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.
Didi was targeted days after floating in New York
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 clampdown on tutoring is believed to have come from President Xi Jinping himself. Pic: AP
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.
Private tuition is big business for companies such as Koolearn Pic: AP
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.
Didi’s shares are now lower than the price at which they listed
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.
Rightly so.
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.
There was no growth in the UK economy in July, official figures show.
It’s the second month of stagnation, the Office for National Statistics (ONS) said as GDP – the measure of everything produced in the UK – flatlined in the weeks following the election of the Labour government.
The flatline was not expected by economists, who had anticipated growth.
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Economists polled by the Reuters news agency forecast the economy would expand by 0.2%.
Some signs of growth
But there’s “longer-term strength” in the services sector meaning there was growth over the last three months as a whole and 0.5% expansion in the three months up to July.
Among the G7 group of industrialised nations, the UK had the highest growth rate for the first six months of 2024.
Why stagnation?
While there was growth in the services sector, led by computer programmers and the end of strikes in health, these gains were offset by falls for advertising companies, architects and engineers.
Manufacturing output fell overall due to “a particularly poor month for car and machinery firms”, the ONS said, while construction also declined.
What will it mean for interest rates?
Market expectations are for interest rates to remain unchanged by the Bank of England when they meet next week to consider their next move in the fight against inflation.
The central bank had raised the rate and made borrowing more expensive to reduce inflation.
A cut in November, at the next meeting of rate-setters, is expected. Rates are forecast to be brought down to 4.75% at that point.
Political reaction
In response to the figures Chancellor Rachel Reeves said:
“I am under no illusion about the scale of the challenge we face and I will be honest with the British people that change will not happen overnight. Two-quarters of positive economic growth does not make up for 14 years of stagnation.
“That is why we are taking the long-term decisions now to fix the foundations of our economy.”
A slump in oil prices could lead to further reductions at the fuel pumps but any benefit risks being stripped away next month as the chancellor seeks ways to bolster the public finances.
A barrel of Brent crude, the international benchmark, slipped below $70 for the first time since December 2021 on Tuesday afternoon.
The month ahead contract was down by as much as 4% on the day at one stage, following a monthly report by the OPEC+ group of major oil-producing nations that further cut demand expectations for both 2024 and 2025.
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The weakening prospects, coupled with growing expectations of oil oversupply, kept the market suppressed according to analysts.
They said the only upwards pressure was being applied by an incoming storm that could affect production in the Gulf of Mexico.
Oil prices have plunged from levels nearer $90 since the beginning of July, largely on the back of evidence that major economies are slowing.
Motoring groups have long complained wholesale fuel prices have failed to keep pace with that decline – being quick to rise but slow to fall.
Sustained oil weakness should push fuel costs down further
Wholesale costs, also recently aided by a stronger pound versus the oil-priced dollar, stood last week at their lowest levels since October 2021, according to the AA.
But it said that without the 5p-per-litre fuel duty cut imposed by the last government to keep a lid on rising prices in 2022, that three-year low for wholesale costs would have been delayed by up to a fortnight.
The AA said the gap between wholesale costs – what retailers pay – versus pump prices had reduced in recent weeks amid regulatory pressure.
Critics have long accused retailers of profiteering, bolstering their margins for a third year after the Competition and Markets Authority accused filling stations of overcharging motorists to the tune of almost £2.5bn during 2022 and 2023 combined. Supermarket chains were singled out for particular criticism.
But with oil costs falling further, it is speculated that chancellor Rachel Reeves may feel able to remove the 5p duty cut without drivers noticing much change at the pumps, assuming pump prices continue to ease – albeit slowly.
She is widely expected to use her first budget on 30 October to fill, what she can, of a £22bn “black hole” she claims to have found in the public finances inherited from the Tories.
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Winter fuel decision ‘totally wrong’
Cuts to winter fuel payments are among measures already announced.
The Treasury has refused to comment on possible other announcements though the wealthy have been put on notice that they will bear the brunt of tax hikes.
A fuel duty reduction has, therefore, not been ruled out.
AA president Edmund King said last week of a fuel duty hike threat: “Removing it threatens to send millions of low-income drivers back into the era of ‘perma-high’ road fuel prices.
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“Getting rid of the fuel duty cut unleashes a £3.30 a tank (standard 55 litres) shock on the personal and family budgets of the 28% of drivers who spend a set amount when they go to a fuel station.
“With 33 million drivers in the UK, that is more than nine million affected private motorists – most of whom are low-income and struggling to balance their budgets.
“If the current pump price rebounds to 144p a litre, and then 6p is added with a fuel duty hike and the extra VAT it will bring, it will plunge the least well-off families and families back into the nightmare of petrol at 150p a litre or more”. he concluded.
The state pension is due to rise by 4% in April, giving an extra £460 a year to recipients.
The payment increases by the highest of total average weekly earnings, inflation for September or 2.5%.
How much will pension payments rise?
Figures on Tuesday showed average weekly earnings rose by 4% in the three months to July.
Inflation data for September has not yet been published but stood at 2.2% for July, according to the Office for National Statistics (ONS).
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It means the weekly pension payment will rise from the current £221.20 a week to £230.05 a week. From April, when the payment rises, pensioners will get an extra £8.85 a week, equivalent to a top-up of £460 per year.
Last year pensioners got a rise of 8.5%.
This year’s pension increase comes with the government under pressure after scrapping the winter fuel allowance for most pensioners. The annual rise in pension payments is more than double the allowance for some, worth either £200 or £300.
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Government ‘picking the pockets of pensioners’
Why are wages going up?
Public sector pay rises may be behind part of the growth, the ONS said.
“Growth in total pay slowed markedly again as one-off payments made to many public sector workers in June and July last year continue to affect the figures,” said the ONS director of economic statistics Liz McKeown.
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Also released on Tuesday was data on unemployment, which eased to 4.1% from 4.2%. At the same time, however, the number of jobs available fell across every industry, the ONS said.
Despite this, the number of jobs on offer remains above pandemic levels.
Wages had been growing even higher in the past months, the 4% rise is down from 4.1% a month earlier and from a high of 8.3% a year earlier.
What does it mean for interest rates?
High wage rises had been a concern for the interest rate-setters at the Bank of England as they battled to bring down inflation through more expensive borrowing.
A continued fall will be welcomed by the Bank but is unlikely to push it to cut the rate from 5% when it meets next week.
Current market expectations are for the interest rate to be held.
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