The knock-on effect for SA investors of tightened regulation in China
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If someone asked you “Do you have investments in China?”, unless you were actively investing globally or had a thorough knowledge of the underlying holdings in your unit trusts and retirement investments, your answer would probably be no.
The fact is that a large proportion of South Africans are invested in China, directly or indirectly. Retirement funds usually have an offshore component to their portfolios and will therefore have some exposure to Chinese companies. On the local market, many retirement funds and unit trust funds hold shares in Naspers and its offshore sister company Prosus, which in turn have a large shareholding in the Chinese tech giant Tencent. And a third way in which you may be invested, indirectly, is through global companies that rely on China for a great deal of their business, such as Coca-Cola and Louis Vuitton.
So what happens in China is likely to affect your investments in some way, and the past months have seen some major shifts, mainly of a regulatory nature, that are having a knock-on effect on investors worldwide. For example, Naspers and Prosus shares have come under pressure recently following regulations affecting Tencent.
In a recent podcast interview, Claude van Cuyck, the head of South African equities at Denker Capital, shared his insights into what was happening in China. He says there are four key areas that the Chinese government is focusing on from a regulatory point of view:
1. Anti-competitive behaviours. “The large platform businesses like Alibaba and Tencent are becoming hugely dominant in China (Tencent has about 1.2 billion people active on its social media platforms). They are crowding out small and medium enterprises, which is a concern for the government. It wants these platforms to be more open to competition to reduce their dominance. In particular, Tencent is very dominant in music, media, entertainment and gaming platforms. So the government is putting a lot of pressure on these companies by forcing them to reduce the exclusive rights and content rights attached to these platforms,” Van Cuyck says.
2. Inequality. “The second key area is what the Chinese government refers to as ‘common prosperity’, or becoming wealthy together. This is clearly a function of being more of a socialist state, so there is greater emphasis on social responsibilities for companies. Many middle-class citizens are being squeezed by higher mortgage costs, higher healthcare costs and spiralling education costs. We have seen a huge crackdown on the education sector – recently, they have effectively nationalised the sector. This is also putting a lot of pressure on Chinese companies to focus on their employees,” Van Cuyck says.
3. Child protection. Teenagers are spending a disproportionate amount of time – and money – on social media and gaming platforms, and the government wants to control this. They've cut the amount of time that teenagers may spend on gaming platforms to no more than one hour a day, three days a week. “This certainly has a direct impact on the likes of Tencent, but to put it into context, the gaming revenues that come from teenagers under 18 is less than 6% of the total revenue,” Van Cuyck says.
4. Data security. “There are enormous sensitivities around national security and consumer privacy protection. China’s regulatory body recently passed a personal information protection law, which will become effective on November 1. They’re targeting data collection and analytics. This will affect how companies can share personal information, and is likely to impact their ability to monetise and generate revenue. So this is a factor for Tencent, as a reasonable proportion of their revenue comes from advertising. The government is also forcing state-owned enterprises to move data out of commercial cloud businesses into a state-owned cloud business. And that’s another area that is essential for both Alibaba and Tencent,” Van Cuyck says.
China’s problems are not very different from those faced in the US; it’s just that the Chinese government can impose regulations far more quickly and rigorously than a democratic Western nation could in dealing with them.
In an article on the Nedgroup Investments website, Iain Power, fund manager of the Nedgroup Investments Balanced Fund, says the aim of the regulations is to achieve a better life for the Chinese people, with greater access to education.
“The state is trying to do away with practices where the social cost is not desirable. The difference with China is that it tends to adopt these changes very quickly and sometimes without tact. In the West it’s a longer process of litigation and lobbying before finding some middle ground in policies and practices.
“So, while we have seen pressure on share prices and the sense that the Chinese government is increasing its involvement in the state, their long-term goal is on common prosperity, which is a well-intended objective. Achieving this and addressing the huge disparity between the rich and the poor in China will, however, be a delicate balance to achieve.
“History has shown that whenever governments get too involved in the state, it tends to be very bad for economic growth. We have seen this in China’s history in particular, so the Chinese government will have to be extremely careful while they go about this process of closing the gap in inequality in their society. They will need to set a framework for their businesses that is accommodative for sustainable growth, and also reasonable in terms of competition. This is something we will watch carefully,” Power says.