A regulatory blizzard: China's private-sector crackdown

THIS WEEK'S TOPIC: What impact, if any, will China's private-sector crackdown have on Singapore's businesses and economy?

Victor Mills Chief Executive Singapore International Chamber of Commerce

In the long term, there will be no significant negative impact. China and the party need the private sector to sustain economic growth and legitimacy respectively. In the short term, the speed of regulatory change has surprised and worried many as have moves to restrict what foreign system schools can teach. These regulatory moves are designed for control reasons and to defuse any threats to national security caused by unbridled corporate ambition and exuberant behaviour. They are also designed to rein in distasteful displays of wealth and to encourage the funding of programmes to help the less well off. This is socialism with Chinese characteristics.

Lawrence Loh Director, Centre for Governance and Sustainability NUS Business School

The current China action on the private sector is probably a one-off correction effort to transit businesses towards a stronger social stance. The income disparity will become even more untenable if the unfettered development of business were to persist. The fundamentals of the Chinese economy continue to be strong. In fact, the regularisation now will bring forth new advantages and opportunities for overseas investors. The competitive map has been re-configured as there is less entrenchment amongst the big Chinese companies. The nature of consumer demand and producer supply will change. If foreign market participants play their cards well, they may actually turn out to be new winners.

John Bittleston Founder and Chair Terrific Mentors International Pte Ltd

China is socialising capitalism to bring both real and perceived benefits to the poor. From Deng Xiaoping's introduction of a more capitalist society to today, the movement has benefitted China society, but unevenly. Visibly great wealth achieved, much poverty relieved but much poverty remains. China's actions are more a levelling up than a crackdown. Singapore was already doing this in a less draconian way. Lowest wages are being increased. Every society has to find the best ways to improve the lot of the lowest paid. Attempts to make a fairer society are praiseworthy. Attempts to reduce game addiction among the young are also important.

Leon Perera Chief Executive Officer Spire Research and Consulting

Sudden policy changes can have outsized effects on business confidence since investment is all about the long-term outlook. What is more damaging about China's recent regulatory blizzard is the perception that these changes are not arbitrary; rather, the government may be entering a new phase of social engineering-oriented policy-making, where companies' ability to innovate will be constrained by what the state deems to be culturally acceptable. Singapore companies that are present in the affected sectors in China will face a subdued outlook for some time to come. Singapore firms may also need to re-evaluate the viability of some of these Chinese companies as business partners in third countries, if they are financially dependent on their home market. However, Singapore firms may benefit from some degree of outflow of financial investment from the affected Chinese companies.

David Sandison Singapore Practice Leader Grant Thornton

Taking a step back, the stated aims of the Chinese government - tackling monopolies, enhancing data protection and protecting the young from technology addiction - are the same things we hold dear. But China goes about it in its own way. Investors are a fickle lot, so naturally, the measures will make some of them wary about putting money into that economy for the time being. It may also cause them, in the short term, to look for more stable environments, aka Singapore, where innovation and entrepreneurial flair are supported, and political and economic stability assured. So, it may have a brief beneficial impact on FDI into Singapore, by diverting attention. But don't bet on it lasting.

Alicia Garcia Herrero Chief Economist Natixis Asia Pacific

China's ongoing crackdown is not only relevant for China, but Asia and the world. Singapore is no exception. There are a few channels for spillover effects. Firstly is the increasingly negative sentiment of foreign investors on China and, more generally, Asia given the dominance of China in Asia's financial markets.

Secondly, China's push to shape its model for digital sovereignty will have a bearing on Singapore's model as well. Singapore will be inclined to become more careful regarding data privacy issues and the role of foreign platforms. This might be hard given the relatively small size of the Singapore economy, and Singapore could feel increasingly squeezed between the US major data platforms and China's digital ecosystem. Finally, China's quest for common prosperity will steer discussions across the region as to a renewed focus on income distribution. This might put into question Singapore's model in terms of the structure which relies on importing labour but with a segmented welfare state. All in all, China's crackdown has many more channels to impact Singapore than prices of tech stocks, many of which are much more structural.

Joanne Wong VP, International Markets LogRhythm

As Chinese tech companies face growing pressures at home, they will have their eye on alternative bases beyond their borders. Singapore, with its strong business climate and connectivity to the rest of Asia, is a natural frontrunner. More are expected to join the ranks of Chinese tech giants that have set up regional hubs here, and turn to us as a hotspot for innovation and investment.

This will undoubtedly inject new life to our nascent tech ecosystem and bring about exciting opportunities for local businesses. But to sustain investors' attention in the long run, we must build on our core business fundamentals - a stable legal and political environment, pipeline of local talent, and strong cyber competencies - and demonstrate that our digital economy is one that is built to last.

