![]() In the food delivery sector, on July 26, guidelines were issued on protecting food delivery riders’ rights and interests. The key rulings included: 1) all exclusive licensing agreement must end within 30 days, 2) new song exclusive release window should be shorter than 30 days and 3) independent artists exclusive contracts should last shorter than three years. In the music sector, on July 24, the regulator issued its final ruling on Tencent Music Corporation, addressing the issue of unfair market competition in a highly concentrated market. We disseminated a more detailed update on the AST industry, which can be accessed here. The key takeaway from the call was the education policies were targeted and not intended to hurt companies in other industries. However, this was in large part due to AST companies being classified as not-for-profit organizations, hence preventing them from raising funds through the VIE structure.Ĭhina’s securities regulator hosted a virtual meeting on July 28 to ease market concerns following the announcement of the new policy governing the AST industry. The VIE structure ban in the AST industry has driven investor fear of similar future actions in other sectors. Foreign investors can no longer invest in AST via Variable Interest Entity (VIE), which will likely result in company de-listings.AST companies must be “not-for-profit” entities, in which case all profits and cashflows must be reinvested into the business and sponsors (shareholders) cannot lay claim to profits.AST companies will be limited by licensing and operating hours restrictions, requiring them to scale down their subject-based tutoring programs and pivot from traditional subjects toward enrichment topic, and from tutoring towards content or pre-recording.The purpose of this policy is to reduce the educational burden on children and parents, in the context of government concerns regarding the country’s slowing birth rate. In the education sector, on July 24, a new policy governing the After School Tutoring (AST) industry was released. There have been new regulatory developments that have caught investors’ attention in recent days. With rail-hailing app Didi, Beijing’s concerns have centered on national security due to the company’s vast amount of consumer data, and fears this may be accessible through audits to the US government. In the previous regulatory cycle, the government also cracked down on peer-to-peer (P2P) loans for similar reasons. In the fintech sector, regulatory scrutiny on the consumer finance co-lending model (that resulted in the suspension of the ANT initial public offering) was driven by government concerns about the rapid growth of consumer leverage, as well as limited oversight into online facilitated lending. This had resulted in rent-seeking behavior such as burning excessive cash in sales and marketing to gain market share and exploiting the scale benefits and information asymmetry between the platform and customers. In the broader internet sector, we have seen extensive anti-monopoly actions, driven by concerns regarding the rapid growth of large internet platforms with strong bargaining power versus their stakeholders. More recent efforts by the securities regulator to ease market concerns offer evidence of this, and the takeaway was that recent actions were targeted and intended to be limited in scope. Rather, similar to many regulators globally, key objectives include curtailing monopolistic behavior, enhancing data privacy/security and improved outcomes for a broader range of stakeholders. ![]() Given the role of innovation as a driver of productivity and gross domestic product (GDP) growth, we don’t believe government regulatory efforts aim to curtail digital sector growth as a whole. Regulatory cycles are not uncommon in China-policy and regulatory scrutiny should be seen as ongoing risks when it comes to investing in China, to be carefully monitored and integrated in company research and portfolio management. ![]() It is critical to evaluate the alignment of companies with China’s long-term strategic goals. The underlying thread that ties the intense regulatory activities across many industries lies in Beijing’s determination to develop China into a “modernized socialist economy,” including objectives of common prosperity, green development and independence in key technologies/industries. Increased regulatory scrutiny, especially the new policy governing the After School Tutoring (AST) industry announced on July 24, has elevated market volatility and investor fears of policy risks in China. This post is also available in: French, Italian, SpanishĬhina is in the midst of a tightening regulatory cycle, implementing anti-monopoly, data security and industry-specific regulations.
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