From tuition to takeaways, why China’s regulatory crackdown is proving unappetising for investors
China’s government has just provided investors with another reminder of why they should tread carefully when putting money into the country.
At the end of last month, the Chinese ride-hailing app Didi made history when it floated on the New York Stock Exchange with a valuation of $70bn, making it the biggest IPO of a Chinese company in seven years.
Just days later, the Chinese government told Didi to stop registering new drivers and users for its app, which it followed by demanding that Didi be removed from Chinese app stores.
The shares plunged and are now 42% lower than the price at which they listed.
Now Beijing has done it again with a fresh salvo aimed at tech and education companies.
Firstly, the Chinese government announced on Friday night that it was banning private tutoring and test preparation for core school subjects, arguing the move would ease financial pressure on hard-up Chinese families.
Private tutoring in China is a $120billion-a-year business and around three-quarters of Chinese children are reckoned to have some form of private tuition outside school.
Beijing, which is concerned about the country’s rapidly-ageing population, suspects the financial pressure of educating children privately may be a reason why couples are still not having more children despite the abolition in 2015 of the “one child” policy.
The measure, which is believed to have come from President Xi Jinping himself, was accompanied by restrictions on foreign investment in private tutoring companies and is also expected to see advertising bans imposed – as well as restrictions on when tutoring can be made available.
The move sent shares of private tuition companies, many of which are listed in Hong Kong, tumbling.
New Oriental Education & Technology finished the session down 47%, while Scholar Education fell by 45% and Koolearn Technology by 33%.
Next came an attack on Tencent, one of China’s biggest tech companies, which on Saturday was ordered to give up the exclusive music licensing agreements it has signed with record companies – including Universal Music and Warner Music – around the world.
Tencent, which owns China’s most popular messaging service WeChat, is estimated to have an 80% share of the exclusive music streaming market in the country.
Shares of Tencent fell by almost 8% on the news.
Then, Beijing unveiled measures aimed at cooling what it sees as an overheated property market.
The People’s Bank of China (PBoC) is reported to have ordered lenders to raise mortgage rates for first time buyers from 4.65% to 5%.
At the same time, the PBoC is said to have ordered an increase in the interest rate for people buying second homes from 5.25% to 5.7%. That sent shares in property development companies lower.
Separately, China also today announced new rules aimed at better protecting delivery riders, following complaints that some are not being paid the minimum wage or are being sent on routes where it is impossible to complete the order in the time allowed.
That news sent shares of Meituan, one of China’s biggest food delivery companies, down by 14%.
Its shares have now halved in value since February.
Shares of the e-commerce giant Alibaba, which also operates a popular delivery service called Ele.me, fell by more than 6%.
Taken together, the various measures add up to an unappetising cocktail for investors, who reacted accordingly.
In Hong Kong, the Hang Seng slid by 4.13%, taking it to a level not seen since December last year.
In Shanghai, the blue-chip CSI300 index fell by 3.22%, again wiping out all gains for the year to date.
The broader Shanghai Composite, meanwhile, fell by 2.34% to a two-month low.
There are two schools of thought as to what Beijing is doing here.
One is that this is just part of a wider campaign by the Chinese Communist Party to reassert its influence over life in China and strengthen its hand – with businesses and investors merely being caught up in this.
The other argues that this is a specific set of measures aimed at clipping the wings of businesses amid concerns that too many of them are not always operating within the law.
Aside from complaints about the treatment of workers in delivery firms, there is also a sense that the accounting practices of some property companies many not stand up to scrutiny, that the banks are being too lax with their lending standards and that the wealth being created by some of these companies, particularly those in the tech sector, are being too concentrated among a handful of plutocrats.
That theory is given credence by, for example, the way Beijing scuppered last year’s proposed stock market flotation of the payments company Ant Financial, which would have further added to the wealth of Jack Ma, the billionaire entrepreneur that created Ant and its former parent company, Alibaba.
Concerns about the quality of accounting at some companies have been rumbling ever since a former stock market darling, the coffee shop operator Luckin Coffee, collapsed last year after falsifying its accounts.
Either way, investors have been spooked, although some will have only themselves to blame given the way regulatory risk in China has been overlooked in recent years.
But it has certainly prompted investors in China to look more closely at their portfolios as they try to assess what other companies are at risk of seeing their business models reduced to rubble overnight by regulators.
This Chinese government is very different from its immediate predecessors and is clearly far more relaxed about alienating foreign investors if it considers more important principles are at stake.
Andrew Bailey says Bank of England in period of ‘heightened tension’ after runs on Silicon Valley Bank and Credit Suisse
The Bank of England governor has told MPs the regulator is currently in a period of “very heightened tension and alertness”.
However, speaking to the Treasury Committee on Tuesday, Andrew Bailey said the country is not in a period comparable to the financial crash of 2008 – but that vigilance is needed.
He said: “I do not want to give you for a moment the idea that we are not very vigilant because we are, we are in a period of very heightened, frankly, tension and alertness and we will go on being [in that position].”
Stress testing of banks will have to include the fact that deposits can be withdrawn electronically in seconds, deputy governor Sam Woods added.
“A very striking feature of the Silicon Valley Bank run, not so much of the Credit Suisse run by the way, was just the speed with which it took place”, he said.
“We know all of us can move money from our accounts in the short time it has taken me to answer this question, as you say, that is a relatively new feature of the market.”
