Rightways: No such thing as ‘too big to fail’ in China

On Oct 24 2020 during the Bund Summit in Shanghai, Jack Ma delivered his keynote address where he criticised China’s regulators’ saying “outdated supervision” of financial regulation was stifling innovation and its global banking rules were like an “old people’s club.”

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PEOPLE who have invested heavily on China stocks in the past two years must be wondering when did it all start to go wrong? After all, China did celebrate the 100th anniversary of the Chinese Communist Party recently on July 1.

Usually on such momentous occasions, one would expect China’s government to prop up financial markets and show the world its economic strength. Ironically, most Chinese stock market indexes are down year to date giving up the strides made for the better half of the year as seen in table 1.

So, did it all start with Jack Ma? On Oct 24 2020 during the Bund Summit in Shanghai, Jack Ma delivered his keynote address where he criticised China’s regulators’ saying “outdated supervision” of financial regulation was stifling innovation and its global banking rules were like an “old people’s club.”

He called for change and said that Chinese banks had a “pawnshop mentality which affects many entrepreneurs.” Many suspected that this led to regulators scuttling Ant Group’s Us$37bil (Rm156mil) mega initial public offering (IPO) and the eventual three-month-long disappearance of Jack Ma.

Before Jack Ma, there was Dalian Wanda Group’s Wang Jianlin, once Asia’s richest man with a net worth of Us$46bil (Rm194bil).

He owned the largest cinema chain AMC (one of the popular Reddit meme stock in 2020/21) and had ambitions to overtake Disney but was hit hard when regulators embarked on capital controls to rein in capital outflow from China.

Businessmen who were taking on debts buying assets all over the world outside of China became a target.

When regulators flexed their muscles, Wang tried to avoid the same fate as HNA Group (one of China’s largest assets buyers which filed for bankruptcy) by immediately disposing foreign assets to comply. Wang then, was among one of the well-connected tycoons to Beijing’s political elites and at one point he was even bidding for the Bandar Malaysia project.

If we were to look back at history, Jack Ma or Wang Jianlin were definitely not the early precedents where China’s government had intervened in businesses.

During the Qing Dynasty, legendary “red-topped hat” businessman Hu Xueyan, the only merchant to be given a second ranked grade official position and control the economy with businesses ranging from banks, pawnshops, silk trade to daily essentials; met with a tragic end despite his fairytale-like rags to riches journey and contribution to the struggling nation then.

This raises the question, what causes the conflict between the China’s government and the business sector?

History have shown us that China is a country where public interests takes precedent over corporate profits.

There are no person or entities that are too big to fail.

This is a complete opposite to United States’s capitalist system. In addition, based on historical literature, the traditional social class structure of China dating back to the imperial periods, consist of four main categories; namely scholars, farmers, artisans and merchants.

Interestingly, merchants have always had the lowest standing in the social class structure.

In the case of Ant Group’s failed IPO, setting aside individual politics and ego, there were justifications for regulators to step in specifically on Ant Financial past lending practices at exorbitant rates.

It was able to bypass regulators’ scrutiny where a financial entity such as banks would otherwise be subjected to. This is rather similar to Malaysia where banks are subjected to regulatory supervision by Bank Negara, whereas money lending entities are subjected to supervision by Ministry of Housing & Local Government (KPKT), allowing it to charge interests as much as 18% per annum.

With regards to Didi Global Inc’s troubled Us$4.4bil (Rm18.6bil) IPO on the New York Stock Exchange (NYSE), the back story was Didi went ahead with its IPO, ignoring Cyberspace Administration of China’s (CAC) order to conduct a thorough examination of its network security. CAC was worried Didi’s massive data will fall into foreign hands due to greater public disclosure associated with a US listing. Clearly, in the interest of its shareholders, many of whom were foreign venture capital and private equity funds, Didi prioritised the listing over national interest.

In the latest regulatory clampdown on the private tutoring education sector, the Chinese government directed that companies in this space to operate as a social enterprise instead of a for profit model.

These new rules barred for-profit tutoring in core school subjects to ease financial pressures on families. The policy change further restricts foreign investment in the sector through merger and acquisition (M&A), franchises and others.

Historically, education is of paramount importance in Chinese’s culture. By doing this, China’s government is seeking to ensure affordable education to a majority of the people in expense of the profiteers.

From table 2, you can see how the best names in each sector have been impacted by China’s new regulatory framework changes in recent times.

Of course there are argument in terms of merits and weaknesses for each governance model. The US model spurs creativity and innovation but it also leads to wide inequality and disparity for the majority of the people. The Chinese model, whilst authoritarian and lacks transparency, does protect the welfare of the masses especially those who may fall through the cracks of society.

Neither one is perfect. It all comes down to different priorities. China have done very well eradicating poverty and lifting the people from hardcore poor to a burgeoning middle class society in the past twenty years.

No matter the propaganda painted in western media to shed China in a negative light, there is no denying that they have accomplished what many countries can only dream of – taking care of the majority of the people.

I am by no means a pro-china hawk as I have undergone western education my whole life. However, with my years of experience working with one of the largest Fortune 500 Corporation in China and being in the inner circle of decision-makers, I have learnt much about their fears, concerns and how they navigate the business, political and social spheres while building a fortune.

Every stock market has its nuances

There is a Chinese character “jing wei” when read together means respect and fear. This word aptly describes how China companies operate at all times.

If you are a Chinese company, wherever you may be, you will bend the knee if China’s government wants you to. It is not easy to be successful in China due to the intense competition. It is even harder to be successful and not attract government attention.

Many retailers often lament, “It is hard to make money from Bursa, better to invest in China and Hong Kong stocks.”

I think it is imperative to first understand that every stock market has its own nuances. Unless one has thorough understanding of the local investment climate, latest news flow and even culture, investing in overseas market is not as simple as just buying big brand names or familiar companies.

It is true that good companies in foreign stock markets is part of a bigger ocean with more opportunities and growth runway due to a larger addressable market.

Similarly there are bigger operators, syndicates or scandals lurking around the corner.

Who would have thought that a company like Luckin Coffee, listed on Nasdaq with a market cap of Us$12bil (Rm50.7bil), once the largest coffee chain in China and touted to be the biggest threat to Starbucks, would turn out to be a fraud?

Having said that, as a fundamentalist, I believe this regulation wave causing the sell down provides a great investment opportunity for these companies due to my belief in the long term prospect of China’s economy.

We must remember that very few people in the world are like Robert Kuok. Some have argued the reason for his success is his early entry into China. I beg to differ. I believe strongly his success in China is because he always placed the interests of China before his own corporate and personal interests.

So entrepreneurs who aspire to do well in China, may consider taking a leaf from Robert Kuok’s playbook and the easiest place to start, is to remove the “I” in the equation of things.