Chia Ngiang Hong President Real Estate Developers' Association of Singapore (REDAS)

China's wide-ranging crackdown is likely to slow its economy. This could have a knock-on effect on regional trades and lead to reduced demand for Singapore's exports and services. The sharp sell-off in Chinese equity markets and stocks would inadvertently affect investors' confidence and dampen sentiments, but the impact on Singapore's businesses exposed to China is likely to be mixed.

Those sectors targeted by the regulatory measures would be adversely affected while industries seen as crucial for promoting the country's ambition to be a manufacturing superpower and achieving carbon-neutral goals will likely benefit. The pervasive crackdown may also prompt foreign businesses to seek alternatives to China and Singapore being a likely candidate could bring about enhanced economic growth. In the longer term, I believe these regulations could pave the way for a more balanced, sustainable and broad-based growth in China, generating knock-on benefits for Singapore.

David Kuo Co-founder The Smart Investor

Actions often speak louder than words. And the actions of the Chinese government speak louder than its soothing words to reassure private businesses. Point is, it can take years to build a reputation but just minutes to ruin it. China has tarnished its reputation as a stable place to do business. But that is unlikely to deter some of Singapore's businesses from pursuing a market of almost 1.3 billion consumers. However, it won't be business as usual now that China has revealed its intentions. Warren Buffett once said: "A man who tries to carry a cat home by its tail will learn a lesson that can be learned in no other way." For many, the rewards of success in China just won't be worth the risk.

Vadim Berman Chief Executive Officer Tisane Labs

The interference will likely not end here. The only real reassurance would be rolling back the changes, which will not happen.

The damage has been done already. Singapore is heavy on fintech and edtech, with much investment going to China. With restrictions on crypto and private tutoring, Singaporean investors lost money.

Xi Jinping's policies borrow heavily from the playbook of Russia's Putin. Fast forward to the present, every significant Russian company today is incorporated offshore, often with the management residing there. That, however, is where Singapore may benefit. The flow of Chinese money started increasing in 2019, and will likely pick up with Singapore's image as a friendly safe haven.

Helen Ng Chief Executive Officer Lock+Store

Singapore businesses with exposure to China, such as real estate companies and gaming companies, should review their business practices and ensure they do not run afoul of local laws. The problem is there is such a lack of clarity as to whether the crackdowns are people or industry-specific that there is nothing much foreign investors can do except try not to stand out from the crowd.

Dileep Nair Independent Director Thakral Corporation Limited

China's private-sector crackdown has been massive. It has wiped out a staggering US$1.2 trillion in market value of large Chinese companies. Many Singapore companies, led by Temasek, have suffered big losses. So have Singaporeans who invested in those Chinese firms. There's a danger now of becoming overly bearish about China. However, there's a method in China's apparent "madness". Economic development firmly remains a priority but with focus shifting squarely on the real economy.

China is subordinating unfettered growth and excessive profitability for higher national objectives such as more inclusive growth, better social well-being, affordable housing and cohesiveness of the people. This is a more enlightened approach to economic governance. Strategic investments into AI, semiconductors, 5G, advanced manufacturing and green energy will continue apace to propel China's technological advance. Singapore companies would do well to invest into such areas either directly or with Chinese companies, and share the fruits of China's continued growth.

Agnes Cai Chief Executive Officer Foord Asset Management

While regulatory nuances ebb and flow regularly across markets, at least a portion of those introduced in China were unexpected. The move to convert the private education sector proved unnerving to investors. With the potential increases in government oversight of firms domiciled in China, we foresee an increase in the number of firms exploring alternative options, including relocation to Singapore.

Singapore is already an attractive jurisdiction for foreign companies to domicile and headquarter - the certainty of the protections provided by a sound legal system, an educated and talented local labour force, the ability to attract and hire foreign talent, and a stable and forward-thinking government, make Singapore a standout among regional and global competitors.

Maren Schweizer Chief Executive Officer Schweizer World Group

The grand steerage is a break with the old pro-growth model and the beginning of "real state capitalism" that will negatively or positively affect businesses connected to China.

What is certain is that these actions raise significant questions about the future role of international tech investors in the world's second-largest economy. Over the last 20 years, that answer was easy. Growth, scale, and investor profits. Anyone who could help was invited.

China's steerage transfers resources from Internet companies to firms that can create technological advances, such as semiconductors, electronics, quantum computing, advanced manufacturing, and enterprise AI. These companies are considered strategically crucial with core technologies that many believe will determine China's future. Our new Schweizer Electronic high-tech plant in Jiangsu province, China, that started operations in May 2020 serves as an example.

While regulation for Internet companies is required, the fast move has spooked entrepreneurs and private equity investors alike.

