In late 2020, China launched an anti-trust campaign focused mainly on big technology firms, aiming to crack down on what the government views as monopolistic practices. China’s anti-trust regulatory body, the State Administration for Market Regulation (SAMR) issued a set of anti-monopoly guidelines that place renewed pressure on the country’s leading internet services.
Subsequent anti-trust probes bear similarity to initiatives undertaken by international peers to increase regulation over online platforms and tech companies. The actions are also in line with the Chinese government’s emphasis on financial reform and de-risking, as well as its focus on improving service quality and boosting innovation. While we are closely watching the evolution of this campaign, we believe the impact on growth and consumption will likely be limited. We remain positive on China’s consumer sector and tech industry, which are key pillars in China’s dual circulation strategy.
China’s anti-trust actions align with its commitment to de-risk its economy
The digital sector has seen an explosion in growth, largely under-regulated, for more than a decade. Across the globe, competition policies have been changing, with enhanced enforcement for violations. Recent anti-trust and regulatory tightening on China’s tech giants follow this global trend and are in line with the government’s efforts to de-risk its economy.
The recently published 14th Five-Year Plan pledges to increase the GDP share of digital economy-related sectors to 10%, and the pro-competition policies aim to foster healthy development in the tech industry. Key regulatory changes include expanding the coverage of anti-trust laws to the digital economy, tightening restrictions on loans and capital requirements for online lending; prohibiting the sale of bank-issued online deposits on third-party platforms; and strengthening supervisions on payment platforms.
Impact on growth and consumption likely to be marginal
The pandemic has continued to accelerate the transition of business models from offline to online, with China’s online sales persistently outperforming offline sales (18% year-on-year growth for online vs. 4.8% for offline in 2019 and 10% for online vs. -9% for offline in 2020). Footnote1 China’s anti-trust actions are unlikely to hold back this progress, especially since the government remains focused on boosting domestic consumption and the digital economy, key elements in its dual-circulation strategy.
Despite investigations into their anti-competitive practices, China’s tech giants remain the dominant platforms in areas such as ecommerce and food delivery. While financial penalties could affect these companies’ earnings and limit their monopolistic profit, a more competitive market should be positive for the industry and consumers. The penalties imposed have been moderate so far considering the relative size of these businesses and can be readily absorbed without serious detriment to companies’ credit metrics. In addition, the government has allowed time for adjustments before rushing into formal investigations for many firms. In our view, this signals that Beijing is mainly aiming to rein in unfair competition and monopolistic behaviors regarding data.
While there has been some market concern that tightening regulation for online financial services could create a drag on consumer loans and in turn affect consumption, we expect the impact to be marginal. New regulations could limit some fintech platforms’ online lending capacity in the near term, but big banks and fintech firms with strong capital positions could benefit. While the share of consumer credit declined moderately to 4.8% of total loans in 1Q 2021 from 5.1% in 4Q 2020, this was mainly due to seasonality.Footnote2 Furthermore, the strengthened regulation could fix key loopholes and help improve asset quality, as the major fintech platforms have lent extensively to lower-income households.
More importantly, disposable income remains the key driver of household expenditure, rather than consumer credit. Recovery in Chinese consumption has lagged in 2020, mainly due to sluggish income growth as the government has provided little stimulus to households. It’s worth noting that the swift deceleration of consumer credit growth from the peak of 35% year-on-year in 2017 to 12.8% as of the end of 2019, caused by financial deleveraging, had limited impact on consumption during the same period. Therefore, a moderate deceleration in consumer credit is unlikely to translate into a significant downturn in consumption.
Risk of over-tightening remains
Given China’s solid recovery in growth, the government has taken the opportunity to implement further reform measures in an attempt to de-risk the economy, including credit tapering and regulatory tightening. In this context, China’s anti-trust actions stem from its fear that the monopolistic practices of big firms could undermine not just the tech sector, but the health of the wider economy.
We expect a well-calibrated policy normalization and regulatory tightening, in line with the government’s official stance of “no sharp policy turn.” However, real-time accurate evaluation is difficult and there is still uncertainty related to geopolitical tensions and the pace of the global recovery. As a result, the risk of over-tightening that could lead to a sharper-than-expected growth slowdown remains.
For details on our outlook for the China property sector, read our recent blog “China Property Sector Remains Robust Despite Policy Headwind.”