Turkeys don’t vote for Christmas

The Chinese Authorities' assault on online successes (or, perhaps, now better described as ‘excesses’) started with Ant Financial’s failed IPO last November, and has been followed by the recent DIDI IPO fiasco, the decimation of the US$100bn market capitalisation AFT (after school teaching) industry, an attack on Tencent backed food delivery business Meituan and, finally, an assault on Tencent’s online games business (spiritual opium). In this context it is easy to understand the panic across a swath of Chinese equities operating in these areas. On the 5th August Tencent backed Kuaishou Technology (a TikTok rival) fell 15.3% on four times average daily volumes as the six month lock up period for cornerstone investors ended. The company ‘IPO’d’ at HK$115 in early February this year, hit a high of HK$417 a week later and closed at HK$89.10 on 5th August which redefines the expression ‘cornered’! We would also remind readers of the ‘three red lines’ policy announced last August when property developers were ordered to comply with three specific debt related financial ratios. Since that policy was announced the share price of the country’s largest property developer, the highly indebted Chinese Evergrande, has fallen by three quarters.

It might appear from afar that the authorities have started a purge of the private sector. We do not believe this to be the case. The private sector generates 80-90% of new jobs in the economy - turkeys don’t vote for Christmas. One needs to remember that the Xi and Li regime started out with a massive purge on corruption in 2013 and have been promoting sustainable growth ever since rather than the ‘growth for growth’s sake’ attitude of the prior Hu and Wen regime. Note, for example, the pragmatic and persistent deleveraging drive and suppression of the shadow banking system in recent years. The ‘assaults’ mentioned above relate more to a crackdown on monopolistic practices and, frankly, this was long overdue. It was only six years ago that Ctrip - with a circa 40% market share in online travel bookings - was able to take effective control of Qunar - who had a 30% market share - without the authorities batting an eyelid. The recent references to Deng Xiaoping’s famous ‘common prosperity’ quote is little different to Boris Johnson’s promise to ‘level up’. We would bet on China making a better fist of it.

Henry Thornton, Fund Manager, Garraway Oriental Focus Fund and VT Garraway Asian Centric Global Growth Fund