Wave of disruption: China’s crackdowns leave investors confused

“Guiding” food delivery platforms to lower their service charges would lower restaurant operating costs, the National Development and Reform Commission said. It also said it would “ask” the platforms to give discounts from those lower fees to restaurants in “middle and high-risk areas” hit hardest by COVID-19.

Meituan, which dominates the food delivery market in China with a market share of close to 70 per cent, had already been directed to pay its drivers more by the authorities and fined $US533 million for alleged abuses of its market dominance.

By the standards of its international counterparts it is a low-margin business, so the combination of increased costs and reduced charges is a threat to a business model that is already unprofitable.

Last year the authorities targeted ride-hailing giant Didi (which has a market share of 90 per cent), blowing up its planned initial public offering, ostensibly to protect its customer data. It, too, was pressured to improve the income and conditions of its drivers.

While the waves of “reforms” to the tech sector continue, and continue to shrink its value and scope, the authorities’ are grappling with a far more direct threat to economic growth and stability.

Last year, the authorities’ tough “three red lines” policy limiting developers’ financial leverage destabilised its over-leveraged property sector, a sector that accounts for at least a third of China’s economy.

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There were cascading defaults across the sector, led by the world’s most indebted developer, China Evergrande. Of the 15 Chinese companies that default on interest and/or principal repayments on their offshore bond issues last year, 10 were property developers.

This year about $US60 billion of principal repayments by developers fall due, about half of them on offshore bonds.

The defaults continue despite some relaxation of the rules restricting leverage, injections of liquidity into the financial system and encouragement from the authorities for more lending for housing. With more developers showing signs of distress – the chairman of the third-largest developer, China Vanke, recently told employees the company was on its “last legs” — China’s property crisis isn’t over.

A spate of auditor resignation in the sector just after the close of China’s financial year underscores its parlous state and the extent to which its finances remain opaque, even to the nervous auditors.

It is ironic that the authorities have turned to their big state-owned bad debt managers – China Huarong Asset Management and China Cinda Asset Management – to help restructure ailing developers. Only last year Huarong itself was bailed out by state-owned entities via a $US6.5 billion equity injection after losing nearly $US16 billion in 2020.

After the confusing array of industry-disrupting and value-destructive changes that occurred last year there had been an expectation that this year would be one of consolidation rather than further reforms within China’s private sector.

The bad debt managers are supposed to help restructure faltering developers, buy uncompleted projects from them and acquire some of their debt. The authorities are clearly trying to stabilise the sector and the threat it poses to economic growth, which has already slowed markedly, and stability.

The sector is particularly important for local governments because land sales to developers provide most of their revenues. Land sales fell in most local government areas last year, with some provinces suffering 20 per cent-plus declines in their revenue.

With developers’ sales of property down 40 per cent against last year and housing prices still falling the local governments will need to borrow more – despite being under pressure to reduce their own indebtedness – or ask Beijing for direct transfers to meet the central authorities’ plans to boost the economy via increased infrastructure investment.

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After the confusing array of industry-disrupting and value-destructive changes that occurred last year there had been an expectation that this year would be one of consolidation rather than further reforms within China’s private sector.

Foreign investors, experiencing sharp falls in their markets as interest rates in the West are poised to rise, were being tempted by the perceived value of China’s fallen angels in an environment of low inflation and interest rates that are declining and one in which the central government is adding stimulus.

After the events of the past week those apparent attractions are being re-evaluated.

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