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Another relatively new development is the rapid transfer of information on social media, described as a noticeable phenomenon by Mr Woods.
“The other aspect that we’ve had and we have dealt with, by the way, in various situations in the past, but it’s more prominent is the speed with which news can travel, particularly among communities and sometimes sort of through private messaging groups, that is a noticeable phenomenon both here [in the UK] and elsewhere,” he said.
A learning point from the collapse of SVB is the speed with which money can travel, he added.
His comments follow the greatest financial turmoil since 2008 as the midsize lender SVB collapsed and its UK arm was subject to a last minute takeover by HSBC. Less than a week later the embattled second largest lender in Switzerland, Credit Suisse was forcibly merged with its rival UBS as its share price plummeted and clients withdrew money.
A difficulty faced by the tech companies and start-ups that banked with SVB was that many had their deposits all with SVB, rather than numerous banks, so when SVB’s share price plummeted depositors took fright and withdrew their money.
That problem may exist in the UK as Mr Bailey said holding many bank accounts can be hard for some new companies.
“Another point that I think we will naturally have to look at … is that something that businesses say to me and actually – particularly start-up businesses, but it’s not just start-up businesses – that opening many business accounts to get a sort of diversified range of banks is not easy.”
“There is I think a point there around the ease of account opening for businesses.”
FTX’s Sam Bankman-Fried charged with bribing Chinese officials
Disgraced FTX founder Sam Bankman-Fried has been charged with bribing Chinese officials with payments of $40m (£32.4m).
Prosecutors have accused him of directing the payment to unfreeze accounts belonging to his hedge fund linked to FTX.
The accounts of his trading firm Alameda Research, which Chinese authorities had frozen, are said to have held more than $1bn (£812m) in cryptocurrency.
Prosecutors claimed they were unfrozen after the alleged bribe payment was made around November 2021.
Bankman-Fried is accused of transferring tens of millions of dollars worth of extra crypto to complete the bribe.
The 31-year-old has already pleaded not guilty to eight counts over the collapse of FTX last year.
It ran out of money on 11 November after the cryptocurrency equivalent of a bank run.
Prosecutors say Bankman-Fried stole billions of dollars in customer funds to plug losses in Alameda.
He faces a total of 13 charges.
They include four counts which accuse him of orchestrating an illegal campaign donation scheme to buy influence in Washington DC.
Banking turmoil: How worried should we be in Britain?
How worried should we be about the banks?
It’s a question that’s been hanging over the financial system since the collapse in the space of a fortnight of three moderate American banks, including Silicon Valley Bank (SVB), followed by Swiss behemoth Credit Suisse.
The spectacle of regulators, political leaders and bankers spending sleepless weekends managing insolvencies, bailouts and takeovers, against the red-ink backdrop of lurching markets, has stirred memories of 2008 and the financial crash.
The answer from Bank of England governor Andrew Bailey, repeated to MPs on the Treasury Select Committee on Tuesday, is “don’t panic”, not yet anyway.
Mr Bailey conceded that recent events made this a moment of “heightened tension and alertness”, but that comparisons with 2008 are erroneous and, so far, UK regulations introduced post-crash are passing the test.
His diagnosis is that while the issues that brought down SVB and Credit Suisse are distinct and separate, the interconnectedness of the financial system means the risk of contagion cannot be ignored.
SVB collapsed because of poor risk management, with deposits locked into fixed incomes investments that fell in value as interest rates rose. Credit Suisse meanwhile, after a decade of unerringly finding new scandals in which to become embroiled, finally stepped on a rake it could not recover from.
Mr Bailey found himself directly involved with the fallout from SVB, engineering the sale of its UK subsidiary to HSBC over a long weekend, with the deal only confirmed he said at 4am on the Monday, hours before markets reopened.
The actions taken by the Bank he said proved the value of new regulation.
SVB had a distinct UK presence because its British branch had grown to a point it was required to become a separate subsidiary. That in turn gave the Bank of England and the Prudential Regulation Authority options in managing its decline, one of which was a sale.
Mr Bailey and his colleagues did concede there are lessons to learn, primarily from the speed with which confidence and, crucially, deposits were withdrawn from the banks.
As a result they will re-examine whether the current bank “stress tests” governing liquidity – the amount of cash banks must have on hand to absorb shocks to the system – are adequate.
Technology may have helped change that calculation. In 2007 we knew Northern Rock was on the brink because customers were queuing outside branches. Today you can withdraw funds digitally in the time it takes to read this sentence, and a bank run could be underway by the end of the paragraph.
Deputy governor Dave Ramsden told MPs that messaging apps further accelerate the potential for bank runs, and said this was a factor in the SVB collapse, with the bulk of depositors all working in the tight-knit US tech industry.
“They were a tech-savvy group, already using messaging in ordinary situations, using it in a run situation.”
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The result was what Bailey called “the fastest journey from health to death since Barings”, a reference to the British investment bank that collapsed spectacularly in 1995.
But he insisted the issues are bank-specific and isolated, describing the jitters that have seen banks stocks rise and fall rapidly as markets “testing” various institutions, looking for weakness. The latest example came on Friday afternoon, when Deutsche Bank’s valuation fell without an obvious trigger only to recover on Monday.
“My very strong view of the UK banking system is that it is in a very strong position,” Bailey said. “But there are moves in markets to test out firms, they are not based on identified weakness, rather they’re testing out. There’s a lot of testing going on.”
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