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Perspectives from China: The Shifting Regulatory Landscape


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Perspectives from China: The Shifting Regulatory Landscape

The story of China over the past few years has been one of slowing growth and an increasingly tightening regulatory environment. The onset of Covid-19 was an obvious driver of the slowdown, but a string of unexpected regulatory moves from policymakers has also contributed to the more challenging business environment and impacted overall market optimism.

For this three-part report, S&P Global Market Intelligence and Regulation Asia surveyed awareness and optimism towards the changing regulatory environment, attitudes towards ESG amongst investors and bankers in China, and the outlook for M&A activity.

Executive Summary

The story of China over the past few years has been one of slowing growth and an increasingly tightening regulatory environment. The onset of Covid-19 was an obvious driver of the slowdown, but a string of unexpected regulatory moves from policymakers has also contributed to the more challenging business environment and impacted overall market optimism. Industries as disparate as technology, finance, education and transport have had to adapt to a new regulatory climate. These obstacles have bled into M&A, which has seen a slump in outbound deals and a flurry of reactive dealmaking in the domestic market. But perhaps one of the most important policy drivers of the past few years has been around ESG. The financial industry and corporations it services are under increasing pressure to incorporate ESG principles into their business practices and help pursue the lofty goal of carbon neutrality. But a lack of maturity in the ESG space means the strategy is often underdeveloped and reliable information tends to be hard to come by.


Cautiously Optimistic: China’s Regulatory Tightening Explained

Over the past forty years, the economic success story that has unfolded in China has transformed the country into a powerhouse of commerce, though it was Deng Xiaoping’s unleashing of the market in the late seventies that created a tidal wave of expansion and paved the way for modern China. In the last two years, domestic policymakers have placed their foot firmly on the brake pedal through a raft of regulations designed to rein in some of the excesses of the country’s business class and guard against potential systemic risk that could stem from the so-called “blind expansion” of businesses. Tolerance for rapid wealth accumulation by individuals and companies is increasingly being tempered, and themes of ‘common prosperity’ and ‘sustainable development’ are increasingly coming to the fore.

The headline-grabbing moment of this policy reversal occurred in the autumn of 2020, focusing on Chinese billionaire Jack Ma, whose planned listing of payments and lending business, Ant Group, was blocked by regulators. The unusually very public rebuke of one of the country’s most prominent business people marked the start of a change in the regulatory atmosphere across multiple sectors of the economy. In the subsequent months, increased scrutiny followed for Ant and its flagship parent company, e-commerce giant Alibaba Group, which was hit with a record USD 2.8 billion fine in April 2021 for violating anti-monopoly rules and abusing its market dominance. Not only did the size and scope of the fine make it the first of its kind, but the speed of policymakers’ actions signalled a seismic shift in their attitudes towards policy and their resolve to take swift action.

This shift in focus wasn’t limited to Alibaba. Regulatory scrutiny has increased in scope to a wider antitrust crackdown against other dominant domestic technology companies, netting other big names in the industry, including, Tencent, Baidu and ByteDance, which were all fined for anti-monopoly violations by the State Administration for Market Regulation (SAMR). As part of the policy refocus, China also launched a new body called the State Anti-Monopoly Bureau (SAMB) late last year, tasked with strengthening competition enforcement.

Technology firms were not the only focus of policymakers; the pivotal domestic real estate sector has also come under increased regulatory scrutiny over government concerns that companies were becoming increasingly over-leveraged. The industry has been central to domestic economic development and still accounts for roughly 30% of the country’s GDP. Still, back in August 2020, the government introduced a raft of measures to counter excessive debt loads. The subsequent slowdown has rocked the wider Chinese economy and resulted in several debt defaults for large real estate developers, including the giant Evergrande, which is now in the middle of a painful restructuring. The notable shifts in attitudes, at least at the banking level, is clear, with one respondent commenting, “Even though a policy-driven rebound in home sales could offer some relief, [China’s] embattled developers won’t be the growth engines they used to be.”

