Register For Our Mailing List

Register to receive our free weekly newsletter including editorials.

Home / 434

Is China’s regulatory reform stifling ‘animal spirits’?

  •   Chi Lo
  •   17 November 2021
  •      
  •   

Some investors worry that regulatory tightening in China could strangle growth in its private sector, which is now dominated by technology companies and e-commerce platforms. Such concerns have wiped about USD1 trillion off valuations on China’s stock market over the past year. The poor sentiment has spilled over to other Asian markets and their tech sectors.

Why is China taking the risk of damaging these new drivers of economic growth when building a high-tech economy is part of its ‘common prosperity’ policy framework? Is there evidence of China’s regulatory overdrive negating investment incentives in its private sector?

How badly damaged is the private sector?

Many players see Beijing’s regulatory campaign, which started in 2020, as a move to exert greater control over the private sector and the technology firms and make them subservient to the Communist Party under the guise of an anti-monopoly policy. According to this school of thought, the survival of China’s private sector is under threat.

On closer examination, though, the e-commerce and technology companies subjected to the crackdown are a small share of the large and growing private sector. We have found no evidence of significant damage done to the private sector despite media reports to the contrary.

Reflecting the continued growth of the private sector is:

  1. The sharp decline in state-owned enterprises (SOEs) as a share of total industrial firms (Exhibit 1)
  2. The strong increase in private-sector employment in the industrial sector (Exhibit 2)
  3. The significant rise in the share of private investment at the expense of the SOEs’ share (Exhibit 3).

All this suggests that the large private and tech companies hit by Beijing’s measures play a small part in the overall private sector. While they may have made the news headlines, their situation is not representative of the whole private sector.

We have also found no evidence as yet of the much-feared decline in private investment in the wake of the regulatory tightening.

High-frequency investment data shows that while the growth rate of fixed asset investment by non-state-owned companies [1] has slowed, it has continued to outperform SOE investment by a wide margin since the regulatory campaign began (Exhibit 4). In fact, SOE investment has been contracting since early 2021, while non-state and private investments have continued to grow.

Why the crackdown?

Beijing is taking the opportunity arising from the economy’s Covid recovery to tighten oversight. It aims to align the private sector’s interests with Beijing’s strategic targets. Indeed, such reform is long overdue, as poor oversight has allowed many Chinese private companies, notably the internet firms, to prosper and add to moral hazard problems in the system. 

Granted, China needs proper regulation for its private and tech sector. The question is whether it has now over-tightened and, thus, risked strangling innovation and incentives in the private-sector. This concern has understandably spooked markets, leading to a sharp sell-off in Chinese equities, especially tech and e-commerce stocks.

However, we believe China is just catching up with global practices of tighter supervision of tech companies rather than pursuing a more aggressive agenda to rein in corporate profits or destroy private capital.

Evidence shows that other countries, notably the US, the EU, South Korea and Japan, have been active in probing technology firms for alleged collusion and monopolistic practices and bringing anti-trust cases against global tech companies. [2]

What makes China different is that it has stepped up tightening efforts on the internet sector faster than other countries. An examination of Asia’s new regulations and remedy measures suggests they are broadly in line with those implemented by Europe and the US. [3]

For example, Chinese anti-trust laws allow for fines of 1-10% of annual turnover for anti-monopoly violations. This is consistent with most practices around the world. However, China and most Asian countries have been lagging in implementing the laws. They are catching up now and China has become even more active in enforcement.

Market implications

In a nutshell, China’s regulatory tightening since 2020 is, arguably, a tactical shift of its reform policy under the ‘dual circulation’ framework to tackle intensifying domestic and geopolitical challenges. Beijing still wants the private sector to drive innovative change and fund the development of high tech.

The regime change may have been abrupt, hurting the valuations of some of the best-known private companies and unsettling the stock market. However, the resultant correction now appears to have priced in most, if not all, of the regulatory concerns.

Repricing the internet sector under the new regime should give China’s tech sector a new investment horizon when the dust has settled.

 

Chi Lo is the Senior Market Strategist APAC of BNP Paribas Asset Management based in Hong Kong. The information published does not constitute financial product advice, an offer to issue or recommendation to acquire any financial product. You will need to seek your own advice for any topic covered in the article. 

