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Economists say the worst of China’s regulatory crackdown is over

Traders work during the IPO for Chinese ride-hailing company Didi Global Inc on the New York Stock Exchange (NYSE) floor in New York City, U.S., June 30, 2021.
Brendan McDermid | Reuters

BEIJING — The worst of China’s regulatory crackdown is over as Beijing shifts its focus to supporting growth, economists said.

That does not mean the end of regulation — which has swept across internet technology, real estate and other industries in the last year — but signals fewer major changes ahead, the analysts said.

China’s economy slowed to 4% year-on-year growth in the fourth quarter, despite expanding by 8.1% for the full year. Sluggish consumer spending dragged down growth, while a slew of regulatory developments added to businesses’ uncertainty on top of the coronavirus pandemic.

Chinese leaders’ new priority for 2022 is to defend 5% growth, Macquarie’s chief China economist Larry Hu said in a note late Wednesday. That means “peak anti-monopoly, peak property tightening and peak decarbonization are all behind us.”

“Peak regulation means fewer and less intensive regulation changes this year, as the focus on regulation last year has given way to a focus on growth,” Hu added in an email. “Put differently, it means that the worst is over, but not a reversion to the past.”

In 2021, Beijing cracked down on alleged monopolistic behavior by internet giants such as Alibaba, real estate property developers’ high reliance on debt and regional failures to reduce carbon emissions. Abrupt changes disrupted business, notably in factory power cuts and mass job losses at after-school tutoring centers.

But in the last few months, official statements point to a softening in Beijing’s stance, analysts said.

“As one senior official, Han Wenxiu, said in December, the government will refrain from launching policies that have negative impact on economic growth,” Zhiwei Zhang, chief economist at Pinpoint Asset Management, said in an email Thursday. “President Xi [Jinping] also published an article which reiterated the importance of digital economy. I’d expect the government to focus on economic stability this year.”

Zhang doesn’t anticipate a reversal of regulations, just fewer major changes. His question is “how and when the government will implement the policies they already announced last year, such as the property tax pilot program and the registration based IPO reform.”

Announcements this week added to signals on how Beijing would reduce its rigidity.

Top leaders in December had already removed references to anti-monopoly, property policy and carbon neutrality from a list of economic tasks for 2022, Macquarie’s Hu said.

Steelmakers get another five years to reduce emissions

Then on Monday, China’s top economic planning agency and two ministries delayed the target year for the steel industry to reach peak carbon emissions by five years to 2030.

The extra five years can reduce the burden on steelmakers by allowing them to spread out investments in decarbonization and avoid large capital expenditures in the short term, Moody’s analysts said in a note Wednesday.

They don’t expect the change to affect the nation’s goal of reaching peak carbon emissions by 2030. “The government will continue to implement strict control over steel capacity and production while encouraging environmentally-friendly projects,” the analysts said. “Such efforts, along with the extension, will also help support stability in steel supply and prices.”

On Tuesday, the People’s Bank of China announced loans for affordable rental housing would not count toward the limited amount banks can lend to the property sector, freeing up more capital to support the real estate industry.

More communication with markets

That same day, the Chinese Communist Party’s official newspaper, People’s Daily, published an editorial stating that while rules on the use of capital are needed to reduce monopolistic behavior, among others, the economy still needs capital for growth.

Beijing’s crackdown on alleged monopolistic behavior has particularly targeted internet technology companies like Alibaba that are listed in the U.S. This and other policy developments since Chinese ride-hailing company Didi listed in New York in late June have given international investors pause on putting money into the country.

The People’s Daily article “suggests regulatory curbs on the internet sector will stay in place, but will likely become more rules based, with fading uncertainty as the regulatory framework takes shape,” Bruce Pang, head of strategy and macro research at China Renaissance, said in a note Tuesday.

Regulation in line with political themes such as common prosperity — moderate wealth for all, rather than a few — and sustainable development will remain, Pang said. But “we think the authorities have begun to carefully manage the pace and intensity of the regulatory campaign in order to complete major economic and social development targets set for the next 5-10 years.”

He noted how Chinese officials have started to communicate better with the market about the motives and reasons for regulation as well as areas of future government scrutiny. “Investor concerns may be driven less by the substance of proposed regulations and more by communication,” he said.

The Shanghai composite is up more than 3% this week — the first trading week of the month due to a holiday — after falling by more than 7.5% in January. The Hang Seng Index is up more than 4% this month after gains of 1.7% in January.

KraneShares CSI China Internet ETF (KWEB) — a U.S.-listed exchange traded fund that includes Chinese stocks listed abroad — plunged by more than 50% last year amid regulatory uncertainty. The ETF is up 5.4% so far in 2022.

Not the end of regulation

Peak regulation is certainly not the end of regulation, Macquarie’s Hu said in his report. He pointed to a similar regulatory peak at the end of 2018, which served as a turning point for a sell-off in mainland Chinese stocks, even though local governments and businesses continued to act.

China’s government system often means local authorities vie for Beijing’s attention through sometimes extreme implementation measures. Official language from central government directives then often warns against “blindly” shutting down a line of business.

For 2022, Beijing has emphasized stability above all. In the second half of the year, the ruling Chinese Communist Party is set to hold a meeting for determining top leadership positions — including the expected extension of President Xi Jinping’s term beyond that of his predecessors.

The political pressure for stability comes after a year in which the Party celebrated its 100th anniversary. The country meanwhile had an economy bouncing back fast enough from the pandemic to withstand what analysts have called painful but necessary changes to address longstanding problems.

Now, growth is slowing as China also tackles fresh coronavirus outbreaks.

“The regulatory wave in 2020-21 brought many unintended consequences,” Hu said. “For instance, business confidence weakened, the property sector plunged, and commodity prices surged.”

“The consequence of [Beijing’s] campaign-style is that things could easily be overdone. As the result, top leaders would have to fine-tune from time to time, decide the time to claim victory and move on to the next campaign,” Hu said. “It happened so many times over the past one hundred years, and will continue to happen in the future.”

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