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Econographics March 24, 2022

Can one statement fundamentally calm market volatility in China?

By Victor Shih

Last week, a Financial Stability and Development Commission (FSDC) meeting chaired by Vice Premier Liu He made a series of key announcements, which seemingly cleared up a number of issues that have clouded Chinese equity markets and Chinese stocks listed overseas. The market responded immediately, with the Shanghai A-share index gaining 6% and the offshore Hang Seng China Enterprise Index gaining a whopping 20% by the end of the week. Clearly, the market found the FSDC announcements assuring.

Yet, although the announcements showed a policy reorientation that will help a number of listed companies, they indicate the reorientation by only one of many bureaucracies which influence listed companies in China. In addition, top-down dictatorial leadership in China, as well as the leadership’s evolving policy preferences, will continue to give rise to higher volatility for Chinese companies—especially in the tech sector.  

The March 16th FSDC meeting does represent a clear policy reorientation by the financial bureaucracy in China. For overseas listed stocks, especially, the financial technocrats in China had threatened to force Chinese companies that had listed in the United States to delist over differences in auditing standards between the United States and China. The FSDC assuaged investors’ concerns by stating that the United States and China “are working hard to formulate a specific proposal for cooperation. The Chinese government continues to support all kinds of companies (in China) to list overseas.” For internet companies, the FSDC called for “stable and healthy development of (internet) platforms…through standardized, transparent, and well expected regulations….” After a year of unrelenting regulatory actions against the internet industry, this provided a bright ray of sunshine.

Perhaps most important after a year of regulatory actions against some of China’s largest listed companies, the FSDC urged that “for policies that have major impact on the capital market, (the issuing agency) should coordinate with financial regulators ahead of time in order to maintain the unity and stability of policy expectations.” This statement clearly sought to assure investors surprised by an unrelenting stream of policies which affected revenue, or even the basic business models of a wide range of Chinese companies in the past year and half. 

Despite these assurances, FSDC statements must be taken with a large pinch of salt. For one, agencies under the control of FSDC, especially the power trio of the People’s Bank of China, the China Banking and Insurance Regulatory Commission, and the China Securities Regulatory Commission, traditionally held important sway over listed companies. However, the Cyberspace Administration of China (CAC), which is outside of FSDC control, has emerged as an impactful agency for tech companies listed in China and overseas. The CAC is the administrative arm of the Central Commission on Internet Security and Informationization (CCISI), which is chaired by Xi Jinping himself. Since the commission is directly under the Central Committee, CCISI and CAC by extension are entirely outside of FSDC jurisdiction. As a State Council organ, FSDC only has jurisdiction over financial regulatory agencies in the State Council.

Although relatively restrained in its first few years of its existence, the CAC engaged in a series of regulatory actions in the past year and half, including placing a daily gaming limit on young people, banning thousands of live streamers and online fan clubs for music and movie stars, and limiting or even proscribing recommendation algorithms, in-app pop ups, and push notifications.  Although some regulatory measures such as data protection requirements and limits on push notifications were likely welcomed by consumers, other measures eradicated or severely undermined basic business models for thousands of Chinese tech companies generating hundreds of billions in revenue per year. Moreover, the CAC enacted a new cybersecurity vetting procedure for any tech company wishing to list in China or abroad, thereby making itself a de facto securities regulator for China’s fledgling tech industry. 

Gaming, live-streaming, online fan clubs, and online tutoring were all multi-billion dollar industries where consumers in China and beyond sought entertainment and ways to improve their lives. Measures enacted by CAC and other regulatory bodies in China resulted in catastrophic losses for some of these companies, while others have scrambled to revise their business models at great costs. This has led to enormous losses in Chinese wealth. Just Tencent, Alibaba, Pinduoduo, and Didi alone had lost close to 1 trillion dollars in market value since the beginning of 2021, only recovering about 20% of the lost value in the recent rally. Although a policy reorientation by FSDC is welcoming, it does little to reassure investors in the technology sector if a similar reorientation does not happen at CAC and other regulatory bodies, such as the State Administration of Market Regulation (SAMR).  

More importantly for the future development of the technology sector in China, the Chinese regulatory system continues to be top-down. A change in the top leadership’s preferences or attention would lead to dramatic policy changes impacting listed companies and their investors. As generations of China scholars have noted, the power of China’s authoritarian government is “fragmented” into several major bureaucratic groupings. With dictatorial power at the top determining nearly all senior level promotions, leaders of these various bureaucracies vie with each other to gain the attention and favors of the top leadership. This power dynamic will continue to create incentives for mid-level ministers to respond immediately to the wishes of the top leadership without too much reflection on the impact of resulting policies on firms and individuals in China. Officials may even be incentivized to enact policies leading to underperformance by bureaucratic or political rivals. But in the process of doing so, companies face potentially catastrophic new regulatory requirements.

Despite recent setbacks, the great wealth of human capital, strong entrepreneurial spirit, and world-class infrastructure in China continue to make it a promising hub for the tech industry. However, in a system governed by the dictates of powerful party organs and individual officials, firms and investors will continue to engage the Chinese tech sector under the shadow of unexpected and potentially devastating state interventions.     

Victor Shih is a contributor for the Atlantic Council’s GeoEconomics Center. He is an Associate Professor and the Ho Miu Lam Chair in China and Pacific Relations at UC San Diego.

At the intersection of economics, finance, and foreign policy, the GeoEconomics Center is a translation hub with the goal of helping shape a better global economic future.

Image: Supported by the growing economic and business development of China, the Shanghai Stock Exchange has grown to be one of the largest stock exchanges in the world.