(Almost) an end of regulatory tumult
China’s historic failure to translate GDP growth into earnings growth has several causes.
A volatile regulatory environment, equity dilution and weak governance have each had a part to play in pegging back corporate profits.
Yet there are grounds to believe these headwinds could ease somewhat over the next several years.
Regulation is the thorniest problem facing corporations and their shareholders.
China has introduced structural reforms aimed at engineering sustained and balanced growth, steering clear of the credit-fuelled investment binge of the past few years.
But accompanying this shift has been Beijing’s tendency to enact sudden regulatory crackdowns on industries it considers have become too powerful.
The 2-1/2 year-long clampdown, involving flagship companies from industries ranging from technology and education to finance and gaming including Alibaba, Tencent and Didi Chuxing, has wiped more than USD1 trillion off the stock market value and impaired companies’ ability to grow their earnings.
But encouragingly for investors, there are signs of an easing of tensions between the private sector and state authorities.
Chinese companies are streamlining their businesses and making themselves more resilient in the face of slowing economic growth... their self-help measures are paying off.
In July, the People’s Bank of China hit Alibaba affiliate Ant Group with a nearly USD1 billion fine for violating various regulations, raising hopes that a possible end to the regulatory deluge will allow it to secure a financial holding company licence and revive its plans for a stock market listing.
In the same month, Beijing also pledged to improve conditions for private businesses, outlining more than 30 measures that included promises to treat private companies the same as state-owned enterprises, consult more with entrepreneurs on drafting policies, and cut market entry barriers for firms.
Chinese companies, on their part, are streamlining their businesses and making themselves more resilient in the face of slowing economic growth.
Many have tightened their control on operational expenses, which in return improved operating margin and profit growth.
The most recent interim result season confirmed a trend which started last year where the bottom-line growth has been much better than the top line growth, especially among large Internet companies and consumer companies, illustrating how their self-help measures are paying off.