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China’s ‘common prosperity’ push leads to divergence in regulatory approach -Breaking

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© Reuters. The Chinese national flag can be seen at a Shanghai construction site near the financial district on June 1, 2012. REUTERS/Carlos Barria/Files

Clare Jim, Eduardo Baptista

BEIJING / HONG KONG – China’s near-term “common prosperity push” will not only seek to close the wealth gap; it is also expected to influence the country’s regulatory approach. The government supports key sectors that can help the economy.

Analysts believe that China’s embattled property industry, which makes up a quarter the country’s economy, will get additional regulatory support. Internet firms, however, will still be under fire for what Beijing considers disorderly capital expansion.

Global investors that were subject to numerous government crackdowns over the past year will be looking for evidence of clear regulatory divergence in China’s Rubber-Stamp Parliament annual meeting on Saturday. This is when China’s policymakers should announce additional stimulus to boost slowing economic growth.

For the discussion on economic and social policy, thousands of Chinese delegates will be in Beijing.

The Chinese technology sector faced fears last month of another round of regulatory restrictions. This was in response to unprecedented changes over the last two years, including antitrust violations, data security concerns and other matters.

On the contrary, the mammoth sector of property has witnessed some rules being relaxed since the start of the year. This allows debt-laden developers to get on their feet again after they have been close to collapse.

Beijing is focusing on halting growth slowdown, and the war in Ukraine adds new uncertainty to a year in which President Xi Jinping seems almost certain of securing a third consecutive term.

Alfredo Montufar Helu, Director of Economist Corporate Intelligence Network said that if you only looked at regulatory developments, you’d be certain to conclude that China is reining down tech and has relaxed their approach toward the property sector.

He said that the property sector was a major driver of economic growth because of its ability to lead to investments, to house purchases, and to development of property. However, there is also high demand in other areas like commodities.

China launched a multifaceted regulatory crackdown last year on a wide range of industries. This left both startups and long-established firms operating in a uncertain and new environment under Xi’s “common prosperity” initiative.

The technology and property industries saw significant declines in revenue and a huge sell-off of their stock and bond portfolios. New rules were put in place to regulate their operations and impose severe penalties for those who violate them.

SYSTEMIC RISK

Beijing took a variety of measures to revive the cooling real estate sector since the beginning of the year. These included making it easier to raise funds for developers of large stature, opening escrow accounts to pre-sale funds, and allowing local governments to reduce mortgage rates and downpayment ratios.

Montufar Helu says that the regulatory relief given to property was probably driven by concerns over the potential knock-on effect of common prosperity measures for the wider economy.

The technology sector, however, was subject to a flurry of stricter regulations. These included bans on overseas listing and outright bans for industries like after-school tutoring. There were also a steady stream of fines.

Most often, companies on the receiving end are tech giants like Tencent Holdings. (OTC) Alibaba (NYSE:) Group.

Rosealea Yao, Gavekal Dragonomics’ China investment analyst, said that technology and education fall under the umbrella “common prosperity”, but real estate poses a unique issue because of its systemic risks.

Yao stated that the central government has a clear goal for property, and it is to help it emerge from deep liquidity crises. Therefore, more easing will be required.

Hang Seng Mainland Properties Index has fallen 0.2% this year compared with a 6% decrease in the. Some investors have bought property shares based upon low valuations or stimulus expectations.

Comparatively, this year’s main Chinese tech-share index, Hang Seng Tech Index, has seen a 12.1% decline.

Louis Lau is a U.S.-based manager of a fund at Brandes Investment Partners LP. He said he was shocked that the regulators are still tightening their screws on tech, destroying hopes for a recovery period.

Lau stated that people don’t know when the crackdown will end and it has taken much longer than they expected.

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