Investors are now deeply worried about Chinese tech stocks’ prospects, after a string of government decrees that targeted different sectors. Some people believe that the worry stems from the fear of “policy uncertainty”.
A post by a blogger in China pointed out the fallacy of such fear. It cited a common thought “any business should be able to develop freely unless explicitly prohibited by the law. If there is another sword outside the law that could fall anytime, won’t you be worried?”
The blogger went to explain that while many investors in China accept the thought that “those not explicitly prohibited by law are allowed”, they do not necessary understand what it really means.
A legal system is the basic protection mechanism for entrepreneurs and investors, and it guarantees the functioning of the economy. However, laws are made for a purpose, and can be tweaked or interpreted when necessary.
Three years in the making
Specific to the education policy, the revision to the Non-State Education Promotion Law in China was passed in 2018. Many of what we see today was already specified in the legislation – how can we accuse the government of being arbitrary?
Even if it was, it is probably no more, in terms of magnitude, than Trump’s attempted TikTok and WeChat ban, which came from decrees?
Unlike the Trumpian episode, the Law in China did not target specific companies, but to specify the positioning, role and responsibilities of private education in China. A few investors the blogger spoke to back in 2018 said “the government seems not to be very determined in education reform”.
That was the reason why more capital investment went into the education sector, further expanding the tutoring industry from kindergarten to K12.
Investors were “gambling”
The blogger pointed out that investors were ‘gambling’ and banking on government inaction in what he called ‘wishful thinking’.
In fact, education, especially primary education, impacts tens of millions of children, and ‘the future of the country’, there is a mismatch between investors’ push for fast growth and the long term planning by the state.
The blogger said that if investors understand the rationale behind, they will know that building an off-campus primary education system is against the objectives of the education reform in China.
“As investors, you should be able to predict it, and act accordingly,” said the blogger.
He also pointed out many wise investors had been prepared. Some tutoring companies have pivoted, over the past years, from building a separate education system to supporting the current, state-dominated, education system.
Hillhouse, the famous fund manager, sold out all education stocks way before the current crisis.
The problem with the edtech companies is, the blogger pointed out, their management knew it was coming, but they could not respond because they were occupied by the fierce competition against each other. A zero sum game as it turned out to be.
Long term thinking
The blogger pointed out that the current storm finally woke everyone up – and they start to realise that changes could really happen. However, 3 years ago, the issues of labour protection, consumer protection, IP protection and anti-trust had been in the eyesight of policymakers, and investors.
The policymakers now came very prepared – to address these issues one by one.
This is how he ended his blog post:
“Those who believe that Chinese policies are unpredictable are those who had their own eyes blindfolded. They expect US and European antitrust measures to be predictable, but China’s to be not; they think it is right for US and Europe to protect labour rights, but wrong for China to do the same.
“It is a time where you need to think long term. And if you do think long term, nothing is unpredictable.”