A popular Wechat blogger, calling himself Chairman Rabbit, wrote an article today to address the panic selling of chinese tech stocks (especially by overseas investors). Chairman Rabbit himself is well connected in the Chinese political establishment.
In his blog, he addressed the question from overseas investors that “they do not understand China, and do not know which industries the supervision will spread to next after education and training”. As he said “The Chinese model is so special that it is not easy to tell Chinese stories.”
The original blog is very insightful, and answers the key questions that investors have.
Question 1: Regarding enterprises/industry, which areas will China’s government/regulatory agencies pay attention to?
The author sets this out in 7 areas that he feels the regulators will focus on, and why.
- The “Too big to fail” threat and companies that use this to confront regulators
Companies that have significant market share will have systemic risk – to their own industry, the financial industry, employment and also to consumers. Many of such companies claim that they are “too big to fail” as their strategic moat to grow even bigger to the extent that it is challenging and confronting regulatory supervision.
The author quotes “In China, first, the bigger you are, the more you have to “obey” and be a good student. Second, there is no such thing as “too big to fail. Don’t think you can hijack supervision and challenge the government.”
- National security
The data security of Didi since its listing has been an integral part of overall China national security outlook. For obvious reasons which the author explained in his original blog, China does not want companies to list in the US, and would want them to list in HK instead. In future, when listing in foreign countries, a thorough review/screening on data-related issues is required.
- Specific industries that are important to national economy and people’s livelihood
Real estate, finance, education and training, or any companies in industries that are subject to heavy regulatory restrictions will face even more policy risks. These industries are important to the national economy and people’s livelihood, the country has an overall strategic orientation and deployment, and there are top-level values behind it.
- Protect small and medium businesses and consumers (i.e. “vulnerable groups”)
Many entrepreneurs/ investors are confused- because this is now different from what the regulators had been doing the past decade, i.e. promoting large industries and capital with relatively few restrictions.
But the author reminds us to take a step back – all these happened before the “new era”, when China’s economy was still in the initial stages of growth. What was to be solved at that time was employment, the improvement of absolute income, the acquisition of labor skills, the upgrading of economic industry and structure, and the improvement of the country’s overall strength and economic foundation.
He reminds us that the values of the Chinese Communist Party have not changed, but the current focus has changed. This is no different from left-wing party politics in the West. What the Chinese Party wants is also what the Western Left Party wants (i.e. progressive politics).
- Protect ordinary workers
In the past, China’s business environment and supervision were relatively favourable toward the capital, and the capital was more comfortable. Similar to point 4, the author shares that in the new era, the balance is moving towards ordinary workers. The basic rights and interests of ordinary workers, including salary levels, social security, working environment, and other benefits are the focus of regulatory agencies.
This is an inevitable trend of social development. The Chinese government is just doing the right thing, and it should have been done long ago. It’s just that people are very unaccustomed to this policy that favors ordinary workers.
Such policies will affect labor-intensive industries and enterprises that employ a large number of people. Its effect has already appeared in the capital market (for example, the food delivery industry).
- Ideological issues
Before the new era, industries involving culture/ content were not high on the regulators radar. However, the political division between China and the United States has made ideology extremely important.
At present, the release of ideological and cultural content requires cooperation, conformity, compliance, and support for China’s mainstream political order and ideology, and it must not cross the border. All kinds of content-related industries and enterprises face relatively large policy uncertainties.
- Public Order and Morals
Sounds a bit abstract, but it actually refers to things like traditional morality, values, intuition. If something goes against traditional or mainstream values, it may be subjected to regulatory restrictions.
For the Chinese, there are unwritten rules/ examples that can be referenced to/ followed. One infamous case was misconduct of a male celebrity (i.e. cheating on his girlfriend) – public outrage caused him to be removed from one of the most high profile movies in China, which will affect his personal future.
Public order and good customs are somewhat related to ESG responsible investment in overseas investment.
Question 2: What are the characteristics of Chinese government regulators? How do they make decisions?
It is difficult for Westerners to understand China’s regulatory logic. They always think that the government wants to “maintain the rule” and restrain/ restrict capital. Or is it to “maintain stability” and “win the hearts of the people” to “maintain the legitimacy of the rule.” In fact, in China, these governance and supervision are driven by values, in order to achieve a higher order, a certain high morals.
Below, the author gives 5 analysis of the Chinese government regulators:
- Value-driven and pursuit of high morals
Behind political policies are a set of values and ethical standards, and they have their own logic. This logic can be deduced, has its reason, and is actually very close to common sense.
- Normative (standardised) and prescriptive (diagnostic/modified)
The idea of supervision is to establish and shape certain values, sort out standards, and regulate certain behaviours by formulating rules. Supervision is a means to establish and maintain values.
- Paternalistic and interventionist
The government assumes the ethical responsibility of finding consensus, building consensus, and pushing society to a better place.
It believes that it needs to tell the people what better practices and better standards are. To this end, it will use necessary “intervention” methods to influence the behavior of society, groups and individuals.This is very similar to Chinese parents.
- Supervision is principle based (principle-led), not rule-based (rule-led)
Behind various regulatory actions are such abstract principles, rather than specific rules. Rules are only means. Therefore, the core is to explore, identify, and understand this set of abstract principles.
- Beyond the law, “legal instrumentalism” (legal instrumentalism)
This system of governance and supervision is actually above the law and operates above the law. At this time, laws and regulations are only tools and means to achieve governance, norms, and ethical goals.
Emphasise: the law is a means and a tool, not an end in itself.
This is very different from the rule of law in the West. The Chinese may be able to understand, but not easy for Westerners to understand this.
Question 3: What are the thought process and choices of overseas investors
It is even more difficult to tell stories about Chinese politics and governance to overseas investors. Because they are not here to just listen to a narrative or a statement – they want to spend real money to invest.
Investors are realistic and profit-seeking, which is known as long-termism, but many decisions are often based on short-term/immediate knowledge and understanding of the situation. Many people do not understand Chinese stories and lack such knowledge.
They may be persuaded and moved to a certain extent, but they don’t think it’s worth the investment. Or, even if they do understand the logic and are willing to invest, they’ll be worried that other people may not understand it – which will also make investment difficult. It’s not enough for one person to understand it, all the stakeholders need to understand it – else, it won’t solve the problem.
Most people may not understand it, or are unwilling to spend time on research, or think that certainty is impossible after research.
The result is,
- First, if you don’t understand, you will first withdraw your funds and not invest.
- Second, it is believed that China’s supervision is indeed logical, but it is not thorough and does not know where the border is. There will always be uncertainty. Then investors will give the company a discount.
This is the “China discount” nowadays. Companies operating in China are subject to the regulatory environment and special governance logic, and they have to bear valuation discounts when offshore financing.
Question 4: What’s going through the Chinese regulator’s mind?
For Chinese regulators, the stand is clear – China needs to regulate and govern these companies in accordance with its own ethics and governance logic (not that of the West).
They will not tolerate Chinese companies listed in the United States becoming “hostages” for the United States and foreign forces to coerce China and reduce the choice of the Chinese government.
Therefore, the intersection between Chinese goverance and overseas investors is actually very limited.
In this environment, China’s stocks will naturally fall sharply. Investors have suffered losses. Even if they can see some of China’s governance logic, the questions raised are far greater than the answers they get, and it will be difficult to fix them for a while.
The next period of time will probably be a severe winter for many Chinese companies which rely on financing offshore. But this is the price that Chinese regulators are willing to bear for stability and moving the country into the “new era”.
