Winners and losers in China's sweeping private-sector crackdown

BEIJING'S agenda to curb the rampant expansion of some private enterprises has sent stocks plunging in sectors ranging from gaming to after-school tutoring and healthcare to liquor, although tech stocks clawed back some gains on Friday as bargain hunters moved in.

Behind the crackdown is the Communist Party's drive to narrow China's wealth gap and keep in check the expansion of capital, as reflected in President Xi Jinping's increasingly vocal call for "common prosperity".

Meanwhile, industries seen crucial for promoting the country's ambition to be a self-reliant manufacturing superpower and achieving carbon-neutral goals, such as semiconductors and renewable energy, are taking on a new shine for investors.

Since July, China has published draft rules banning unfair online competition and vowed to better protect the rights of gig-economy workers, while state-run media have ratcheted up rhetoric regarding tighter oversight of online drug sales.

The barrage of new regulations has especially squeezed the MSCI China Index subgauges for communications services, consumer discretionary and healthcare, with each plummeting 21 per cent since June 30.

Internet bellwether Tencent Holdings is set for its worst quarter in a decade, with a 19 per cent loss. Regulators in July ordered the company to give up exclusive music rights and rejected a merger of two game-streaming firms it has stakes in.

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Sentiment took another blow this month after state media blasted digital games as "spiritual opium" and urged "zero tolerance" for "vulgar" content on live-streaming platforms.

The selloffs in e-commerce stocks and private-education firms were even more brutal. Alibaba Group Holding has tumbled to record lows in Hong Kong while Meituan has sunk 29 per cent. TAL Education Group is worth just a quarter of what it was a month ago after a plethora of regulations prohibiting tutoring firms from making profits.

Inequality factor

The move underscores efforts by the authorities to eradicate an inequality factor in China's competitive college-entrance examination.

Shares of pharmaceutical companies and online medical-service providers have also been dumped on fears of narrower profit margins. The healthcare sector is believed to be a target of the Communist Party for squeezing livelihoods, widening the wealth-and-services gap and deterring people from starting families.

"We believe uncertainty will remain high across the Internet and other related sectors," said Vincent Mortier, deputy group chief investment officer at Amundi.

"Education and healthcare are the other two sectors exposed to regulatory risks, and in particular the latter," he added.

Investors have piled into industries seen benefiting from China's determination to meet its green goals and maintain its edge in electric vehicles, pushing the materials subgauge up by 11 per cent, quarter to date.

Battery makers such as Ganfeng Lithium have soared, while large steel mills have rallied partly because product prices have risen after the government imposed output curbs to reduce emissions.

The utilities subgauge was propelled by power-generation firms, whose prospects are buoyed by a shift to cleaner energy and their participation in the nation's nascent carbon-trading market.

Banks and industrials are probably "the safest" in the short term, said Louis Lau, director of investments at Brandes Investment Partners. But "if I'm looking to double or treble my money in the next five years, it'll probably have to come back to the areas of greatest pressure", he said.

While Hong Kong's Hang Seng Tech Index, with a heavy concentration of Chinese consumer-Internet stocks, has plunged 25 per cent so far this year, Shanghai's Star 50 Index, which is loaded with semiconductor, renewable-energy and high-end manufacturing companies, has risen 7.5 per cent. The disparity shows just how hardware tech - or innovation in chips, electric vehicles and high-end manufacturing - is now favoured by investors over software tech, which is seen as more geared towards marketing and fund-raising.

As such, Shanghai Bright Power Semiconductor has surged 162 per cent this year, while Trina Solar has jumped about 130 per cent.

"We are focusing on strategic sectors where government policy is a clear tailwind rather than a headwind," said Mr Mortier of Amundi.

"China's transition to a green economy has immense implications and opportunities for investors. This is one of the reasons why we are constructive on the green economy and the new advanced materials industry."

On Friday, some Chinese technology shares advanced initially as traders continued bargain hunting on hopes that the most intense phase of Beijing's regulatory clampdown on private enterprise may have passed.

The Hang Seng Tech Index closed just 0.2 per cent lower after rising as much as 2 per cent in the morning.

Alibaba Group Holding fell 3.9 per cent, Tencent Holdings slid 1.1 per cent and Meituan dropped 0.8 per cent. The tech gauge still posted a 7.3 per cent advance for the week, its best performance since Jan 22.

The recent reversal of weeks-long selling of tech stocks is shoring up confidence among some investors that the recovery has more upside to go.

Traders largely ignored a warning from China's supreme court and a government agency against the excessive work hours that pervade the country's largest corporations.

The mood has also been upbeat in the US, where a bout of frenzied dip buying from retail traders over the last couple of days has helped spur a rally in Chinese stocks listed in America. The Nasdaq Golden Dragon China Index is up more than 10 per cent this week despite falling for the first time in five sessions on Thursday.

Meanwhile, China's CSI 300 Index closed 0.5 per cent higher, led by industrial and materials stocks. It had earlier gained as much as 1.3 per cent. BLOOMBERG

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