 

[1] Non-state-owned firms include private firms, collectives, cooperatives, joint enterprises, foreign private firms and sole propriety ownership.
[2] “A Cheat Sheet to all of the Antitrust Cases Against Big Tech in 2021”, Quartz, 29 September 2021 at https://qz.com/2066217/a-cheat-sheet-to-all-the-antitrust-cases-against-big-tech-in-2021/.
[3] “APAC Regulatory Fears Drive US$1tn Selloff: Overreaction or Signal of More to Come?” UBS Q Series, Global Research, 20 October 2021.

 


 

Leave a Comment:

RELATED ARTICLES

Three themes and companies to play China's rise

China’s new model is a plan for a hostile world

Five trends shaping investments in China: 2021 and beyond

banner

Most viewed in recent weeks

Are LICs licked?

LICs are continuing to struggle with large discounts and frustrated investors are wondering whether it’s worth holding onto them. This explains why the next 6-12 months will be make or break for many LICs.

Retirement income expectations hit new highs

Younger Australians think they’ll need $100k a year in retirement - nearly double what current retirees spend. Expectations are rising fast, but are they realistic or just another case of lifestyle inflation?

Welcome to Firstlinks Edition 627 with weekend update

This week, I got the news that my mother has dementia. It came shortly after my father received the same diagnosis. This is a meditation on getting old and my regrets in not getting my parents’ affairs in order sooner.

  • 4 September 2025

5 charts every retiree must see…

Retirement can be daunting for Australians facing financial uncertainty. Understand your goals, longevity challenges, inflation impacts, market risks, and components of retirement income with these crucial charts.

Why super returns may be heading lower

Five mega trends point to risks of a more inflation prone and lower growth environment. This, along with rich market valuations, should constrain medium term superannuation returns to around 5% per annum.

Super crosses the retirement Rubicon

Australia's superannuation system faces a 'Rubicon' moment, a turning point where the focus is shifting from accumulation phase to retirement readiness, but unfortunately, many funds are not rising to the challenge.

Latest Updates

Investment strategies

Why I dislike dividend stocks

If you need income then buying dividend stocks makes perfect sense. But if you don’t then it makes little sense because it’s likely to limit building real wealth. Here’s what you should do instead.

Superannuation

Meg on SMSFs: Indexation of Division 296 tax isn't enough

Labor is reviewing the $3 million super tax's most contentious aspects: lack of indexation and the tax on unrealised gains. Those fighting for change shouldn’t just settle for indexation of the threshold.

Shares

Will ASX dividends rise over the next 12 months?

Market forecasts for ASX dividend yields are at a 30-year low amid fears about the economy and the capacity for banks and resource companies to pay higher dividends. This pessimism seems overdone.

Shares

Expensive market valuations may make sense

World share markets seem toppy at first glance, though digging deeper reveals important nuances. While the top 2% of stocks are pricey, they're also growing faster, and the remaining 98% are inexpensive versus history.

Fixed interest

The end of the strong US dollar cycle

The US dollar’s overvaluation, weaker fundamentals, and crowded positioning point to further downside. Diversifying into non-US equities and emerging market debt may offer opportunities for global investors.

Investment strategies

Today’s case for floating rate notes

Market volatility and uncertainty in 2025 prompt the need for a diversified portfolio. Floating Rate Notes offer stability, income, and protection against interest rate risks, making them a valuable investment option.

Strategy

Breaking down recent footy finals by the numbers

In a first, 2025 saw AFL and NRL minor premiers both go out in straight sets. AFL data suggests the pre-finals bye is weakening the stranglehold of top-4 sides more than ever before.

Sponsors

Alliances

© 2025 Morningstar, Inc. All rights reserved.

Disclaimer
The data, research and opinions provided here are for information purposes; are not an offer to buy or sell a security; and are not warranted to be correct, complete or accurate. Morningstar, its affiliates, and third-party content providers are not responsible for any investment decisions, damages or losses resulting from, or related to, the data and analyses or their use. To the extent any content is general advice, it has been prepared for clients of Morningstar Australasia Pty Ltd (ABN: 95 090 665 544, AFSL: 240892), without reference to your financial objectives, situation or needs. For more information refer to our Financial Services Guide. You should consider the advice in light of these matters and if applicable, the relevant Product Disclosure Statement before making any decision to invest. Past performance does not necessarily indicate a financial product’s future performance. To obtain advice tailored to your situation, contact a professional financial adviser. Articles are current as at date of publication.
This website contains information and opinions provided by third parties. Inclusion of this information does not necessarily represent Morningstar’s positions, strategies or opinions and should not be considered an endorsement by Morningstar.