China is proving remarkably skilled at taking its censorship policies global.
From NBA players to H&M executives to European Union officials to Hollywood celebrities like John Cena, the outside world is learning it’s best to avoid offending President Xi Jinping’s Communist Party.
But are Xi era sensitivities about to cut into economic bone?
Xi’s increasingly thin-skinned government is now actively scanning the internet and social media platforms for financial-related materials. In a Friday statement that was both vague and chilling, the Cyberspace Administration of China said it’s on the lookout for any content it deems as “maliciously” critical of mainland financial markets, domestic policies, economic data – you name it.
Critically, what is missing from the announcement is any detail on where the red lines lie.
How exactly might this effort stop – or punish – those who bad-mouth the economy and financial system? And what exactly defines “malicious?”
All the agency will say is that China aims to foster a “benign” online universe where the government can pursue the “sustainable and healthy development” of Asia’s biggest economy and the society it affects.
Those who circulate foreign media reports or opinions thought to inaccurately characterize domestic financial events “without taking a stance or making a judgment” will also be in regulators’ crosshairs.
Information flows at risk
This is obviously worrying for the media. What if you’re a reporter at a major foreign news organization and you have new information about Jack Ma’s standing in Xi’s party? Might you engage in self-censorship?
But beyond journalism, the decree looks like it could cover pretty much the entire information and intelligence environment investors rely on to make markets work. That means its strictures reach far beyond newsrooms – they will extend into banks, investment funds and analytical and research firms.
Say you’re an investment bank analyst and you’re worried about debt troubles at China’s Evergrande Group or other over-leveraged property developers. How would you not look at this latest attempt to police unflattering views as a reason to pull punches?
What if you are an analyst with credible, fact-based reasons to argue that China’s gross domestic product (GDP) data doesn’t add up? Could a player at a hedge fund shorting a politically connected company run afoul of authorities?
And what of the credit-rating company getting ready to publish a report raising concerns about state finances, bond market transparency, corporate governance or the security of the digital yuan the People’s Bank of China is perfecting?
Do you publish at the risk of having to tell shareholders why you’ve just been banned from Asia’s biggest economy?
These questions aren’t a reach.
Certainly not when you consider the ways in which Xi’s government has steadily and methodically tried to remake Hong Kong in China’s image, rather than learning from its capitalist ethos.
For years, from the early 2000s, the battle in Hong Kong was against the “Article 23” anti-subversion laws Beijing was forcing on the city. That’s all a bit moot now, as Beijing has methodically chipped away at Hong Kong’s autonomy.
No transparency, many surprises
Bigger picture, the last 10 months have been brutal for China’s reputation as open for business.
From last November’s scrapped Ant Group initial public offering (IPO) to more recent crackdowns on Didi Global, Tencent Holdings and private education companies, investors have been left to brace for the next regulatory surprise.
And there have been plenty of those in the last week alone – starting with the “Don’t bad mouth our economy” edict.
Since then, punters have been trying to make sense of a commentary circulated widely in Chinese state-run media heralding Xi’s regulatory crackdown as a “profound revolution.”
It also warns that resisters will face retribution.
On Monday, Xi helmed a top-level meeting that “reviewed and approved” steps to combat monopolies, reduce pollution and buttress Beijing’s strategic reserves. All these moving parts are in some way pivotal to Xi’s accelerating push to improve the quality of life for China’s 1.4 billion people, says analyst Ernan Cui at Gavekal Research.
“The dramatic moves of recent months come from the intersection of multiple political priorities articulated by Xi, which were given additional urgency by how the Covid-19 pandemic highlighted Chinese society’s reliance on internet services,” Cui explains.
Xi’s key themes
What are these priorities?
“The key political themes to understand are: building the rule of law, which requires a comprehensive regulatory framework; dual circulation, which includes strengthening antitrust and improving competition; common prosperity, which is about combating inequality and social division; and family values, which express official concern about childbearing and education,” Cui says.
For now, she notes, “the major internet platforms are bearing the brunt of the crackdown because they are affected by all four of these political priorities. Businesses in other sectors are also facing increased government intervention and regulation, but less intensely because official concerns are more narrowly focused.”
As analyst Michael Orme at GlobalData puts it, markets are only now “adjusting to a new social contract and regulatory infrastructure that the party is creating as the details become clearer.” These “swift and brutal regulatory crackdowns” appear to be about the “need to head off a growing anti-capitalist mood among those born after 1990.”
So much for the reasoning. Meanwhile, the crackdowns are expanding by the day.
Xi’s securities regulators are now going after China’s private equity and venture capital funds. Specifically, they want to stop what Beijing calls the disguising of public offerings as private placements as a way to curb the embezzlement of assets.
Investors are quickly realizing that Xi’s “common prosperity” is anything but a hollow slogan. And “with power mostly centralized in his hands, Xi now can change status quo policy quickly and even without much warning,” observes Victor Shih, author of Factions and Finance in China: Elite Conflict and Inflation.
With Xi almost certain to win an unprecedented third term as leader next year, Shih notes, senior officials under him “want to zealously implement any new policy.”
This assertive implementation, he adds, will go on “regardless of the longer-term consequences because officials are afraid” of disappointing Xi.
Don’t investors know it?
“Xi’s drive for ‘common prosperity’ clouds the outlook for equities,” says Diana Choyleva at Enodo Economics.
China’s recovery, she adds, “continues to lose momentum while deleveraging and financial risks persist, making policymakers’ job of balancing growth and supply-side transformation challenging.” Given the regulatory surprises coming out of Beijing day after day, it’s hard not to be “negative on Chinese equities,” Choyleva says.
“The next few quarters are likely to be marred by a protracted downturn, while over the long term the ‘great decoupling’ and Beijing’s drive towards ‘common prosperity’ means it is hard to make the case for Chinese stocks, especially for US and European investors,” she notes.
The big risk
Could Xi’s dragnet of any negative views on the economy and markets backfire even further?
A major Xi era success had been the internationalization of yuan assets. First, the currency itself, which in 2016 was added to the International Monetary Fund’s “special drawing rights” basket, putting Beijing on a path to rivaling the US dollar.
In the years that followed, Xi’s team aggressively expanded the channels for foreign investors to access stock and bond markets. Mainland shares were added to the MSCI index and government bonds to top global benchmarks, most recently the FTSE Russell. And tidal waves of global capital raced China’s way.
That is, until around November 2020, when Xi unleashed the ongoing campaign that many household-name investors including George Soros see as anathema to China’s ambition to be a financial leader.
As it presses forward, Xi’s government must tread carefully not to throw the baby out with the proverbial bathwater.
The announced clampdown on comments and views – and efforts to create a “benign” online environment for public opinion – seems a particularly slippery slope. Any financier will tell you, the free flow of information is the lifeblood of any financial market.
Investors tend to remember when regulatory volatility wiped out trillions of dollars of wealth. If China thinks it can build an economy that leaves unfettered discourse at the door, it might need to learn to live without foreign capital flows.