Jakob Nilsson Head of Distribution, Asia-Pacific Federated Hermes

We think that China's crackdown will have two outcomes for Singapore - one economic and one more societal. As business opportunities within China have become more restrictive - hopefully this is temporary - the affected companies will pivot more toward their offshore businesses, which should be positive for the Singapore economy. The second impact is a potential re-evaluation of some of the practices that China is trying to curb that are present here and in many parts of the world. Some examples include the education arms, excessive screen time and gaming for children, as well as inequalities within society.

Mario Singh Chief Executive Officer Fullerton Markets

It's important for us to first understand the reasons for China's recent crackdowns. China is currently into its 14th five-year-plan which runs till 2025. During this time, the Chinese government plans to "pursue common prosperity" and prevent the "disorderly expansion of capital". This is the main reason for the widespread crackdown on various sectors.

So far, the crackdowns have wiped off over US$1 trillion in the value of the affected companies. These measures are bound to affect Singapore's businesses and economy at some level. China has been Singapore's largest trading partner and Singapore has been China's largest foreign investor since 2013.

Singapore also became China's largest foreign direct investment destination country since 2019. So the link is clear - China's continual crackdowns will result in more economic value being wiped off from the affected firms, thereby directly impacting companies here with trading or investment ties with those affected firms.

Henry Tan Group CEO Nexia TS Group

The crackdown on Chinese private companies is mainly not an economic decision but a political one. With the need for China to ensure that the communist party and its ideology continue to be relevant, the increasing power that its high tech private firms have been building is not something that the party is comfortable with. It doesn't help that the owners of these companies have grown rather influential.

China has to clamp down before things get out of hand. The Chinese action creates an opportunity for other countries, as the affected companies adjust their business model to survive and thrive. Singapore can be one of the benefactors of this shift that will gain in momentum. Singapore can be a platform that Chinese private companies find comfortable to collaborate with to deal with the rest of the world.

Lim Soon Hock Managing Director PLAN-B ICAG

While the regulatory blitz, recently extended to a broad swath of sectors amid national campaigns for an Internet clean-up and "common prosperity", intended to reduce income inequality, is altruistic and laudable, the restrictions and bans seem to run counter to acceptable marketing practices, more so in a now fairly developed country like China.

The growing concern over gaming addiction on kids should best be left to parents rather than lead to an unnecessary intervention by the state. The new rules on the tuition industry also go against the spirit of enterprise.

An important lesson to be drawn, not just for businesses but for Singapore as well, is that China can be unpredictable, and going forward all must be prepared to expect the unexpected. That Singapore companies with businesses or investments in those sectors are now in a fix is an understatement. Social imperatives seem to have taken priority over economic goals. The affected firms will have to reposition, reshape, reconfigure, reallocate, perhaps even reinvent themselves, to tackle all the knock-on effects.

The reassurance to private businesses of the authorities' continued strong support remains to be seen.

David Leong Managing Director PeopleWorldwide Consulting Pte Ltd

China's broad regulatory sweep, covering a large swath of sectors and/or aimed at particular persons, are meant to equilibrate back to the centre, to prevent over-heating effects of certain behaviours or market and societal tendencies with long term undesirable consequences. Common prosperity is the current reigning agenda. While the world is battling Covid-induced stresses, both economically and socially, China is resetting its growth tempo by centering its economic and social tendencies.

Singapore's businesses need to hold and watch as these are not random occurrences and transitory but with deep impactful changes and consequences. The issues at play - student stress, pressure-cooker education system, falling birth rates, vulnerabilities of tech data, etc - also affect Singapore. There may be lessons for Singapore.

Joshua Yim Chief Executive Officer ACHIEVE Group

China's recent crackdown is a bold move to eradicate malpractices that are harming the well-being of the country. While these actions are having major impacts on China's economy, Singapore businesses are unlikely to be adversely affected. In the aftermath of the crackdown, some global players may shift their operations and funds to Southeast Asia, bringing with this an uptick in business activities. This will undoubtedly spur local businesses and benefit the Singapore economy.

In the long run, however, once the impact of the crackdown settles, investments are highly likely to flow into China again, and China will be better prepared to advance to a higher level of economic expansion. Singapore, as a longstanding partner of China, will grow alongside China and benefit from the affiliated prosperity.

Ulisse Dell'Orto Managing Director APAC Chainalysis

Amid China's private-sector crackdown, there are lessons that regulatory bodies and financial institutions in Singapore can take away - particularly when it comes to the governance of blockchain technology and cryptocurrency.

Cryptocurrencies operate on public, immutable blockchains ledgers. That means the network is inherently transparent and all activities - legitimate or illicit - could be effectively monitored and traced with the help of blockchain data platforms like Chainalysis. The missing piece now is a regulatory framework that scales with the burgeoning applications on the network.

As one of the world's most established regulatory climates for cryptocurrencies, Singapore is well positioned to strike a balance between regulation and financial innovation, and cement our position as Asia's leading crypto-financial hub.

READ MORE: China's common prosperity drive a good thing: DBS chief Piyush Gupta