China Inc unconvinced Xi Jinping’s regulatory storm is over

Eighteen months after Beijing started dealing body blows to China’s business elite and their investors, President Xi Jinping’s economic tsar has finally called a truce. China Inc, however, needs convincing the pain is over.

In a rare intervention on Wednesday, vice-premier Liu He reassured investors that Beijing would support the economy and financial markets. The comments were made after Liu, Xi’s closest economic adviser, convened a special meeting of the Financial Stability and Development Committee, a critical financial oversight body.

Liu’s pledges had an immediate effect in stemming a market rout. Shares in China’s internet companies Alibaba and Tencent notched some of their biggest one-day gains in history and Hong Kong’s Hang Seng index enjoyed its best day since 2008 after closing at a six-year low the previous day.

Yet analysts and insiders have warned that Liu’s comments might not mean the end of Beijing’s punishing regulatory overhaul and unpredictable policymaking. Many are waiting to see whether actions will follow, and whether they will resolve the thorniest issues weighing on sentiment in a market deemed “uninvestable” by some.

“The government must deliver a few examples to convince the market it is doing what it said would,” said an executive at a large Chinese internet company.

“The impact of Liu He’s remarks will be shortlived without concrete actions,” added Dan Wang, chief economist at Hang Seng Bank China.

Alibaba has been buffeted by investigations since 2020 © Greg Baker / AFP / Getty Images

Liu’s statement follows a tumultuous chapter in the relationship between the Chinese Communist party leadership and the entrepreneur class that has underpinned growth in the world’s biggest consumer market.

Since the autumn of 2020, Alibaba, Jack Ma’s flagship ecommerce platform, and his internet finance group, Ant, have been rocked by monopoly and other investigations. The rapid growth of Didi Chuxing, the ride-hailing company, came to an abrupt halt after China’s cyber-space regulator, state security ministry and other agencies launched an investigation into its data security practices.

Analysts are now closely tracking how Beijing’s technology and market regulators respond to Liu’s orders.

Regulatory agencies were told to stay within their remits and roll out plans beneficial to the economy while thinking hard about undertaking policies that detracted from growth. “For any policy that will have an impact on financial markets, it should first be co-ordinated with financial regulators,” the committee said.

That uncertainty was a particular problem last year as a crackdown on China’s tech sector deepened and one regulatory agency after another piled into the attack on the country’s big internet companies.

The Cyberspace Administration of China (CAC), a unique body that answers to the party’s leadership, has expanded its purview from overseeing online content to sweeping internet regulation, including data security and regulation of algorithms. The State Administration for Market Regulation has meanwhile been empowered to tackle anti-competitive behavior.

CAC’s rise has meant officials aiming to ensure the ideological purity of the internet have at times had the upper hand over the bureaucracy responsible for economic growth. CAC officials want to ensure the country’s tycoons, in particular, are brought to heel.

“Jack Ma is nothing, even if there were a thousand Jack Mas, we could crush them all like little ants,” said a senior official at CAC last year at a closed-door seminar, according to a person in attendance.

The agencies’ next steps will help reveal who has the ascendancy in an intensifying battle between China’s economic planners, under Liu He, and the ideological-focused regulators at the CAC.

“The big question is does the CAC actually listen to him? That has been at the heart of the question that we’ve had over the past year, ”said Kendra Schaefer, a tech analyst at Beijing-based consultancy Trivium China. “How much power does the CAC have now? How much are they operating on their own, with tacit approval, how much are they taking direct orders? “

The internet executive said tech companies were “scared” of the CAC, which appears to wield more power than the top market watchdog, China Securities Regulatory Commission and the People’s Bank of China, the central bank.

However, the signal of a potential change in course coincides with Xi’s government chasing an ambitious growth target of 5.5 per cent while also dealing with a debt-fueled real estate crisis, the fallout from Russia’s invasion of Ukraine and outbreaks of the Omicron variant, which have forced tens of millions into lockdown.

Weijian Shan, chair of PAG, one of Hong Kong’s largest investment groups, believes regulators had sought to “address some issues which needed to be addressed”, including antitrust practices and the country’s property bubble.

“But the lack of co-ordination, process, warning, guidance or explanation led to unintended consequences, shocked the market and spooked investors, all of which caused the sharp slowdown in economic growth,” he said. “I think the policymakers didn’t realize how fragile the market is.”

Analysts also noted that economic stability was paramount this year as Xi, China’s most powerful leader since Mao Zedong, cements an unprecedented third term in power.

Andrew Gilholm, head of China analysis at Control Risks, said the call to “tap the brakes” on regulation reflected caution over the economic outlook rather than a sudden course change.

“It’s not ‘crackdown or no crackdown’. Enforcement will continue along the same lines, and in the same sectors. There will be times when it is more strong and dramatic and times when they ease off, ”he said.

In Beijing a popular interpretation of Liu’s message is circulating among China’s financial elite: “Foreign investors don’t run away, even though we’ve attacked you countless times, please stay.”

Additional reporting by Hudson Lockett

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