Digital opium and delisting: key China stories from 2021
The addition of Chinese government bonds to FTSE Russell’s flagship government bond index in October was meant to herald the world’s most populous country’s move into the financial mainstream.
But the last 12 months have been anything but conventional for China’s listed firms. Gaming companies were accused of offering users “digital opium” while business drinking was labelled “disgusting” by the country’s authorities.
Even the education sector came under fire under a “common prosperity” drive by President Xi Jinping which sought to put social needs above economic growth.
A clampdown on tech firms eviscerated shareholder values and saw Hong Kong’s Hang Seng TECH index become the worst performing tech benchmark globally in 2021.
Here are five key China stories from the last 12 months:
Alibaba’s mammoth fine
By December this year Alibaba Group had lost over $546bn in market capitalisation since its shares hit an all-time high of HKD309.4 at the end of October 2020.
Chinese equity markets had outperformed the rest of the world in 2020 as the Asian economy reopened from social distancing restrictions as other major economies stayed stuck in lockdowns, driving Alibaba’s shares to their zenith.
Things started to deteriorate straight after. Its fintech arm Ant Group’s bumper dual listing in Shanghai and Hong Kong was called off in November 2020.
Worse was to come in 2021.
Alibaba’s outspoken founder Jack Ma’s criticism of China’s banking system and its financial regulation saw him disappear from public view and sparked a regulatory blitz that would see Alibaba Group hit with a landmark $2.8bn anti-monopoly fine in April.
Ant Group’s highly anticipated initial public offering (IPO) was put on hold as the payment provider was forced to restructure from a nimble fintech firm to a more restricted financial holdings company. While Ma has reappeared the value of the company he once helmed appears lost.
Beijing widens its crackdown
Alibaba’s multibillion-dollar fine was a precursor to a broader regulatory crackdown that would rattle entire sectors including education and online gaming.
The education sector in China was hit the hardest as after-school tutoring firms were forced to register as non-profit organisations and were barred to list on the stock market.
The video gaming sector was next in line as a state-affiliated news agency described video games as “spiritual opium” and “electronic drugs” and called for stricter control on time spent by young students on video games.
Chinese gaming firms Tencent and NetEase dropped 18% and 11.6% during the month of July. Meanwhile, Hong Kong’s benchmark Hang Seng index posted four straight months of losses between June and September on the back of Beijing’s relentless regulatory sweep.
The Hang Seng TECH index, which comprises Chinese technology companies including Alibaba, Tencent, JD.com, Xiaomi, and many more, was the worst performing technology sectoral index in the world in 2021. The index is now down over 33% year to date.
The highlight of China’s regulatory crackdown on its private sector was the delisting of ride-hailing platform Didi Global within five months of its New York Stock Exchange debut.
Didi had infuriated Chinese authorities by pushing ahead with its $4.4bn US IPO in late June despite calls from Beijing against the move. Less than a week after its New York listing, the company was scrutinised on data security grounds and had its apps banned from app stores in China.
China’s cybersecurity watchdog then broadened its crackdown on all offshore listings, ruling that companies handling personal information of more than one million users must undergo a security review before listing abroad.
As shares prices in Didi slumped, the US Securities and Exchange Commission (SEC) Chairman Gary Gensler expressed concern and stated that China-based companies seeking to list in the US will have to disclose whether it received or was denied permission from Chinese authorities to list on US exchanges.
In early December, Didi announced plans to delist from the US and to seek a Hong Kong listing instead.
With a debt of over $300bn, Chinese property developer Evergrande became the most widely discussed topic of the financial world in the second half of the year as markets beyond China felt the ripples of a potential default scenario.
In September, Evergrande flagged a default risk citing “tremendous pressure” on cash flow and liquidity due to an expected decline in contract sales. Property sales slowdown and tight credit environment for the Chinese real estate sector forced more companies including Kaisa Group and Fantasia to flag similar default scenarios.
While Chinese banks and property players saw stock prices drop on the souring news, the effects were felt far and wide as iron ore prices and commodity-linked currencies like the Australian and New Zealand dollars fell.
Global mining companies including BHP Group and Rio Tinto saw stock prices slump for three straight months following slowdown in the real estate sector of the world’s leading iron ore importing nation.
China bans crypto
In May, Beijing authorities banned banks and payment companies from facilitating cryptocurrency transactions, a move which saw bitcoin prices plunge over 35%, hitting a low of $30,000 on 19 May.
The province of Inner Mongolia banned crypto mining in May, and a month later Chinese authorities made this a countrywide measure. Bitcoin prices further dropped to about $28,800 by late June, its lowest since early January.
The University of Cambridge said in a report: “The immediate effect of the government-mandated ban on crypto mining in China was a 38% drop in global network hash rate in June – which corresponds roughly to China’s share of hash rate before the clampdown, suggesting that Chinese miners ceased operations simultaneously.”
Chinese authorities kept up the pressure on crypto with the People’s Bank of China declaring all cryptocurrency transactions illegal in September.
Chinese crypto exchange Huobi saw its share price crater as it first announced it would not serve new Chinese users and then close up shop completely and moved to Singapore.
Despite this move, bitcoin mining levels globally are now higher than they were in May and activity appears to have shifted to the DeFi (decentralised) sector. The question is, how long will Beijing let this continue.