microlending venture. Months later, the government imposed record anti-monopoly fines against its e-commerce parent Alibaba, founded by billionaire Jack Ma.

Since then, a series of badly-timed investigations, enforcement actions and regulatory measures have disrupted investments and plans of China's far-flung platform providers and technology companies.

Jack Ma has vanished from public view, adding to investor anxieties. Over U.S. $1 trillion (6.47 trillion yuan) in market value has been wiped off the books, reports say.

In April, the People's Bank of China (PBOC) and other regulators slapped sweeping restrictions on 13 internet-based businesses, curbing their collection of personal and credit data, and demanding restructuring of their business models.

Technology, e-commerce and communications giants including Tencent Holdings Ltd., ride-sharing firm Didi Chuxing Technology Co., and ByteDance Ltd. were all targeted.

“Investors, analysts, and company executives believe the government is just getting started in its push to realign the relationship between private business and the state, with a goal of ensuring companies do more to serve the Communist Party’s economic, social and national security concerns,” The Wall Street Journal said on Aug. 6.

The government has stepped up the pressure with new rules that it says are needed for cybersecurity.

Draft revisions required tech companies with over 1million pieces of personal data to be subject to cybersecurity reviews before seeking listings abroad, the official Xinhua news agency reported on Aug. 20.

Final versions of the Personal Information Protection Law have yet to be published, but drafts require companies to get user consent for data collection and strict rules for transferring data outside the country, according to CNBC.

Recent government interventions in the tech sector have spanned corporate interests from the online video game business of Tencent Holdings to the operations of for-profit tutorial companies, which were banned by an order of the cabinet-level State Council last month.

Since the Ant Group suspension, regulators have taken more than 50 actions against private companies for alleged antitrust violations and other issues, according to a Goldman Sachs Group report.

The market value of six leading technology companies in China has dropped by over 40 percent since February, The Wall Street Journal said.

A common denominator

It may be difficult to draw a straight line between the e-commerce crackdowns and the funding restrictions for property development, but it is inescapable that all of the recent regulatory targets are private enterprises.

In the face of rising criticism, a regulatory official denied the existence of any such connection, Xinhua reported Thursday.

The crackdown is “non-discriminatory and by no means targeting private and foreign enterprises only,” said Han Wenxiu, an official of the Central Committee for Financial and Economic Affairs.

“The purpose of tougher regulation is to ensure healthier, more sustained and longer-term development,” Han said.

On Friday, The Wall Street Journal reported that regulators are working on new rules that would bar Chinese companies with large amounts of “sensitive consumer data” from listings in the United States.

The wave of regulatory measures has been unusually arbitrary, value destructive, and abrupt. The power of the party and the state to control private enterprise is a common denominator, regardless of cost.

While the tech sector has struggled to comply with the regulatory push, the government's ban on tutorial companies may have set a new standard for regulatory overreach and flimsy rationale.

The State Council order of July 19 barred licenses and investment in tutorial institutions because they may raise educational costs, posing a potential disincentive for President Xi Jinping’s three-child policy.

“The move threatens to decimate China’s U.S. $120-billion (778-billion yuan) private tutoring industry,” Reuters said.

“This is unprecedented. A whole industry was almost wiped out overnight. And it just underscores how hard it is to quantify risks tied to investing in China,” Alex Au, managing director of Alphalex Capital Management, told The Wall Street Journal.

While the government's regulatory responses have been impulsive, its policies seem to be following at least two streams. One is oriented toward controlling societal conditions, while the other aims to keep pace with technological change.

“The crackdown on education fits the long pattern of periodic attacks on property investment. It’s standard central government behavior,” said Derek Scissors, an Asia economist and senior fellow at the American Enterprise Institute in Washington.

“The central government doesn't care if a few major developers die or the private education sector largely disappears,” Scissors said.

“In comparison, the tech sector must grow, yet it needs to be tightly controlled for the party leadership to feel secure,” he said.

Regulation of the tech sector has been typically behind the curve of innovation by the private sector, exposing investors to sudden risks and losses.

“Private investment is dynamic, so it’s the natural target for regulators and they are usually late in understanding the situation, regardless of the industry. But tech is genuinely strategic, while the others are not,” Scissors said.


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