China is trying to balance more support for smaller privately owned companies that are still struggling with more regulation in “bubbly” sectors.
The latest developments suggest that China is implementing both “targeted” easing and “targeted” tightening; trying to balance support to small privately owned companies with more restrictions in “bubbly” sectors, such as property developers and online platforms. Examples of the former include City of Shanghai raising mortgage rates and Ministry of Housing and Urban-Rural Developments promising to step up supervision of property developers. As regards online platforms, regulators just banned Tencent from exclusive online music rights and tightened rules for online food delivery services.
China’s regulation drive in real estate is understandable, especially with the on-going liquidity crisis in Evergrande, China's second-largest property developer by sales, which is widely considered systemically important for the economy. It also comes on the heels of the continuing decline in shadow lending. The anti-trust push in the tech sector appears to have political connotations as well - most likely due to fears that tech giants might challenge the supremacy of the communist party. Authorities are not in the mood to back off yet, and the market is becoming uneasy about wider implications for the economy, which is one of the reasons behind today’s 322bps drop in the CSI 300 Index.1
The tech/real estate crackdown is taking place alongside more support for companies/sectors that are still struggling against headwinds created by insufficiently high vaccination rates and additional mobility restrictions. This was behind the central bank’s seemingly “blanket” cut in the reserve requirements for banks, which was mostly aimed at boosting loans for smaller and medium-size companies. Will China broaden this kind of support? July’s corporate default rates and the next batch of activity gauges (PMIs) will send important signals. Note that for now, authorities chose to keep all benchmark interest rates unchanged.
1The CSI 300 Index is comprised of the 300 largest and most liquid stocks in the Chinese A-share market.