Winners and losers in China’s sweeping private sector crackdown

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(Bloomberg) – Beijing’s agenda to curb the rampant expansion of some private companies has sent stocks plummeting in sectors ranging from gaming to after-school tutoring and healthcare to liquor.

Behind the crackdown is the Communist Party’s drive to narrow China’s wealth gap and curb capital expansion, as evidenced by President Xi Jinping’s increasingly loud call for “common prosperity.”

Meanwhile, industries deemed critical to advancing the country’s ambition to be a self-sustaining manufacturing superpower and to achieve carbon-neutral goals, such as semiconductors and renewable energy, are taking on a new shine for investors.

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Here are some charts showing how the regulatory shock has evolved for different sectors:

Losing favor

Since July, China has published draft rules banning unfair online competition and has vowed to better protect the rights of workers in the gig economy, while state media have fueled rhetoric about tighter controls over online drug sales. In particular, the barrage of new regulations has put a strain on the sub-meters of the MSCI China Index for communications services, consumer goods and healthcare, with each falling 21% since June 30.

Internet bellwether Tencent Holdings Ltd. faces its worst quarter in ten years, with a loss of 19%. Regulators in July ordered the company to give up its exclusive music rights and rejected a merger of two game streaming companies in which it has interests. Sentiment took another blow this month after state media labeled digital games as “spiritual opium” and pushed for “zero tolerance” for “vulgar” content on live streaming platforms.

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The sell-off in e-commerce stocks and private education companies was even more brutal. Alibaba Group Holding Ltd. has plunged to all-time lows in Hong Kong, while Meituan has plunged 29%. TAL Education Group is worth just a quarter of what it was a month ago, following a plethora of rules banning tutoring companies from making a profit. The move underscores the authorities’ efforts to eradicate an inequality factor in China’s competitive university entrance exam.

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

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“We believe that uncertainty in the internet and other related sectors will remain high,” said Vincent Mortier, deputy group director for investments at Amundi SA. “Education and health care are the other two sectors exposed to regulatory risk, especially the latter.”

light spots

Investors have piled into industries that have benefited from China’s determination to meet its green goals and maintain its lead in electric vehicles, pushing the materials submeter up 11% in the quarter so far. Battery manufacturers such as Ganfeng Lithium Co. have surged, while major steel mills have recovered, in part because product prices rose after the government imposed production restrictions to cut emissions.

The utility submeter has been driven by power generating companies, whose prospects are bolstered by a shift to cleaner energy and their participation in the country’s nascent carbon trading market.

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Banks and industry and services are probably “the safest in the short term,” said Louis Lau, director of investments at Brandes Investment Partners. But “if I want to double or triple my money in the next five years, it will probably have to return to the areas of greatest pressure,” he said.

Hardcore innovation

While Hong Kong’s Hang Seng Tech Index, which has a strong concentration of Chinese consumer internet stocks, has fallen 25% so far this year, Shanghai’s Star 50 Index, which is full of semiconductors, renewable energy and high-end manufacturing companies, has up 7.5 percent.

The disparity shows how hardware technology – or innovation in chips, EV and high-end manufacturing – is now favored by investors over software technology, which is seen as more focused on marketing and fundraising. As such, Shanghai Bright Power Semiconductor Co. up 162% this year, while Trina Solar Co. increased by about 130%.

“We focus on strategic sectors where government policy is a clear tailwind rather than headwind,” says Mortier of Amundi. “China’s transition to a green economy has huge implications and opportunities for investors. This is one of the reasons why we are constructive towards the green economy and the new advanced materials industry.”

©2020 Bloomberg LP

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