Despite the deleveraging drive shaking confidence in the Chinese economy, the government initially adopted a light-touch approach to supporting the property sector, opting for measured assistance in the form of interest rate cuts and guidance to financial institutions encouraging them to facilitate property lending, M&A deals and bond issuance. Plans to expand a controversial property tax appear to be on hold for now. More recently, some property firms have received direct investment from state-owned enterprises, as well as full guarantees on their debt securities offerings.

The Cyberspace Administration of China (CAC), China’s cyber regulator, opened up a further front in the regulatory campaign when it banned popular ride-hailing group Didi Chuxing from domestic app stores just days after its June 2021 IPO in the United States, citing violations of data collection laws. The company was also told to stop signing up new users. The financially-strained company has now de-listed in New York and plans to seek a new public listing in Hong Kong. The introduction of China’s Personal Information Protection Law (PIPL) in November further added stronger legislative protections for consumers who must now consent to the use of their personal data.

The Chinese education industry was targeted last summer when the government cracked down hard on the country’s large and lucrative tutoring sector. The government ordered school-age tutoring businesses to become non-profit enterprises and refrain from operating on weekends and holidays. The policy fed into state objectives around common prosperity, with policymakers saying tutoring services only benefited the rich over the poor, further widening China’s achievement gaps.

The unwieldy and highly fragmented financial sector also continues to be under the regulatory microscope for longer than some industries. The rapid expansion of domestic conglomerates saw several companies push into the financial sector without official approvals or licensing. As a result, the People’s Bank of China (PBOC) issued a flood of new rules in September 2020 designed to wall off financial assets from industrial assets inside large companies to prevent systemic shocks to the wider economy.

The rules allowed any domestic non-financial enterprise, natural person, or recognised legal person, to be classified as a financial holding company if they substantially control two or more types of financial businesses, and if they have either banking assets exceeding CNY 500 billion or non-banking financial assets exceeding CNY 100 billion.

Alongside the PBOC’s rate cuts, banking regulators also deployed several more targeted measures this year, encouraging banks to ease access to account services for small and micro enterprises, issuing guidance to spur financing for affordable housing construction, and directing banks in certain parts of the country to accelerate mortgage lending.

While 67% of research respondents highlighted a refocus towards common prosperity type products and services relevant to rural and village level financing, this was most notable with the small and medium-sized provincial, city level and credit union type institutions. As many as 81% of these institutions said they experienced a significant refocus towards common prosperity-oriented products and services.

Digital transformation has also emerged as a key government priority for Chinese banks and insurance firms. The China Banking and Insurance Regulatory Commission (CBIRC) pushed out new guidance at the end of January this year, urging firms to boost digitisation to widen product availability. The regulator would also like to see an improvement in data capabilities as a parallel priority.

Interestingly, over 63% of respondents indicated that of the numerous nationwide digital transformation initiatives, the changes with the State Taxation Administration, the government department responsible for collecting taxes and enforcing state revenue laws, had the most notable impact. The new digital-first processes eased the administrative burden, leading to a notable spike in higher-value activities such as investigations and overall enforcement actions.

China is also using policy tools to encourage carbon reduction. President Xi Jinping stated back in 2020 that China plans to hit peak carbon emissions by 2030 and be completely carbon neutral by 2060.

Overall, respondents remained upbeat but cautiously optimistic, citing factors such as Covid-19, city-wide lock downs, and the conflict in Ukraine as dampeners of economic momentum and opportunities for business in the coming twelve months. Either way, if the past 18 months are any indication, it’s clear that the government’s regulatory campaign has shifted away from the ‘growth above all’ mentality seen in previous years.

But, government pronouncements this year already point to a moderating attitude and an easing of the assault on business excesses, at least for now. Time will tell whether the ship has fully course-corrected.

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