Tag Archives: regulation

Policy Shift Will Favour China’s Tech Platform And Real Estate Firms

THERE IS LITTLE doubt that China’s economic managers are ruffled. The combination of economic headwinds from the war in Ukraine to Covid’s resurgence with its large-scale lockdowns and the uncertainty over the global economy caused by inflation, supply chain chaos and tightening monetary policy are as disruptive as they were unanticipated.

The readout from Friday’s Politburo meeting was a clear recognition that the leadership understands the straitened state of the economy. Thus it is switching the balance of policy priorities from regulation and structural change back to growth.

Evidence of that can be seen in the Politburo’s signalling of an end of the campaign to ‘rectify’ the platform tech companies that started in late 2020, and its declaration that there needs to be liquidity support for beleaguered property development firms.

The English-language version of the readout put less emphasis on continuing regulation of the tech sector than the Chinese version, which, similarly, was clearer that controls on real estate speculation would continue. 

If that was an attempt to send different messages to domestic and international audiences, it strikes this Bystander as cack-handed.

Many international investors have recently turned bearish about China and moved capital out, believing the economy is in worse shape than even the official figures suggest, exacerbated by adherence to the zero-Covid policy.

However, they will judge the concrete support for the ‘healthy’ development of the platform tech and real estate sectors on its merits rather than its promise. That support will come sooner rather than later.

The government wants both sectors to thrive, especially now, but in a way that serves central policy objectives more directly than before. 

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China’s New Tech Order

AFTER NEARLY TWO years of crackdowns on various tech industry sectors, a series of policy plans have emerged that collectively outline a path of re-organisation and gradual but not disruptive development into the middle of this decade.

They bring some cohesion to the loosely connected regulatory measures taken since late 2020. The steady implementation of a clear regulatory and policy framework will replace what has looked like abrupt and random regulatory interventions.

This will be a cornerstone of the recently issued five-year plans for national informatisation and the digital economy,

China’s goal is to streamline private tech businesses from fintech firms to app platforms and enmesh them with state-owned enterprises and investment vehicles to ensure greater policy control. There is a particular focus on data and aligning the tech sector with the ‘common prosperity’ and ‘dual circulation’ development agendas.

It will be a balancing act. Beijing needs to avoid squashing innovation as it pushes to develop an indigenous tech sector that can improve economic self-reliance and be internationally competitive.

Policymakers want to use digital technologies to enhance service capacity and quality across the economy and serve underserved populations, for example, by expanding social services to rural consumers or extending credit to small and medium-sized enterprises. Yet, they also want to ensure state control of the data generated by private businesses and that those businesses do not use oligopolistic power to exploit the troves of data they collect from consumers and citizens.

The plans align with the intent to redress ‘the disorderly expansion of capital’. As with the admonition to the real estate industry that housing is for living in, not speculation, the tech sector is being schooled that it has to fulfil the needs of the real economy.

In particular, that means contributing to national innovation to help transform legacy industries in manufacturing and agriculture and playing a more significant role in generating access to and delivery of government and public services.

That message is being strongly sent to fintech firms, in particular. The idea is that fintech should be incorporated into the existing banking system, not disrupt it.

Financial instability remains a worry. Authorities are increasingly concerned that fintech products for consumers risk adding a layer of unsustainable household debt on top of existing corporate debt. Concerns about threats to the financial system were one of the reasons that authorities banned cryptocurrencies last year.

For tech companies as a whole, Beijing is making it clear that it rejects the digital economy model of large, winner-takes-all platforms as seen in the West and embraces new business models that enmesh state and private actors.

The era of unregulated growth is over. Tech firms will now be expected, for which read required, to contribute to the Party’s other policy objectives — tackling financial risk, supporting social objectives and development goals, improving market regulation and data security — and their shareholders, patriotically, to bear the costs.

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Beijing Reportedly Tightening Up On Tech Company Foreign IPOs

CHINA’S SECURITIES REGULATORS indicated last month that stricter supervision of all firms listed offshore was coming. Reports now say this sweeping intent is being narrowed to a ban on foreign listings by platform technology companies whose data poses potential security risks. Any proposed foreign listing would have to pass Cybersecurity Administration of China review.

In recent months, Beijing has tightened its grip on the platform companies. Particular attention is being paid to unfair competition and the companies’ handling of the enormous troves of consumer data they collect. Foreign initial public offerings have been part of that, but have become more politically sensitive after Didi Global, parent of ride-hailing app Didi Chuxing, ignored the authorities’ request to pull its share offering in New York.

The new rules to limit foreign listings are also reported to include a tightening up on variable interest entities (VIEs), a legally ambiguous corporate governance structure used by technology companies to raise capital overseas as it gets around Beijing’s restrictions on foreign investment in sensitive industries such as media and telecommunications. The changes could include greater shareholding disclosure and bringing VIEs, generally incorporated in tax havens, under direct legal jurisdiction.

One intent behind the change may be to drive tech companies back to domestic markets on the mainland or Hong Kong for their listings. After the halting of Ant Group‘s $37 billion share flotation last year and subsequent regulatory tightening over domestic new listings, scores of tech companies seeking outside capital dropped plans to list on Shanghai’s STAR Market and Shenzhen’s ChiNext market and rushed to list overseas, particularly in New York.

More broadly, the new rules, if they come to pass as advertised, will be in line with Beijing’s national security concerns, imagined or not, that foreign ownership could result in the disclosure or compromise of mass Chinese user data.

They will also align with the leadership’s growing intent to ensure that business supports China’s national interests as the Party defines them. Keeping the wealth created by the country’s burgeoning technology sector at home to fund more indigenous development in the sector is one of them.

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Cracked

We”ll we’ve seen and aren’t too sure what we are looking at. Immediately after announcing new regulations to close loopholes in 2006 securities transaction rules, (see Stock Sheriff Swaggers) the regulators have announced their first exemplary fine on a retail investor.

Zhou Jianming has been fined 1.8 million yuan ($245 million) and a similar amount said to be his illegal profit confiscated. Zhou was accused of ramping the share price of Datong Coal Industry and 14 other companies between June and November last year. He did this in Datong Coal’s case by raising his bid from 10.22 a share to 10.59 a share 61 times in course of an hour during which he bid for 40 million shares, according to Shanghai Daily.

The China Securities Regulatory Commission says this was done to mislead other investors and bloat the share price. Given the Wild West ways of the Shanghai market, this seems like crushing a nut with a sledge hammer while leaving the rock nearby untouched.

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