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Chinese Whispers

July 29 2021 | Reading Time: 6 Minutes
Its neither COVID nor economic slowdown and not even bond yields that rattled the market. The pain this time is China and Hong Kong shares, which have fallen sharply to their lowest this year. The key reason is that investors are worried over Chinese government regulations that have put pressure on stocks in the education, prop-erty, and tech sectors. The Nasdaq Golden Dragon China Index, which follows the 98 biggest US-listed Chinese stocks, has fallen by almost 15% in the last two trading sessions.
 
 
China's new rules in private tutoring are expected to have a significant business impact on private education firms. The industry size is expected to be around $120B. The new rules, released on Friday, bar for-profit tutoring in core school subjects to boost the country’s birth rate by lowering family living costs. According to an official document, all institutions offering tutoring on the school curriculum will be registered as non-profit organizations under the new rules, and no new licenses will be granted.
 

The move by the Chinese government resulted in a steep fall last Friday in the Hong Kong and New York-listed shares of Chinese private education companies. The sell-off continued on Monday, with some of the Scholar Education Group stock and New Oriental Education & Technology Group Inc plummeting 40–50%.
 
Similarly, the Chinese authorities issued several guidelines as part of regulatory tightening in the food sector. The set of reforms will make it mandatory for the food delivery platform companies to guarantee their workers with income above minimum pay, insurance, and relaxation in delivery deadlines. This has made investors worry regarding the increase in the cost of riders by platform businesses. Post this announcement, Meiutann, one of the food delivery tech platforms, plunged about 14%.
 
Also, shares of Tencent fell by another 9% on Tuesday in Hong Kong after China ordered the company to end exclusive music licensing deals with major record labels worldwide. Regulators said that the order was to tackle Tencent’s dominance of online music streaming in the country.
 

The real estate market in China also faced regulatory woes as the Chinese government hints at avoiding the use of the property sector to boost the economy. Further, the policymakers strengthened the regulations on property gifting. Also, the mortgage property rate was increased, and the policymakers issued orders that they would elevate penalties for misconduct. This will mainly target the developers that default on debt repayments, delay deliveries on pre-sold homes or spread negative news or market concerns.
 

Will this shake the global investor confidence in Chinese stocks and benefit India?

China’s economic development across the sectors has been phenomenal. With the surge in China's GDP, a lot of global funds have invested in China. Global firms will redeploy the money being withdrawn from China due to the sell-off in the developing economy. And India, being one of the best options, can benefit from this outflow. Also, Indian start-ups, especially tech firms, are all looking to raise money. Last year, some of these floated IPOs, and others raised funds. The trend is expected to continue with more start-ups coming up with IPOs in 2021.
 
Since the start of the pandemic last year, global firms are trying to reduce their supply chain dependence on a single country, especially China. That has resulted in increasing interest from international companies wanting to invest in India. China plus one policy is helping our manufacturing firms. But the Chinese government’s crack- down on tech firms will bring even more investors to India.

What do you think? Please email us any questions or comments.

Disclaimer: Information contained herein is not and should not be construed as an offer, solicitation, or recommendation to buy or sell securities. It is for educational purposes only.For more information, see our Legal disclosures here.

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