•Regulatory storm to dampen corporate sentiment, weigh on growth: MS
• Measures boost households, hurt owners as China addresses inequality: MS
Beijing’s sweeping regulatory clampdown is a profound policy shift that will shape the evolution of China’s capital markets in the coming years.
That’s according to Morgan Stanley Asia chief Asia economist Chetan Ahya, who says the measures, designed to address rising inequality, came at “a speed, scale and intensity” that was unforeseen. The shift will boost households and consumption at the expense of owners, and cause increased risks for equity investors, he wrote in a research note.
”Rebalancing towards consumption comes at a price,” said Ahya. ”A higher wage share helps households but affects the owners of capital. A declining share of corporate profits in GDP means that even with relatively high rates of GDP growth, corporate profitability in aggregate will face headwinds.”
China’s economic development has reached a critical juncture with per capita income on the cusp of crossing the high-income threshold but with the distribution of household incomes markedly uneven, Ahya said. That’s why Beijing is moving so quickly now to restore a long-standing goal of rebalancing the economy towards consumption.
That has seen it target several of its e-commerce giants, tech sector and tutoring firms as it looks to rein in the big players of the new economy.
Ride-hailing app Didi made its US stock market debut at the end of last month, raising $4.4bn. Just two days later, China’s internet regulator launched an investigation into the company over how it collects user data.
Another government agency fined 12 companies over deals that violated anti-monopoly rules. The companies included Tencent, Baidu, Didi again, SoftBank and a ByteDance-backed firm.
Regulatory changes are often unpredictable, leading market participants to second-guess when the next wave will hit, which sectors might be affected and to what extent, Ahya wrote. The intense regulatory action is limiting their scope severely and even disrupting their business models while uneven communications around regulatory changes and seemingly uncoordinated actions across different regulatory agencies have left global investors in need of clarity, he said.
The near-term impact will be a dampening of corporate sentiment that will curtail private investment and weigh on the growth outlook, Ahya said, adding that it may also deter global investors from deepening their participation in China’s capital markets.
Morgan Stanley equity strategists Jonathan Garner and Laura Wang believe that equity risk premium will remain at a relatively high level, at least in the near term, and that over time the MSCI China universe will gradually have a more balanced sector allocation with a reduced weight on e-commerce and a higher weight for sectors like Industrials and IT.
From a capital markets perspective, Morgan’s China financials analyst, Richard Xu, believes that the recent regulations may lead to further shifts in some IPOs from the US to Hong Kong.
But they say they believe that Beijing’s policy-makers understand the challenges posed by dampening corporate sentiment and investment and will steer a middle course between tempering the worst effects of market forces while ensuring a reasonable and sustainable rate of economic growth.