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Sharp downward stock market reaction to curbs on education tutoring companies came as a surprise to regulators.
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Chinese regulators are expected to be cautious but not back away from further crackdowns on companies straying from social and economic goals after sharp slides in big tech and tutoring shares rattled both investors and financial officials, sources and advisors told MNI.
Financial policymakers remain determined to ensure that markets serve China's overall state strategies and to avoid monopolies developing in areas such as digital, financial and educational services, sources said. China also wants to ensure long-term funding is not diverted from key sectors, including green energy, semiconductor production and health-related services for a rapidly ageing population, or from policies designed to raise birth rates, one person familiar with the crackdown said.
At the same time, regulators feel pressure to avoid a repeat of the share selloffs in Hong Kong, mainland China and in Chinese stocks on Wall Street, and will rethink how they unveil new rules, particularly given the growing role of foreign capital in Chinese markets, the source said.
One-year chart of leading China share indices vs S&P 500
Banking sources told MNI that regular conversations with financial regulators have stepped up since the sharpest market plunges on Tuesday, though no action was taken. Still, the PBOC is expected to closely watch market developments as it outlines monetary policy at a time of in what is expected to be a slower rate of growth into next year (see: MNI INTERVIEW: Rate Cuts The Best China Growth Path-Advisor – July 22).
IN THE SPOTLIGHT
Companies in industries seen to be in danger of misallocating capital, such as big tech monopolies and over-leveraged property developers, can expect strict regulation, the person added.
But officials were surprised by the market turmoil prompted by an announcement of a new regulations for after-school tutoring services, the source said.
The rules were driven by social goals as education costs leapt just as the government moved to a three-child policy, the source said, adding that officials wants an education sector under state and not private control to encourage larger families. Companies operating in healthcare, medicine and services such as transport, finance and shopping for the elderly are also attracting the attention of regulators.
Jia Kang, a former research head at the Ministry of Finance, said it is necessary to crack down on chaos in tutoring industry, which he said was rife with overcharging and false advertising, but policy makers should take care not to rattle markets unnecessarily.
Foreign investors joined in the stock rout amid speculation China could target the variable interest entity structure widely used by Chinese companies to list overseas, an official at a state-owned bank based in Hong Kong told MNI. Falls were intensified by rumours the U.S. could further restrict the activities of its institutional investors in Chinese markets.
Calm returned after regulators provided reassurance to major market participants on Thursday and the central bank boosted liquidity via its open market operations, the official said.
The so-called Connect schemes linking Shenzhen and Shanghai with the offshore financial hub of Hong Kong have boosted foreign investment in Chinese A shares and bonds, as the country moves towards further financial liberalisation.
Officials now expect Chinese equity markets to rebound next month, as companies release semi-annual reports likely to show improved performance from last year. Long-term returns on Chinese equities should be strong, as the country strives to maintain growth at over 4% for the next 15 years, the official added.
But more regulatory moves will be necessary, as authorities target growth from reforms to boost internal demand rather than from fiscal stimulus of the sort seen in the aftermath of the global financial crisis, when local governments were able to draw on revenue from land sales.
In the meantime, debate is growing among advisors about whether China should continue to encourage its companies to list in the U.S.
China will not give up on the world's biggest capital market, said Jia Kang. But he added that Chinese companies should be encouraged to list in Hong Kong instead, to avoid increasingly demanding U.S. disclosure rules.