Written by: Maria Novikova
Can a clamp down on capitalism produce strong investment growth? Adam Smith would firmly say no. However, I will argue that despite all the regulations, investigations and fines, China’s redirection in its economy may well boost foreign investment. At the very least, a more optimistic view should be taken for China’s future regarding investment despite such large changes.
The Chinese Communist party under President Xi Jinping is steering China towards becoming a ‘techno-authoritarian power’. What this means is that the authorities are building control over all technology to re-balance the power that Big Tech has acquired over its people. Achieving digital sovereignty will allow authorities to regain control of both inside of China and of agents who are influencing from outside of China. First, through the use of propaganda tools and intimidation tactics reminiscent of that from the Mao era, the authorities obtain the ability to monitor and direct their people through technology thus re-establishing internal power. Second, by regaining digital sovereignty, China is protecting the national interest and limiting any external influence of this multi-national and often foreign Big Tech corporations.
Che and Goldkorn in their SupChina article usefully sum up the vast array of changes in the Big Tech crackdown into three main categories:
- An antitrust crackdown: Already 34 tech firms have been called in by regulators to rectify their antitrust practices. From failing to disclose mergers to misleading market tactics, authorities are on a mission to eliminate all ‘merger irregularities’
- A data security overhaul: A flurry of laws have been passed that effectively increase the state’s access to the data of private companies and also insure that most of China’s data does not leave its borders.
- A check on capitalist ‘excess’: Actions such as the suspicion of the IPO of fintech company Ant Group exemplify China’s strong commitment against ‘growth at the expense of public interest’.
The purpose for China’s new direction? The country is recalibrating its economy towards strategic industries, particularly manufacturing and hard tech, whilst dealing with the public dissatisfaction with ‘tough-on-business’ regulations.
The effect of this huge multi-pronged policy change impacts various parts of the economy from IP debates to large-scale company restructurings. I will focus on the economic impact of investment, my argument that it will not be so negatively impacted, and end with the effect this will have on UK law firms.
A reduction in investment?
The Big Tech crackdown has broken down any emerging US-China capital markets relationship and has caused investor confusion and uncertainty. Both of these effects may reduce overall investment into China.
The growing strength US-China capital markets relationships has been stifled by China’s new hefty data regulations. This capital markets relationship was hugely lucrative where 248 Chinese companies with a total market capitalisation of $2.1tn listed on US exchanges as of May this year. American asset management groups leapt at the idea of investing into the growing economic superpower. JPMorgan Asset management announced in March plans to invest $415m in China Merchant’s Bank’s wealth unit. BlackRock approved a wealth partnership with China Construction Bank in May. But the days of building bridges to reach new economic heights are gone. Regulators so far have wiped out $400bn off the value of US listed Chinese companies. Such strict data protection regulations either makes it impossible to list on the New York stock exchange, or simply makes it too uncertain or unprofitable for investors to invest, making the option of listing in America unfavourable to Chinese tech companies. Look at Didi Chuxing, a newly listed Chinese ride-hailing company that had been accused of breaching data protection rules; having raised $4.4bn on the New York Stock Exchange, its shares plummeted. This scene gives no hope neither to investors to invest into Chinese tech firms nor to Chinese tech firms to list in New York.
The second obvious point that any sort of large policy restructuring such as this will plague the country’s economy with uncertainty. Uncertainty about what the new regulations will look like, how they will be enforced and which sectors techno-authoritarian-style regulations going to be hit next. Industries such as advertising and healthcare are already on the cards. It is unsurprising investors would be hesitant to invest into the unknown.
A more optimistic view?
There are three main reasons why we shouldn’t be so pessimistic about the impact on investment by China’s Big Tech Crackdown.
- Investment has statistically gone up
As Fan Bao founder of a fund manager and investment bank in Beijing said, ‘China still needs foreign capital’ for growth. And foreign capital it is acquiring. KPMG’s analysis of Pitchbook data on venture capital financing in China puts the third quarter figure at $23.7 billion, up from $22.5 billion in the second quarter. Venture capital investment in China rose in July-September period bringing the year to date to more than all of 2020. The launch of China’s five-year development plan in March attracted a flurry of investment into China’s semiconductor industry in ways that commentators say is reflective of investment into the internet two decades ago. Chinese company Alibaba set the world record for IPOs in 2014 and its shares still true around 150% above the offering price. Clearly, investment in the sectors China is turning its growth to is still attracting significant investment. After all, in a country determined to quickly outgrow other global economies, what is there not to like for ambitious investors?
2. Investors should simply re-align with China’s re-alignment:
If China’s economic objectives have changed, it seems sensible that investors should simply readjust their investment strategy. Investors will do well to invest and buy stock in companies that align with China’s new strategic goals such as AI, semiconductors, 5G and advanced manufacturing. China wants fast growth and need foreign capital to support it. See this as a closing of some doors and opening of new ones.
3. Clarity and certainty?
The caution that investors have that I have discussed that may impede investment is limited to certain industries. Big Tech, the education sector, healthcare, the gaming industry are all areas whose futures are unclear, and investors will stay away from. However, health-tech, hardware and consumer market solutions are all areas that are set for strong growth. Thus, these areas are attracting a significant amount of investment. Sequoia Capital China has been the busiest investor in the third quarter of 2021, investing in 1.5 deals day including some of the largest investment in chip and industrial software. Ultimately, just like in any other economy, some sectors have a more stable growth prospectus than others. Painting the picture that the whole economy is uncertain, unclear and doomed for investment is too broad a statement in any case, but especially in this one, given China’s clear strategic realignment.
Who cares about investment? Impact on UK law firms
This discussion has a two-fold relevance to UK law firms. First, it will impact their advisory role and second, the breakdown of the US-China capital-market relationship may benefit UK firms.
First, a sharp policy change from a global economic player will require commercial lawyers to adjust their advice they give to their multi-national clients accordingly. Investors, asset management and private equity firms will require advise about how to best invest into the changing Chinese economy. Or perhaps the investors’ needs are best served by working in other emerging markets. Given the changing regulations impacting capital markets, maybe Chinese-based firms require advise on creating an IPO, or on other alternative growth strategies. Lawyers will need to react to ensure the delivery of the best, up to date advise to their clients.
Second, the Hong Kong stock exchange will probably become the alternative listing venue for raising funds given the difficulty with listing in the US; this will benefit UK-based firms. The reason for the switch to HK is that the cyber-security rules that are problematic for Chinese firms listing in the US are non-existent in HK. China doesn’t regard it as a foreign venue. Now whilst UK firms and to lack capital markets expertise in for the US securities market, this is not the case in Hong Kong. With Chinese firms switching to the HK stock exchange, more are talking to UK firms who tend to charge lower fees, have a larger capital markets team on the ground and typically have a stronger track record for IPOs in this jurisdiction. Thus, although the breakdown of the US-China capital markets relationship may be damning for US firms, UK firms will benefit from the change to the HK stock exchange.
So in all, we should take a more optimistic view to China’s Big Tech crackdown and its impact on investment. Of course, any re-direction of economic and political strategy will send nervous shock-waves throughout the economy, which is never any good for investors. However, a re-direction is just that; as old doors close, such as the deterioration of the US-China capital markets relationship or growth of the Big Tech and healthcare industries, new ones open, such as the opportunities to invest in semi-conductors, hardware and consumer market solutions, which is already taking place. At the very least, we should take a more optimist view of China’s future investment, even in the midst of such policy change.