Sunset in Guangzhou, a city of 16 million people located in the Pearl River Delta. Photo credit: Quingbao Meng/Unsplash
Sunset in Guangzhou, a city of 16 million people located in the Pearl River Delta. Photo credit: Quingbao Meng/Unsplash
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5/25/2022

Will the Chinese Private Market Weaken in 2022?

Just days after the Beijing Winter Olympics ended, Russia invaded Ukraine, with tragic conflict ongoing. With 2022 already set to be another challenging year for the global economy, we’ll be examining the private investment opportunities in China, and will look at the extent of government intervention in the private market space.

Politically speaking, many hold the belief that, following the tech reform and education reform in China, 2022 will be an even more difficult year for the Chinese private sector. However, as argued by Chingxiao Shao in our roundtable episode in January,  tech reform, on the contrary, is the Chinese government preparing for the new round of international competition in the high tech sector (especially in hardware, such as in semiconductor manufacturing). The regulation campaign claimed by Shao and Ron Cao in the episode has resulted in little major long term damage, but opens new possibilities for Chinese entrepreneurship and thus may have long-term benefits for the foreign investors.

However, if we look close enough, despite Shao, Cao, and Chi Lo’s positive opinions on the Chinese market, we can’t deny that through China’s “Operation Cyber Sword” and multiple campaigns from Beijing, hundreds of tech companies have been fined, especially focusing on the likes of Alibaba, Tencent, Baidu. The actions also indirectly led to the disappearance of Jack Ma (China’s richest man) for 3 months. Does that mean the Chinese government wants to discourage the growth in private market?

The answer, in my opinion, is no! It can be argued that the Chinese government doesn’t want to discourage the growth of the private sector. The reforms have in fact been led by a principle of “Beat the Big, Help the Small”, which is linked to Xi Jinping’s wider common prosperity policy. Neither Chinese technology regulatory nor educational reform has resulted in significant damage on the wider market, with the targets always being the biggest companies in the market (such as DiDi, Alibaba or New Oriental). It can therefore be argued that Chinese policy supports free market principles thanks to its anti-monopoly actions, encouraging innovation, competition and efficiency in the targeted markets.

Economically speaking, as claimed by Shao in the episode, China was the first country to be hit by COVID-19, and at the same time to recover from the pandemic. Meanwhile, with China enjoying a huge trade surplus, the Chinese economy has capacity for the private market to grow further. And for the foreseeable future, some industries have significant growth potential (including healthcare, renewable energy, AI and 5G-linked technology). As predicted by Shao, this will have a bottom-up effect to benefit the economy and wider society in the country.

Last but not least, Web 3.0 – or in other words, the decentralised world - is the next big international area of competition between China and the U.S. However, there isn’t much scope for growth in the decentralised world, nor the metaverse, which can be attributed to government intervention in the economy. Ever since the Chinese government banned cryptocurrency in September 2021, China is isolated to the rest of the metaverse (including from the NFT, blockchain and cryptocurrency sectors). However, it shouldn’t be too hard for China to catch up with the metaverse development, just like how it caught up with the telecoms industry, the internet industry, and the online payment sector. China is instead just waiting for the rest of the world to develop the metaverse ecosystem, and presumably will just copy the successful system once the industry has matured (although the country has developed its IP laws in recent years as an attempt to shed its ‘copycat’ reputation).

In conclusion, taking into account both the economic and political context, the foundations of the Chinese private market and its firms will not change significantly in 2022. It is those bigger companies that the Chinese government will further regulate and control in order to have stronger centralised power and a more sustainable structure that benefits most of the emerging firms, readying for entering the era of a new competition between the U.S. on key digital industries (such as the metaverse).

By Junqi Liu, part of the Money Maze Brand Ambassador Programme. Junqi is a management student in ESCP Business School Paris. He has owned two companies in China, including an educational consulting company and a technology company (earning him the nickname 'Dean Ant!’). He loves films, badminton and British rock music. Find him on LinkedIn here.

This content does not constitute any form of advice, recommendation, representation, endorsement or arrangement, and should not be used to make any investment decisions. Our full disclaimer is available below.

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