China's new regulations for companies are the government's intention to correct economic openness's drift in recent decades. However, this new policy is worrying investors and is beginning to penalise the activity of specific sectors. Nevertheless, its long-term impact will be positive.
Tackle inequalities
Deng Xiaoping, the father of current economic development, said that "we must first allow part of the population to become richer". His wish exceeded all his expectations. As a result, China is now the country with the most billionaires, more than 1,000. More than the number accumulated in the United States and India, these two nations complete the podium.
National pride, this 1st place in the ranking of billionaires, is also a source of social tensions because, at the same time, 600 million Chinese live on less than 130 euros per month. Inequalities have increased sharply. Today, 1% of the wealthiest Chinese own 30% of the national wealth compared to 20% a decade ago.
For the current strongman of China, Xi Jinping, it is time for wealth to benefit as many people as possible, hence his desire to update the concept of «common prosperity» launched by Mao in the 1950s. Through this policy, the Chinese Communist Party wants above all to capture a part of the country's wealth, farmland during the forced collectivisations under Mao, the immense profits made by the private sector, and in particular, the tech giants today. But there is also a genuine desire to reduce inequality and to create a good middle class.
Financial turbulence, economic slowdown
Given the negative impact, they will have on the development and profits of targeted companies, the new rules enacted by Beijing have depressed stock prices. Investors abandoned the Chinese stock market all the more because they were surprised by this regulatory trick and had not understood the authorities' aim, fearing that all private companies would end up being severely penalised.
Financial turbulence is not limited to equities alone but also affects bond markets. Alongside the technology giants, property developers are the other actors targeted explicitly by Beijing. "Housing is for living, not for speculation," Xi Jinping said in October 2017. Four years later, he acted to make this maxim a reality. To curb speculation, mortgage rates have increased, the debt of major developers is limited, and investment funds can no longer borrow to invest in brick. As a result, it is also more difficult for an individual to buy a 2nd home and sometimes impossible to acquire a 3rd.
The fight against real estate speculation makes victims, like Evergrande, the country's second-largest developer, on the verge of bankruptcy due to lack of liquidity. Activity in the construction sector is also beginning to suffer from the tightening of financing rules. And more generally, the dynamism of the Chinese economy seems to suffer from the turn of the regulatory screw.
Long-term benefits
Harmful today, the policy of "common prosperity" will be beneficial tomorrow. Reducing inequalities will first calm the social protest, which has become more and more intense in recent times. It will also allow the emergence of a true middle class, which will be tomorrow the engine of the Chinese economy through its consumption. New rules specifically aim to strengthen competition for the benefit of households, remove barriers to social advancement, or increase the wages of the most precarious workers. More redistributive taxation and strengthening of social security are also part of the central power. In addition, Chinese companies are finally "encouraged" to strengthen their philanthropic work to benefit the poorest.
"Common prosperity" is not just an empty concept that must help Xi Jinping strengthen and sustain his grip on the country. On the contrary, it is a policy that must allow the indispensable transformation of China towards economic development that is no longer based solely on exports and over-investment but also on household consumption, as is the case in all developed countries.
This change will not be without economic difficulties or financial turbulence. It now frightens speculators who were hoping for a fast and high return with Chinese equities. But from a long-term perspective, it strengthens the attractiveness of Chinese assets.
Chinese equities occupy 5% of our neutral portfolio.